Any fraud is the theft of money or other property using deceit or abuse of trust. Financial market frauds have a long tradition, their earliest examples date back to the 17th – 19th centuries and are associated with the emergence of the first joint-stock companies, whose shares were actively speculated by criminals, deceiving gullible investors. With the advent of new information technologies, the list of opportunities for criminals is expanding, and new ones related to cryptocurrencies and Internet projects are added to the classic frauds. Even traditional schemes like MMM are starting to move to bitcoin.
Criminal law
Fraud is considered in the Criminal Code of the Russian Federation, article 159 is devoted to it, which considers theft committed by means of deception or abuse of trust. The article contains 6 parts, each of which mentions different qualifying signs - from the creation of a group by prior agreement to an especially large amount of damage resulting from the illegal acquisition of the right to someone else's property. The severity of the possible punishment depends on the qualifications.
The group of financial frauds includes the following subgroups:
- crimes in the credit and banking sector;
- crimes in the field of investment in securities;
- financial pyramids.
The specificity of the commission of each type of crime depends on the willingness of the potential victim to part with his money. The authors of the schemes are guided by such human instincts as greed and the desire for common collective behavior.
Types of financial fraud
Both individuals and companies suffer from scams. The criminals have developed such types of fraud, which are designed to steal money from different people, using the peculiarities of their thinking or interaction with partners. There are types of fraud that are typical only for American markets and have not taken root in Russia, and schemes that are actively used on domestic soil, such as financial pyramids and waste of pension investments.
Russian fraud schemes
Among the schemes that have taken root in Russia, financial pyramids are especially popular; this form is being modified under pressure from law enforcement agencies, but its essence remains unchanged. Such frauds with money of clients of banks and securities management companies are no less common, but information about them rarely becomes widely known, since widespread publicity threatens the reputation of not only managers, but also depositors.
Financial pyramids
For Russia, a typical style of financial fraud is the organization of a pyramid scheme. Not only naive people take part in them, but also experienced players with a mathematical education, who have a good idea of the scheme algorithm and manage to get out of it. Any financial pyramid assumes an exponential increase in the total volume of debt, and at one of the stages, the total volume of debt, which exceeds the volume of all previously collected funds, destroys the pyramid. After that, the organizer can only change the director of the company and start over, somewhere in another country.
The famous Mavrodi, who dreamed of collecting all the money in the world and one day completely destroying the modern financial system, recently organized a new project in Africa. There he managed to involve more than 2.5 million people in his project, the MMM site became more popular in Nigeria than Facebook and Wikipedia, thereby creating our possible asymmetric response to the "Nigerian letters". This type of fraud is an offer to allow an unknown person from Africa to use their bank account for a reward or to inherit from an unknown relative in Africa. All commissions paid to intermediaries fall prey to scammers.
Pyramids in Russia from a scam intended for the general public have grown into something more and are beginning to bear an elitist character. Closed elite clubs are being created, whose members receive not dividends on shares, but help from other members of the club, this largely repeats the Mavrodi model recently. Members of his network also receive help from the organization and must publicly thank for it. Elite clubs carefully select members and use NLP techniques to influence and create a conducive environment for deception to manipulate members.
Credit and banking fraud
Numerous bank failures, revocation of licenses and the introduction of interim management indicate that not everything is as good with banks as their reporting presents. A hole in the balance sheet means that clients' money has been withdrawn from the bank and replaced with impaired securities such as promissory notes or shares of front legal entities created by the bank's management. The structure of the bank's assets until a certain point remains outwardly satisfactory, but with a sudden early demand for deposits or a change by the company of the operating bank of current accounts, a credit institution with such a balance becomes unable to fulfill its own obligations.
Securities frauds are common in banking. An interesting example will be the situation with the "Chechen advice notes", where several billion rubles were stolen with the help of fake bank advice notes. The downside is fraud in the credit sector, from which banks themselves suffer. Cases of obtaining a loan with the deliberate purpose of its non-repayment have become frequent. In this case, fraudsters collude with bank employees, and loans are received by technical, operating companies that do not have real assets, under guarantees of the same technical firms. Securities that have no value are used as collateral, while fictitious appraisal acts are being prepared, which overstate their value many thousands of times. After receiving the funds, they are quickly cashed, and the bank can only bankrupt the one-day company and write off the irrecoverable debt. Conscientious clients of banks, whose money are used by fraudsters, suffer from the implementation of these schemes.
Brokers, pension funds, trust management
Many owners of small fortunes who leave them for management by stock market professionals have no idea what kind of fraudulent schemes can be carried out with their securities. Fraud by individual traders with clients' securities is not widespread in Russia, as is the case in Europe and America. Thus, Société Générale trader Jerome Kerviel, managing 50 billion euros of funds entrusted to him, was able to cause damage to clients in the amount of 8 billion. In our country, management of funds and management companies often manipulates clients' funds.
The simplest way of abuse is the purchase of knowingly devalued securities. For example, in 2008, many private pension funds and management companies invested in bonds of the Moscow region, for which payment was not planned, as well as in securities of regional enterprises issued under government guarantees. As a result, a default was declared on the securities, and the organizer of their issue and the plunderer of the funds received, Minister of Finance Kuznetsov, fled abroad. The damage caused to the region, according to various estimates, ranged from 14 to 19 billion rubles.
In that situation, the first crime (issuance of securities with the obligation to pay coupon income and failure to fulfill this obligation) was combined with the second - the investment of pension funds and money of individuals in illiquid securities. The collapse of these funds and management companies was a natural consequence of the criminal actions of managers - waste and fraud, from which thousands of people suffered. Despite the tightening of legislation after the events of 2008, another scam with pension money occurred in 2015, when banker Motylev invested the funds of future retirees in mortgage securities issued on his land assets, the valuation of which was overestimated dozens of times.
Fraud cases
Binary options, popular among newcomers to the foreign exchange markets, have already been officially recognized as a scam in many countries of the world. The offer to guess the increase or decrease in the price of an asset is analogous to the game of chance "even-odd". Binary options trading offers are often made by companies that do not have Russian registration and licenses required to operate on the stock markets, websites specially created to collect money. At some point, payments even on won options stop, clients' money disappears in the Cayman Islands, and the site is closed. The government is considering various measures to combat this practice, but has so far been unsuccessful.
Many are starting to consider cryptocurrencies as financial fraud. Bitcoin price surges are cited as examples of risky transactions. Mavrodi's transfer of his pyramid from national currencies to bitcoins is already starting to worry.
American models
In the United States, the securities and financial services market is more structured than in Russia. Derivative securities, which are almost absent in Russia, are widespread; organizations, for example, crowd-lending platforms, which have not yet come to our country, operate. The specificity of the instruments also determines the specificity of the crimes. Among them, the following schemes are used in securities trading:
- "increase and dump" (Pump & dump). An artificial excitement is created around the shares of a company, many portfolio investors who do not have special knowledge seek to purchase these shares, after which they begin to fall in price. This is one of the oldest schemes, practically not implemented in Russia, in which, apart from Yandex, there were no high-profile success stories of the instant growth of start-up shares and the necessary investor behavioral stereotypes were not formed;
- Pyramid Schemes literally repeats the model of conventional pyramids, but all transactions take place using electronic payment systems and using Internet resources. Such schemes are not associated with the creation of legal entities, and it is difficult to find a real organizer due to the use of programs that increase the secrecy of data (anonymizers, proxy servers, and the like);
- scheme of "reliable" capital investment (The Risk-free Fraud). Fraudsters play on the needs of investors to obtain "reliable guarantees" of the profitability of their investments, and the offer to purchase shares of non-existent companies and projects with high profitability is supported by a substantial package of recommendations, reviews and similar guarantees;
- "exotic" offers (Exotic Offerings) - an American client is offered shares of any business in hot countries, affiliated with American brands known to him. When purchasing shares or bonds, they promise a high guaranteed profit. Recognition of a successful American brand becomes a tool of influence, and the project's profit is linked to its success.
The American market is not limited to these types of scams. There are vivid scams that have gone down in history. For example, the Madoff Investment Securities fund, which was able to raise about $ 65 billion, presenting the activities of an ordinary pyramid as an ordinary but successful investment fund.
How can a company protect itself from risks?
The active position of the organization's security services will be the main barrier against fraudsters. Among the necessary measures:
- responsible attitude to the choice of the bank in which the current account of the legal entity will be opened or the deposit will be placed. Small private and so-called captive (created in the interests of a certain financial and industrial group and to service its schemes) banks should be avoided;
- introduction for managers and CFOs of the company of the need to attend financial literacy courses, in which they will be explained the basic mechanisms of financial schemes and signs of fraud;
- creation of lists of accredited financial and insurance companies, banks with which it is recommended to conclude contracts;
- at the first suspicion of a possible fraudster among the company's counterparties, contact the law enforcement agencies.
Working to improve financial knowledge is a necessary element in the fight against financial fraudsters, but they should also be blocked at the level of tightening regulatory norms, both state and corporate.
