Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy. Allowit, Tracy, I think
Speaker 1: you're really gonna like today's episode. Oh okay, what is it?
Speaker 1: I mean? I guess I would hope that you like
Speaker 1: all of the episodes. But I feel like this is
Speaker 1: a topic that, just from what I know about you
Speaker 1: really animate too. But we are going to be talking
Speaker 1: about fraud and financial fraud. Fraud. Wait. Should I take
Speaker 1: that as like a personal slight that you think I'm
Speaker 1: really interested in financial fraud? No, it's not a slight.
Speaker 1: I just feel like that you have a mind that
Speaker 1: likes to figure out frauds and leans towards fraud. Yeah, exactly,
Speaker 1: and figures them out and understands how they happen and
Speaker 1: the conditions it allow frauds to take place, and how
Speaker 1: people missed everything. I feel like that's a youth thing.
Speaker 1: Am I wrong? No, you're right. Uh, you actually nailed
Speaker 1: it on the head in um what you just said.
Speaker 1: It's the fact that people miss these things when they're happening,
Speaker 1: and then as they unfold, you kind of go back
Speaker 1: and you see all the warning signs and you think,
Speaker 1: how could people not have seen this coming. That's what
Speaker 1: fascinates me the most. It's it's people missing out on
Speaker 1: something that is quite clear in hindsight. Yeah, it's pretty
Speaker 1: incredible when we have these stories about big financial frauds,
Speaker 1: how egregious they seem always in retrospect, and how they're
Speaker 1: just always seemed to be numerous red flags that anyone
Speaker 1: with half a brain should have been able to pick
Speaker 1: up on. And yet somehow we have this suer delusion
Speaker 1: where nobody sees it, or maybe people who saw it
Speaker 1: decided that it wasn't worth pointing it out, and then
Speaker 1: we have to relearn human history and human behavior all
Speaker 1: over again for the next time. Yeah, exactly. And there's
Speaker 1: an example that springs immediately to mind, probably one of
Speaker 1: the most famous recent financial frauds, Bernie made Off and
Speaker 1: you remember, um, after he got arrested, people started circulating
Speaker 1: charts that showed the historical performance of the fund that
Speaker 1: we're coming from, uh, the made Off funds marketing materials,
Speaker 1: and they were just a straight, smooth line pointing upwards.
Speaker 1: And of course, in hindsight, everyone thought that was deeply,
Speaker 1: deeply suspicious. But at the time, people some of them anyway,
Speaker 1: seemed more than happy to just accept that as fact. Yes,
Speaker 1: it's it's perfect example, because it's one of these things
Speaker 1: that in hindsight, as you say, it's like, oh, of
Speaker 1: course that could never have been realistic. Where was everyone
Speaker 1: at the time saying how impossible it was. It's a
Speaker 1: perfect example of how something happens and the exact same
Speaker 1: fact goes from being oh, this is very impressive to oh,
Speaker 1: this is obviously a scamp. Yeah. How quickly things change. Yeah,
Speaker 1: So maybe we could avoid frauds in the future, or
Speaker 1: spot them quicker if we really studied the patterns and
Speaker 1: instituted some good practices about the weak spots in our
Speaker 1: behavior and in organizational behavior that fraudsters like to exploit.
Speaker 1: I think that would make a lot of sense. So
Speaker 1: maybe we'll start on that road with our guest today.
Speaker 1: His name is Dan Davies, and he is the author
Speaker 1: of a new book called Lying for Money, How Legendary
Speaker 1: Frauds Reveal the Workings of our World. And it is
Speaker 1: a fascinating book, and it looks at lots of frauds
Speaker 1: and historical patterns and how they come about. And uh,
Speaker 1: Dan joined us. Now, Dan, thank you very much for
Speaker 1: joining us, Thanks very much for having me Dan. Before
Speaker 1: we get into the frauds and the patterns of fraudsters
Speaker 1: and why we miss them and all this stuff that
Speaker 1: we're talking about, let's just talk about your career. I
Speaker 1: kind of think of you as someone who just knows
Speaker 1: about everything, and you, uh, you can talk about political referendums,
Speaker 1: and you can talk about technical things, and tell us
Speaker 1: a little bit about your career background and why you
Speaker 1: wanted to write a book on this topic. Sure, well,
Speaker 1: I was basically acquisi analyst for fifteen years. I started
Speaker 1: out at the Bank of England as a regulatory economist
Speaker 1: and I used to be in the office next door
Speaker 1: to the guy who was the elite supervisor of Barings
Speaker 1: Bank at the time of the Nick Leason crisis, which
Speaker 1: was kind of an interesting set of office traffics watch.
Speaker 1: Then I was lucky enough, over the course of about
Speaker 1: fifteen years in equity analysis to have a succession of
Speaker 1: busses who allow old me to mess around looking at
Speaker 1: quirky things rather than doing something about the usually disgraceful
Speaker 1: quality of my own ex forecasts. And so, you know,
Speaker 1: you pick up a little bit of everything because I
Speaker 1: was covering the financial sector, and financials are relevant to
Speaker 1: more or less anything you want to get interested in,
Speaker 1: which was something that I took full advantage of. Then
Speaker 1: about four or five years ago, I kind of felt
Speaker 1: that I had had as much fun as it was
Speaker 1: possible to have out of equity analysis, so I quit
Speaker 1: and well started writing articles for newspapers and websites and
Speaker 1: eventually started writing this book. And you know, frauds. It's
Speaker 1: just really interesting because it's like where the system breaks down.
Speaker 1: You know, you can study the economics all the time,
Speaker 1: but if you're only studying successful companies and economies, then
Speaker 1: it's like trying to learn about medicine by only studying
Speaker 1: healthy people. Where you really see how the structure works
Speaker 1: is in cases like bankruptcies and frauds and all these
Speaker 1: nasty things that people don't like to think about, where
Speaker 1: the whole system breaks down and where key assumptions turn
Speaker 1: out not to be true. I like that description. You're
Speaker 1: sort of probing the system for its weak spots. So
Speaker 1: I'm just going to jump right into it because, as
Speaker 1: Joe has already said, this is a topic that is
Speaker 1: dear to my heart. So what's your favorite example of
Speaker 1: fraud that you chronicle in your book. Oh, it kind
Speaker 1: of changes every day, because the thing is that obviously
Speaker 1: every day I'll come up with a new one that
Speaker 1: I wish i'd put in the book but didn't, or
Speaker 1: someone asks whether they're favorites in there, and I'm just
Speaker 1: like to do half of my favorites aren't in there.
Speaker 1: But I think the classic one is the Great salad
Speaker 1: oil scam. It's just such a beauty. Yeah. I mean,
Speaker 1: it's just basically oil floats on water. And because of
Speaker 1: this fact, it is surprisingly difficult to tell the difference
Speaker 1: between a tank full of valuable soybean oil and a
Speaker 1: tank that is basically full of seawater with a few
Speaker 1: gallons of soybean oil floating on top. And there was
Speaker 1: a guy called Tino de Angelis who was the salad
Speaker 1: oil king and really knew more about soybean markets than
Speaker 1: anyone else in the world at that time. But he
Speaker 1: was an absolute crook, and one of the ways that
Speaker 1: he managed to extract fraugil in cash from his company,
Speaker 1: American Crude Vegetable Oils, was to borrow money collateralized against
Speaker 1: the soybean oil in his tanks, but to have vastly
Speaker 1: more warehouse receipts, as the kind of short term ones
Speaker 1: were called outstanding, than there was soybean oil cartalized against them.
Speaker 1: He was a hell of a character. But what he
Speaker 1: used to do was let the lenders come out take
Speaker 1: a dip sample into one of his tanks, and it
Speaker 1: either had oil floating on water, or there was a
Speaker 1: length of pipe welded into its full of soybean oil
Speaker 1: and the rest of the tank was empty, or they
Speaker 1: even had a plumbing system to pump it around so
Speaker 1: that the same soybean oil could appear in different tanks.
Speaker 1: In the end, he was claiming to have more in
Speaker 1: his one tank form than the USA produced in an
Speaker 1: entire year. Now, obviously there's a scientific lesson here that okay,
Speaker 1: oil floats on water, and just for various technical reasons,
Speaker 1: it's difficult to verify that a big tanker is actually
Speaker 1: filled with the soybean oil that the owner claims it is.
Speaker 1: What is the sort of human lesson though? So what
Speaker 1: did he exploit with regards to human systems that allowed
Speaker 1: him to perpetrate this highly profitable scam. Well, yeah, that's it.
Speaker 1: It is all about the human systems. Because at the
Speaker 1: end of the day, if it hadn't been that, he'd
Speaker 1: have thought of something else. That was just the kind
Speaker 1: of guy he was. At the time, American Express was
Speaker 1: an independent financial institution rather than just a credit card brand,
Speaker 1: and it had a brand new corporate lending business, and
Speaker 1: it had a set of targets whereby every one of
Speaker 1: its divisions had to make at least a million dollars
Speaker 1: worth of profit every quarter, back in the days when
Speaker 1: that was a lot of money. And so there were
Speaker 1: people out there looking to gain market share rapidly, and
Speaker 1: if you're looking to gain market share rapidly, you tend
Speaker 1: to not be choosing off about the kind of customers
Speaker 1: that you take on. Now, everyone wanted to believe him
Speaker 1: he was a larger than life character. He actually used
Speaker 1: to allow rumors to circulate that, you know, D'Angelis was
Speaker 1: in the mafia because he felt like, you know, he wasn't,
Speaker 1: but he felt like if people believed that, then they
Speaker 1: would think that he had extra sources of cash flows
Speaker 1: and paid back his loans. And so, really, the thing
Speaker 1: that I keep on coming back to in these things
Speaker 1: is it's surprisingly difficult to challenge someone who's really determined
Speaker 1: to be a big time fraudster. If you've got someone
Speaker 1: who's really got into running a dishonest business, then actually
Speaker 1: they're going to design their scam around all the controls
Speaker 1: that you have, and they're going to look like a
Speaker 1: really successful operator. And you know, as we know from
Speaker 1: the dot com era, from all sorts of examples from
Speaker 1: the very recent past, if something's a success story, it's
Speaker 1: very psychologically, sociologically, and institutionally difficult to be the person
Speaker 1: who stands up to that guy. You know, It's the
Speaker 1: whole Emperor's New Clothes phenomenon. So I'm curious from the
Speaker 1: fraudsters perspective. I mean, there's clearly a lot of intellectual
Speaker 1: ingenuity that goes into a scam like the one that
Speaker 1: you just described. Why do you think they sort of
Speaker 1: channel their creative energies towards fraud and scamming people rather
Speaker 1: than actually working within the system to create a legitimate business.
Speaker 1: It's very weird, actually, Tracy. I mean, I'm not sure
Speaker 1: I understand why these people do this. I think the
Speaker 1: classic model is what they call the fraud triangle, Like
Speaker 1: you have the murder triangle of means, motive and opportunity
Speaker 1: for fraud. What it seems to be is that you
Speaker 1: have an opportunity which is a deficient control or a
Speaker 1: way around the existing control systems. You have a mead,
Speaker 1: which is just someone you know. As I say in
Speaker 1: the book, bankers in the end steal for the same
Speaker 1: reason that heroin addicts do. They've been put in a
Speaker 1: position where they have to get hold of more money
Speaker 1: than they can get hold of immediately by honest means.
Speaker 1: And then you have what Kressy called a rationalization, because
Speaker 1: the interesting thing about these fraudsters is in general, they
Speaker 1: don't regard themselves as deviance individuals in the way that
Speaker 1: other criminals basically do. Are read about two dozen autobiographies
Speaker 1: of people who had been convicted of famous frauds, and
Speaker 1: the absolute constant refrain through all of them is that
Speaker 1: it wasn't really my fault. They always find some way
Speaker 1: of distancing themselves and putting a psychological barrier between their
Speaker 1: self image as basically an honest and successful business person
Speaker 1: and the reality of what they're doing. So even to
Speaker 1: you know, the Angelus, who was clearly stealing money from
Speaker 1: his company, kept on rationalizing it that all he was
Speaker 1: doing was borrowing money in order to finance later transactions.
Speaker 1: There's usually some fantasy that there's going to be a
Speaker 1: big score at the end of it which will allow
Speaker 1: them to pay everything back and make everything right as
Speaker 1: if the fraud had never happened, and then we only
Speaker 1: find out about them when they collapse. One thing that
Speaker 1: interests me is how many nick Leason's there are out
Speaker 1: there who actually did happen to have a good day
Speaker 1: on the market and managed to make cool of the
Speaker 1: hitting account's balance. Daniel said something that I thought was
Speaker 1: very funny when you said that this character, you know, de'
Speaker 1: angelis like to have the rumor out there that he
Speaker 1: was linked to the mafia even though he wasn't, because
Speaker 1: it put the idea in prospective business partners had that
Speaker 1: maybe had actually made him more credit worthy because he
Speaker 1: had other sources of income coming in. It kind of
Speaker 1: reminded me of with made Off. Weren't there people who
Speaker 1: suspected something was amiss, but that they thought it was
Speaker 1: something else, so they thought, oh, maybe he's doing some
Speaker 1: sort of insider trading or doing something else that sort
Speaker 1: of scam me with the uh, you know, market maker
Speaker 1: side of his company. And although you'd think that should
Speaker 1: be a red flag to anyone that actually made them
Speaker 1: more confident that he would have the money to keep
Speaker 1: supporting his fund. Yeah. Yeah, yeah, quite a lot of
Speaker 1: people thought exactly. Thus, also with some Israel that you
Speaker 1: capital and some Israel actually wasn't inside its radiator as
Speaker 1: well as a conci scheme operator. But yeah, people thoughts, well,
Speaker 1: he's a crook, but he's not necessarily going to scam me,
Speaker 1: which turns out usually to be quite about way to
Speaker 1: run your relationships. So how can organizations, I mean, you've
Speaker 1: identified a couple of obvious weaknesses or blind spots that
Speaker 1: happened when organizations they set out a specific target for
Speaker 1: making money or market share that causes them to drop
Speaker 1: their guard. They think, well, I'm I'm okay getting into
Speaker 1: business with the scammer because I'm not the one being
Speaker 1: scammed here. What are some practices that companies can actually
Speaker 1: implement to sort of guard against these sort of obvious
Speaker 1: human failures. Well, I'm going to give two answers to that,
Speaker 1: I mean, directly answering the question. I think it comes
Speaker 1: back to the fraud triangle. You want to avoid creating
Speaker 1: a need so you don't want to create situations in
Speaker 1: which you're setting unrealistic targets for your staff, because if
Speaker 1: you're setting on realistic targets, then you're putting them in
Speaker 1: a position where they can't do things legitimately, and that's
Speaker 1: where you're getting what they call criminergenic in sensuves so
Speaker 1: in sense of structurally making people more likely to commit crimes.
Speaker 1: You can then look at the opportunity side of the triangle,
Speaker 1: and an opportunity to commit fraud is just a weakness
Speaker 1: in controls. As we say in the book, every time
Speaker 1: you decide what you're going to check up on, you
Speaker 1: are also deciding what you're not going to check up on.
Speaker 1: And that's how the fraud gets into the system, because
Speaker 1: you simply can't check up on everything. And so, you know,
Speaker 1: for catching the bulk of frauds, it's really you know,
Speaker 1: a like a return except it's say fraud return trade off,
Speaker 1: where you start beefing up the controls until you think
Speaker 1: that the marginal value of the frauds you're preventing is
Speaker 1: equal to the marginal cost of doing so. Having said that,
Speaker 1: that's a really difficult thing to investigate because the definition
Speaker 1: of a fraud is it's something that happens outside your
Speaker 1: normal manufacturements information systems, so you can really badly get
Speaker 1: that optimization calculation wrong. In the classic example of that
Speaker 1: is Medicare, where in the end, credible people like non
Speaker 1: politically say that in the nighties, between twenty and a
Speaker 1: third of all payments made under the Medicare system were fraudulent,
Speaker 1: which was probably hundreds of billions of dollars, probably the
Speaker 1: biggest fraud until the financial sector took the title back.
Speaker 1: And what was going on there is that it was
Speaker 1: absolutely assumed that the main cost problem in Medicare was
Speaker 1: over treatments, and that the main driver of over treatment
Speaker 1: was defensive medicine from doctors who are scared of getting sued,
Speaker 1: and so they had systems that were meant to catch
Speaker 1: unusual treatments but minimize otherwise the cost per claim processed.
Speaker 1: And so what they built was a system that couldn't
Speaker 1: detect four thousand identical hip replacements coming in from a
Speaker 1: clinic in Florida that just simply didn't exist because it
Speaker 1: was a paper creation of some fraudsters. So you can
Speaker 1: think about things like that. On the other hand, the
Speaker 1: second answer I'd give is almost to turn around the
Speaker 1: question and say, are you sure that minimizing your exposure
Speaker 1: to fraud risk is actually what you want to do,
Speaker 1: because you know, the question is do you want to
Speaker 1: make yourself bulletproof against fraud or do you want to
Speaker 1: get rich? And actually, it turns out, as far as
Speaker 1: I can sell, the optimum level of fraud is certainly
Speaker 1: not zero, and it could be very high. We could
Speaker 1: look in Silicon Valley and take a look at the
Speaker 1: Frans case and Elizabeth Holmes and say, well, this is
Speaker 1: pretty easy. You avoid a thranos by really checking out
Speaker 1: all your tech demos and then not doing any business
Speaker 1: at all with people who fake their demos, which is
Speaker 1: a great way of avoiding frauds. Unfortunately, it also means
Speaker 1: that you miss investing in Oracle because Larry Ellison totally
Speaker 1: fake demos at crucial elite stages. It means you probably
Speaker 1: miss investing in Apple around the time of the iPhone
Speaker 1: because some of those demos there were definite differences between
Speaker 1: what was happening on the big screen and what was
Speaker 1: being sent from the device. In general, a system that's
Speaker 1: set up to eliminate fraud risk is going to eliminate
Speaker 1: so much legit some business that I kind of find
Speaker 1: myself wondering if what you should be looking for is
Speaker 1: almost a rule of thumb to stop you trusting too
Speaker 1: little rather than trusting too much. H Um. I want
Speaker 1: to press you on this point because it's a really
Speaker 1: interesting one. And you know, if you read another very
Speaker 1: good book, Bad Blood, about the Sarin Nos case, one
Speaker 1: thing that comes out is that Elizabeth Holmes was sort
Speaker 1: of pursuing strategies that she thought had been pursued by
Speaker 1: Apple and Microsoft before, so sort of a fake it
Speaker 1: till you make it approach. How many of the frauds
Speaker 1: that you look at actually start out as legitimate business activities,
Speaker 1: maybe even promising business activities, and then encounter some trouble
Speaker 1: and then turn into actual frauds. I think it's about
Speaker 1: fifty fifty between that sort of thing of being a
Speaker 1: legitimate business that drifts and something that was clearly set
Speaker 1: up as a fraud from day one. I mean, the
Speaker 1: interesting thing about the whole Soranus and the fake it's
Speaker 1: or you make it model is that it's a history
Speaker 1: of that comes from mining fraud. Gold miners always thought
Speaker 1: that there was a great big load just a few
Speaker 1: feet away for digging rock, and that all they needed
Speaker 1: was a little bit more investors cash in order to
Speaker 1: achieve it. And that's how gold miners started getting into
Speaker 1: the habit of faking essay results, which is a tradition
Speaker 1: that goes way back to the first days of the
Speaker 1: Californian gold Rush. And you get these things which start
Speaker 1: out as having an honest intention, but then when you
Speaker 1: realize that you can do that, there's some people who
Speaker 1: realize that actually faking it until you make it is
Speaker 1: one business model, but it's in many ways cheaper to
Speaker 1: just start straight out by faking it. Dan, what is
Speaker 1: the oldest type of pride? The very earliest one I
Speaker 1: found as public procurement fraud. There is a public procurement
Speaker 1: fraud in the Bible, and it's a case of skimming
Speaker 1: profits of a maintenance contract in the Book of Kings
Speaker 1: for anyone who's counting. And that's really because governments developed
Speaker 1: earlier in the history of civilization than corporations did. And
Speaker 1: what is actually quite interesting is that modern commercial fraud,
Speaker 1: as opposed to just generally stealing by lying, is surprisingly modern.
Speaker 1: You don't find that many of them before about eighteen hundred,
Speaker 1: and the reason for that is that you don't find
Speaker 1: that many recognizably capitalist enterprises before eighteen hundred. Actually, I
Speaker 1: tell a lie because I've got my ancient history wrong.
Speaker 1: The ancient Greeks had a loss of shipping fraud, and
Speaker 1: that would presumably have predated the ev answer of the
Speaker 1: Book of Kings. Getting a ship, pretending to load it
Speaker 1: with a valuable cargo, scuppering it or hiding it, and
Speaker 1: then telling your investors that they've lost their money. That's
Speaker 1: probably the oldest form of fraud. Um. I have what
Speaker 1: might be a strange question, but I'm going to ask
Speaker 1: it anyway. Do you think as the world grows more
Speaker 1: complex and as we get more regulation, more supervisors, you know,
Speaker 1: big supervisory departments situated within companies, whether they're financial or
Speaker 1: something else, do you think that makes the potential to
Speaker 1: have frauds more likely or less likely? So, for instance,
Speaker 1: the fact that we have insurers is what allows us
Speaker 1: to have insurance frauds. Right, So do the opportunities expand
Speaker 1: as we have more regulation and more supervision or do
Speaker 1: they shrink. I think it's an arms race basically, so
Speaker 1: locally they could be growing or shrinking. Globally, I think
Speaker 1: they probably stay at a reasonably stable long term proportion
Speaker 1: of the economy. I'm writing some more at the moments
Speaker 1: because there's a U S edition of the book coming out,
Speaker 1: and looking back through the book, I realized that it's
Speaker 1: time after time that I'm talking about something that happened
Speaker 1: in the a C. S or nineties and saying, of course,
Speaker 1: you couldn't get away with this today because they changed
Speaker 1: the rules. And it makes me worry that I'm portraying
Speaker 1: this view of an almost whig version of history of fraud,
Speaker 1: that all these bad people did bad things in the past,
Speaker 1: but we got wise to them and we've shot that
Speaker 1: particular loophole, and so that couldn't happen anymore. And then
Speaker 1: you get something coming along like sub primal libel. So
Speaker 1: what you get is technology and algorithms, I think are
Speaker 1: very good at detecting the general run of fraud, and
Speaker 1: you might actually even see genuine structural declines in just
Speaker 1: simple credit card skimming, check kiting and fairly straightforward small
Speaker 1: time stuff like that. But the nature of the really
Speaker 1: big frauds is that they're designed around the systems. They're
Speaker 1: designed around the guy who sets the algorithms in place,
Speaker 1: and you have the whole company controlled by a either
Speaker 1: by a fraudster or by a system of incentives that's
Speaker 1: so bad that it might as well be a fraudster.
Speaker 1: And the thing is that the amount of loss and
Speaker 1: the amount of damage is just totally driven by the
Speaker 1: very big frauds. If we consider something like payment protection
Speaker 1: insurance in the UK, or libor or forex, every single
Speaker 1: small time fraudster in the USA could work for five
Speaker 1: years and not get to be the tenth part of
Speaker 1: what the size of one of the really big financial scandals.
Speaker 1: Someone like you know, d'angelus, the salad oil king, if
Speaker 1: he were in his prime today, is he still alive?
Speaker 1: He is still alive. Yes, he was arrested for another
Speaker 1: fraud in the nine hasn't done anything since. That's if
Speaker 1: you were in his prime today. Coming up with the
Speaker 1: skills that enabled him to identify the selled oil opportunity,
Speaker 1: in your view, lend themselves to spotting opportunities for fraud today.
Speaker 1: Oh yeah, absolutely, because it's just picking. It's a combination
Speaker 1: of a very deep understanding of one industry and the
Speaker 1: way that it goes about. Because in general, if you
Speaker 1: were able to defraud something, then you have exactly the
Speaker 1: same knowledge as someone who's really good at managing it.
Speaker 1: If Tina was around today, though he'd been doing initial
Speaker 1: coin offerings. As far as I can see, with the
Speaker 1: amount of money that I c o s are capable
Speaker 1: of raising and the amounts of direct a site and
Speaker 1: regulation that goes into them, anyone who's doing any other
Speaker 1: kind of securities fraud today is just a damn fall.
Speaker 1: That brings me to the sort of obvious question. To
Speaker 1: identify initial coin offerings is sort of a ripe opportunity
Speaker 1: for fraud. Are the rules or rules of thumb that
Speaker 1: you could set up for look again an economy, looking
Speaker 1: at a situation and saying, okay, this is the area
Speaker 1: a generalizable rules to be able to say this is
Speaker 1: the area where right now we're probably seeing a lot
Speaker 1: of fraud. I think the big rule is exponential growth,
Speaker 1: because the absolute signature of a fraud is that firstly
Speaker 1: it has to grow as a compound rate because it's
Speaker 1: based on a business units that's showing positive growth. And
Speaker 1: then on top of that, you've got a wedge reflecting
Speaker 1: the money removed by the fraudster, which also has to
Speaker 1: show compound growth, but us you've got those two things
Speaker 1: acting together. In general, a fraud has to grow unusually quickly,
Speaker 1: which is why they always look like great, big success stories.
Speaker 1: So in the book, I think the golden rule that
Speaker 1: we suggest is if something's growing unusually quickly, then it
Speaker 1: needs to be checked out. And then the second part
Speaker 1: of the test is it needs to be checked out
Speaker 1: in a way that it hasn't been checked out before,
Speaker 1: because if it's a megafraud, then it's being designed around
Speaker 1: all of the usual qualifications. And probably something I'd add
Speaker 1: to that is if you try to check something out
Speaker 1: and the person in charge won't give you any of
Speaker 1: the information that you're looking for, then that ought to
Speaker 1: be really suspicious. Well, Dan, that was really fascinating, and
Speaker 1: I feel like I could keep asking you for more
Speaker 1: examples of famous financial frauds, but then we'll be here
Speaker 1: for about four hours, so we're gonna leave it there,
Speaker 1: and we don't want to spoil the book. Yeah, and
Speaker 1: you have the U S edition coming out right, Well, yes,
Speaker 1: that's going to be coming out in Basically, we realized
Speaker 1: with the US publisher Scritner, that in the book, I've
Speaker 1: got value added tax payment, protection, insurance, Ronnie and Reggie Cray,
Speaker 1: loads of kind of British things that despite the best
Speaker 1: efforts of guy Richie, Americans don't care about. So I'm
Speaker 1: rewriting that. Also, it turns out that Americans have slightly
Speaker 1: stronger forearms, so they won't mind a book that's longer.
Speaker 1: So I'm really excited about that working on that at
Speaker 1: the moment. All Right, Dan Davis, thank you very much
Speaker 1: for joining us. Thanks very much, well, Joe, you are
Speaker 1: absolutely correct in your assessment. I did very much enjoy
Speaker 1: that conversation, and I think the thing that I found
Speaker 1: the most interesting is the concept of this idea that
Speaker 1: there's actually a really fine line between genius, you know,
Speaker 1: someone who sees an opening in the economy or in
Speaker 1: the system to make a bunch of money legitimately, and
Speaker 1: someone who pursues fraud and basically sees an opening in
Speaker 1: the economy or in the system and pursues it illegitimately. So,
Speaker 1: you know, Dan gave that example of Apple and Steve
Speaker 1: Jobs and embellishing some of their reports early on in
Speaker 1: their history, and of course you Jobs now is widely
Speaker 1: lauded as a genius, but it could have turned out
Speaker 1: so very differently. Yeah, I think that idea that to
Speaker 1: commit fraud within an industry requires a deep, granular knowledge
Speaker 1: of the industry itself is a really sendating one. And
Speaker 1: you know, someone who just came to mind without regards
Speaker 1: to this is Martin Schrilly and the farmo bro who's
Speaker 1: currently in prison. But the thing is, he really does
Speaker 1: know a lot about pharma, Like, he is extremely knowledgeable
Speaker 1: about how the pharmaceutical industry works. And of course he's
Speaker 1: argued that he was not a fraud stir and so on,
Speaker 1: but regardless, he's someone with an unusually high level of
Speaker 1: just the actual mechanics of how the business works. Yeah,
Speaker 1: and there's plenty of dumb frauds out there, for sure,
Speaker 1: but some of them are legitimately ingeniously crafted and you
Speaker 1: just think, Wow, this person is clearly smart, clearly knows
Speaker 1: the business, has clearly analyzed it, put the effort in
Speaker 1: to find the holes in the system. Why couldn't they
Speaker 1: have pursued, you know, a legitimate business absolutely and this, uh,
Speaker 1: you know, this idea to that, if you're going to
Speaker 1: catch a fraud, you better come up with some test
Speaker 1: that's never been devised before or never been applied to
Speaker 1: this company before, because if the fraud had gotten to
Speaker 1: point X where you're thinking about it, it was almost
Speaker 1: certainly designed to to fool the standard tests. Yeah, and
Speaker 1: there's one other interesting thing down said, which was do
Speaker 1: you want to aim to have no frauds ever in
Speaker 1: your system? And you know, he pointed out to the
Speaker 1: idea that a lot of frauds either end up as
Speaker 1: legitimate businesses or end up creating a lot of wealth
Speaker 1: for the people involved with them. And that kind of
Speaker 1: goes back to some of the bubble episodes that we've had, Joe, Like,
Speaker 1: clearly we all went insane when we thought beanie babies
Speaker 1: were worth thousands and thousands of dollars, but it did
Speaker 1: make a lot of people wealthy if they were able
Speaker 1: to pull out at exactly the right time. Well, and furthermore,
Speaker 1: this idea that if you were to construct a set
Speaker 1: of behaviors is that to ensure that you never got
Speaker 1: caught up in a fraud, you would have to also
Speaker 1: guarantee that you miss a lot of things that don't
Speaker 1: turn out to be frauds that turned out to be
Speaker 1: wildly profitable. So you really sort of want to calibrate
Speaker 1: your fraud detection level, your approach at a level that
Speaker 1: maybe is per is not too onerous. Yeah, there's so
Speaker 1: much to unpack in this entire topic. It's such a
Speaker 1: good topic, which gets back to Dan's point in the
Speaker 1: beginning that frauds are just a great entry point to
Speaker 1: understanding business or human systems. Yeah, and human nature. Um,
Speaker 1: but for the avoidance of doubt, this is the p
Speaker 1: s a moment of odd lots. Don't do fraud, kids,
Speaker 1: don't do it. This isn't an endorsement, I have to say,
Speaker 1: so that, uh, this seemed to leb blurbed Dan's book
Speaker 1: and his blurb is if you want to learn to
Speaker 1: fend a fraud, read this, and if you want to
Speaker 1: commit fraud, don't. But if you absolutely must, first read this,
Speaker 1: which I thought was a pretty great blurb. Okay, all right, well,
Speaker 1: this has been another edition of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway, and I'm Joe wise in't all. You could
Speaker 1: follow me on Twitter at the Stalwart, and you could
Speaker 1: follow our guest Dan Davies on Twitter at d Square Digest,
Speaker 1: and you should follow our producer Topur foreheads on Twitter
Speaker 1: at for hiss T, as well as the Bloomberg head
Speaker 1: of podcasts, Francesca Levy at Francesca Today. Thanks for listening.