Financial Scams A Quick Dictionary Lookup : Financial crimes are, crime against property, involving the unlawful conversion of the ownership of property (belonging to one person) to ones own personal use and benefit.
Terms & Examples Money Laundering : The process of concealing the source of money obtained by illicit means. Terrorist Financing : Illegal Monetary and Resource Supply to terrorist groups. Black Market : a market in goods or services which operates outside the formal one(s) supported by established power. Credit Card Fraud : wide-ranging term for theft and fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction.
Terms & Examples Greenmail : The practice of purchasing enough shares in a firm to threaten a takeover, thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover. grey market : It is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. Structuring, smurfing in banking industry : It is the practice of executing financial transactions (such as the making of bank deposits) in a specific pattern calculated to avoid the creation of certain records and reports required by law.
Terms & Examples Securities fraud, stock fraud and investment fraud : It is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws. Skimming : refers to taking cash "off the top" of the daily receipts of a business (or from any cash transaction involving a third interested party) and officially reporting a lower total.
Potential Scams Affinity fraud - These scams target groups with common interests, such as alumni associations or religious or ethnic clubs, letting the members sell one another on bad or fake investments. Annuity misrepresentation - These arent scams so much as failure to disclose hefty sales commissions, huge surrender fees and other things that eat up the buyers money. Promissory notes - These are short-term, supposedly high-return debt instruments issued by obscure or non-existent companies and sold by unlicensed individuals posing as brokers, insurance agents, etc.
Potential Scams Unlicensed agents - Nearly every financial endeavor is regulated and sales people are required to be licensed at either the state or federal level - but most scammers arent. Even non-regulated operations usually have professional or business associations you should be able to check with if you have doubts. Pressure tactics - Cold callers operating out of boiler rooms similar to those portrayed in the 1980s film "Wall Street" promote commodity futures, precious metals, penny stocks, coins, and travel and vacation properties. While some cold calling operations are legitimate, many arent. The bad ones typically offer either "a special one-time deal" or an opportunity you have to "grab now or youll miss out." Diamond investments are popular among pressure sales teams since theyre one of the few commodities not traded on any organized exchange, meaning you have no real way to compare prices to actual market values.
Potential Scams "Prime-bank" schemes - These offer small investors high returns by giving them supposed access to the worlds elite banks and entry into the exclusive world of the ultra-rich. Brokerage scams - These can range from outright fraud, such as selling phony securities, to "pump-and-dump" promotions of penny stocks, unauthorized trading of customer accounts (known as "churning"), excess or hidden fees and other irregularities.
Some Classic Cases Some important Scams in Financial Markets History include: 1. The Enron Scam 2. The Baring Bank Collapse 3. The Guinness share-trading fraud
1 – The Enron Scam The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. The grand-daddy of all scams. You have all of the elements. A company with incredible political connections. The seventh- largest company in the United States at the time. A darling of the stock market. Thousands of employees with their life savings tied up on the stock, and many more thousands with exposure to the stock either directly or indirectly.
1 – The Enron Scam The multi-billion dollar company was mostly smoke and mirrors. Company officials were using shell companies to hide hundreds of millions of dollars in debt, and to inflate profits. Company officials were creating shell companies in order to enrich themselves as well through lucrative side deals. Enron truly signalled the end of the "boom era" in the United States stock market. Billions upon billions were lost.
2 – Barings Bank Collapse Barings Bank (1762 to 1995) was the oldest merchant bank in London. Founded and owned by the German-origined Baring family. Despite surviving the Great Depression and both World Wars, Barings was brought down in 1995 due to unauthorized trading by its head derivatives trader in Singapore, Nick Leeson. i.e. The bank collapsed in 1995 after, Nick Leeson, lost ($1.3 billion) due to speculative investing, primarily in futures contracts, at the banks Singapore office.
2 – Barings Bank Collapse -Scenario At the time of the massive trading loss, Leeson was supposed to be arbitraging, seeking to profit from differences in the prices of Nikkei 225 futures contracts listed on the Osaka Securities Exchange in Japan and the Singapore International Monetary Exchange. Leeson began doing this at the end of January 1995. Due to a series of internal and external events, his unhedged losses escalated rapidly.
2 – Barings Bank Collapse -Scenario Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures arbitrage market at Barings Futures Singapore and cover for his shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branchs error account, subsequently known by its account number 88888 as the "five-eights account", to prevent the London office from receiving the standard daily reports on trading, price, and status. Using the hidden five-eights account, Leeson began to aggressively trade in futures and options on the Singapore International Monetary Exchange. His decisions routinely resulted in losses of substantial sums. Leesons activities had generated losses totalling £827 million (US$1.3 billion), twice the banks available trading capital. The collapse cost another £100 million. ING, a Dutch bank, purchased Barings Bank in 1995 for the nominal sum of £1 and assumed all of Barings liabilities, forming the subsidiary ING Barings.
2 – Barings Bank Collapse –Reasons Under Barings Futures Singapores management structure through 1995, Leeson doubled as both the floor manager for Barings trading on the Singapore International Monetary Exchange and head of settlement operations. In the latter role, he was charged with ensuring accurate accounting for the unit. The positions would normally have been held by two different employees. By allowing Leeson, as trading floor manager, to settle his own trades, Barings short-circuited normal accounting and internal control/audit safeguards. In effect, Leeson was able to operate with no supervision from London—an arrangement that made it easier for him to hide his losses. After the collapse, several observers, including Leeson himself, placed much of the blame on the banks own deficient internal auditing and risk management practices.
3 – The Guinness share-tradingfraud The Guinness share-trading fraud was a famous British business scandal of the 1980s. It involved an attempt to manipulate the stock market on a massive scale to inflate the price of Guinness shares and thereby assist a £2.7 billion take-over bid for the Scottish drinks company Distillers. The scandal was discovered after testimony as part of a plea bargain by the US stock trader Ivan Boesky. Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes, the so-called "Guinness four", were charged with heavy fines.
Financial Scams Psychologist Stephen Greenspan stated that even intelligent and smart people can be victims, especially of financial scams. Financial scams have destroyed lives and left people penniless. Any Protective Measure ? It is best not to put all the eggs in one basket.