 | This article relies largely or entirely on a single source .(December 2013) |
Control fraud occurs when a trusted person in a high position of responsibility in a company, corporation, or state subverts the organization and engages in extensive fraud for personal gain. The term "control fraud" was coined by William K. Black to refer both to the acts of fraud and to the individuals who commit them.
The concept of control fraud is based on the observation that the CEO of a company is uniquely placed to remove the checks and balances on fraud within a company, such as through the use of selective hiring and firing. These tactics can position the executive in a way that allows him or her to engage in accountancy fraud and embezzle money, hide shortfalls or otherwise defraud investors, shareholders, or the public at large. A control fraud will often obtain "investments that have no readily ascertainable market value", [1] and then shop for appraisers that will assign unrealistically high values and auditing firms that will bless the fraudulent accounting statements. [2]
Some control frauds are reactive in the sense that they turn to fraud only after concluding that the business will fail. [3] Opportunistic control frauds, by contrast, are attracted to a criminogenic environment where it is harder to detect fraud, e.g., as a result of deregulation. [4]
An example would be when an insolvent company publishes accounts showing massive profits. This will cause the stock to rise beyond its actual value, and those exercising the control fraud will cash in their stocks before the reality is known by others. [1] Additionally, companies can lobby for changes to weaken the law or accompanying regulation. This can be particularly effective with large campaign contributors like Charles Keating, who with other control frauds in the United States League of Savings Institutions, was able to get his own people placed on the board of the primary regulatory agency, the Federal Home Loan Bank Board (FHLBB). With the assistance of people like Speaker of the House Jim Wright and the Keating Five, he was able to convert Lincoln Savings and Loan Association into a Ponzi scheme, making millions for himself, while suppressing the investigative and regulatory functions of the FHLBB. Eventually, the Ponzi collapsed, as all Ponzis must, but with a massive cost to the taxpayers and unsecured investors.
Control fraud can also occur in a political situation, for example by the leader of a country who can use their position to embezzle public funds and turn the country into a kleptocracy. For example, the post-Soviet republic of Azerbaijan. [5]
Examples of control fraud include Enron, the savings and loan crisis, Sam Bankman-Fried, and Ponzi schemes such as that of Bernard Madoff.
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy. Economic regulations were promoted during the Gilded Age, in which progressive reforms were touted as necessary to limit externalities like corporate abuse, unsafe child labor, monopolization, pollution, and to mitigate boom and bust cycles. Around the late 1970s, such reforms were deemed burdensome on economic growth and many politicians espousing neoliberalism started promoting deregulation.
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk knowing that its insurance will pay the associated costs. A moral hazard may occur where the actions of the risk-taking party change to the detriment of the cost-bearing party after a financial transaction has taken place.
Embezzlement is a crime that consists of withholding assets for the purpose of conversion of such assets, by one or more persons to whom the assets were entrusted, either to be held or to be used for specific purposes. Embezzlement is a type of financial fraud. For example, a lawyer might embezzle funds from the trust accounts of their clients; a financial advisor might embezzle the funds of investors; and a husband or a wife might embezzle funds from a bank account jointly held with the spouse.
The term "white-collar crime" refers to financially motivated, nonviolent or non directly violent crime committed by individuals, businesses and government professionals. It was first defined by the sociologist Edwin Sutherland in 1939 as "a crime committed by a person of respectability and high social status in the course of their occupation". Typical white-collar crimes could include wage theft, fraud, bribery, Ponzi schemes, insider trading, labor racketeering, embezzlement, cybercrime, copyright infringement, money laundering, identity theft, and forgery. White-collar crime overlaps with corporate crime.
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expense of other parties who do not have the same information.
Charles Humphrey Keating Jr. was an American sportsman, lawyer, real estate developer, banker, financier, conservative activist, and convicted felon best known for his role in the savings and loan scandal of the late 1980s.
Donald Wayne Riegle Jr. is an American politician, author, and businessman from Michigan. He served for five terms as a Representative and for three terms as a Senator in the U.S. Congress.
A savings and loan association (S&L), or thrift institution, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. The terms "S&L" or "thrift" are mainly used in the United States; similar institutions in the United Kingdom, Ireland and some Commonwealth countries include building societies and trustee savings banks. They are often mutually held, meaning that the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization like the members of a credit union or the policyholders of a mutual insurance company. While it is possible for an S&L to be a joint-stock company, and even publicly traded, in such instances it is no longer truly a mutual association, and depositors and borrowers no longer have membership rights and managerial control. By law, thrifts can have no more than 20 percent of their lending in commercial loans—their focus on mortgage and consumer loans makes them particularly vulnerable to housing downturns such as the deep one the U.S. experienced in 2007.
The savings and loan crisis of the 1980s and 1990s was the failure of 1,043 out of the 3,234 savings and loan associations (S&Ls) in the United States from 1986 to 1995. An S&L or "thrift" is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members.
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s.
The early 1980s recession was a severe economic recession that affected much of the world between approximately the start of 1980 and 1983. It is widely considered to have been the most severe recession since World War II. A key event leading to the recession was the 1979 energy crisis, mostly caused by the Iranian Revolution which caused a disruption to the global oil supply, which saw oil prices rising sharply in 1979 and early 1980. The sharp rise in oil prices pushed the already high rates of inflation in several major advanced countries to new double-digit highs, with countries such as the United States, Canada, West Germany, Italy, the United Kingdom and Japan tightening their monetary policies by increasing interest rates in order to control the inflation. These G7 countries each, in fact, had "double-dip" recessions involving short declines in economic output in parts of 1980 followed by a short period of expansion, in turn, followed by a steeper, longer period of economic contraction starting sometime in 1981 and ending in the last half of 1982 or in early 1983. Most of these countries experienced stagflation, a situation of both high inflation rates and high unemployment rates.
Cottage Savings Association v. Commissioner, 499 U.S. 554 (1991), was an income tax case before the Supreme Court of the United States.
A credit crunch is a sudden reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates changes. Credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability. Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments.
The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger savings and loan crisis of the late 1980s and early 1990s. The five senators—Alan Cranston, Dennis DeConcini, John Glenn, John McCain, and Donald W. Riegle, Jr. —were accused of improperly intervening in 1987 on behalf of Charles H. Keating, Jr., Chairman of the Lincoln Savings and Loan Association, which was the target of a regulatory investigation by the Federal Home Loan Bank Board (FHLBB). The FHLBB subsequently backed off taking action against Lincoln.
James M. Fail was an American financial executive, the chairman of Stone Holdings, Inc. and Bluebonnet Savings Bank. A native of Mobile, Alabama, he attended Murphy High School and served for three years in the U.S. Navy. After graduating from the University of Alabama in 1949, he began his career as a securities salesman for Merrill Lynch. In the following decades, Fail and his holding companies have owned and operated a variety of investment, mortgage, banking, savings and loan, and insurance businesses throughout the U.S.
William Kurt Black is an American lawyer, academic, author, and a former bank regulator. Black's expertise is in white-collar crime, public finance, regulation, and other topics in law and economics. He developed the concept of "control fraud", in which a business or national executive uses the entity he or she controls as a "weapon" to commit fraud.
Capital and the Debt Trap is a research monograph by Claudia Sanchez Bajo and Bruno Roelants. The first four chapters provide a general summary of the economic instability afflicting the international economy at the time of publication (2011), noting that cooperatives have on average performed better than traditional for-profit corporations. The next four chapters describe four different cooperatives in four countries. The final chapter provides a summary. Cooperatives seem on average to last longer and be more responsive to the needs of customers and the communities in which they operate, because their shared ownership and participative management generally makes labor more flexible while reducing the incentives of upper management to maximize short-term performance at the expense of the long term.
Edwin J. Gray is an American politician and businessman who served as the chair of the Federal Home Loan Bank Board in the 1980s.
Black, William K. (2005). The Best Way to Rob a Bank Is to Own One . University of Texas Press. ISBN 0-292-72139-0.