Is Fraud Really Bubbling?

By Michael Panzner on July 23, 2009

As any savvy investor might, the first thing you should ask yourself when you come across or analyze an interesting data series is to try and figure out whether it is describing the past or hinting at the future.Some economic indicators, like the unemployment rate, for example, have not been particularly helpful when it comes to identifying turning points in the economy.One reason is because hiring and firing staff can have serious consequences for any business, and the point at which such decisions are made often comes when employers are forced — or absolutely convinced they need — to take drastic action.

However, as with the financial markets, that highly-charged moment when a lot of people are doing the same thing often represents the point at which much of the news — whether good or bad — has been factored in and a reversal is near.There are other reasons, of course, why apparent trends aren’t necessarily predictive in nature. In my view, one example likely includes the accelerating pace of growth of allegations of financial miscreancy detailed in the Economist article that follows, “Fraud Reporting.”While it is certainly possible that criminal activities of this sort are burgeoning, based on past history, at least, I reckon that a heightened focus by law enforcement agencies on financial chicanery, fears about the health of markets and the economy, and a generalized loss of trust in the wake of last fall’s meltdown and the Madoff affair are probably the real reasons for the surge.

Given what’s happened so far, one would naturally expect that more longstanding frauds would suddenly be exposed because time or the money has run out, while paranoia and uncertainty is probably spurring many individuals to suspect the worse in their various dealings with others.

I guess we’ll know soon enough.
The rise in financial crime in America

Over 730,000 counts of suspected financial wrongoing were recorded in America last year, according to recent data from the Treasury Department’s Financial Crimes Enforcement Network. Institutions such as banks, insurers and casinos are required by law to report suspicious activities to federal authorities under 20 categories. Financial institutions filed nearly 13% more reports of fraud compared with 2007, accounting for almost half of the increase in total filings. The number of mortgage frauds alone rose by 23% to almost 65,000. But not all categories saw an increase: incidents suspected terrorist financing fell. Just under half of all filings are related to money laundering, a proportion that is little changed in over a decade.

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