Publication Date
10-2015
Document Type
Paper
Abstract
"Control fraud" refers to frauds in which the person who controls a seemingly legitimate entity uses it as a "weapon" to defraud. Control frauds cause greater financial losses than all other forms of property crime - combined. We are now living in the era of recurrent epidemics of control fraud. The LIBOR and foreign exchange cartels, for example, are the largest cartels in history- by roughly three orders of magnitude. VW has just admitted that it committed over 11 million fraudulent sales. Our largest financial institutions have been revealed to be criminal enterprises - and recidivists.
This paper brings the multi-disciplinary perspectives of criminology, (successful) financial regulators, economics, law and accounting plus the insights of a serial whistleblower to bear on the subject of the victims of control fraud epidemics. Criminologists take the study of victims seriously. Victimology is a subfield of criminology. White-collar criminologists have never fallen into the trap of neoclassical economists who assume pure rationality, but we see elite white-collar criminals as relatively rational. It makes sense, therefore, to investigate whether they show a fair degree of rationality in the choice of their victims. The logic is that they would rationally target victims who combine the traits of being more vulnerable, easier to reach, and having enough money to be worth defrauding. These three traits could push in different directions - the wealthy have more money to steal but might be less vulnerable to some forms of fraud.
Criminologists have confirmed that fraudsters frequently target those who are most vulnerable. But criminologists have also confirmed that a far broader meaning of the concept of "vulnerable" than that commonly used by legal scholars and economists is essential to understanding the most destructive financial frauds. It turns out that we are all vulnerable to the largest and most destructive frauds. I urge legal scholars who emphasize the importance of the "vulnerability" of particular groups to embrace our findings rather than view them as a threat. Our findings support your basic insight and offer the potential to form a far broader coalition for reform. Conversely, criminologists' findings about the extent of vulnerability to sophisticated frauds pose an existential threat to neoclassical economics, which treats the concept of vulnerability - and the vulnerable - with disdain. This paper provides examples of the demonization of the primary victims of the three mortgage fraud epidemics that drove the 2008 financial crisis and the Great Recession.
Recommended Citation
William K. Black,
Vulnerability and "Control Fraud" Economics,
(2015).
Available at:
https://irlaw.umkc.edu/faculty_works/1016
Comments
This paper was presented as part of "A Workshop on Vulnerability at the Intersection of the Changing Firm and the Changing Family" held October 16-17, 2015 at the Emory University School of Law.