Financial Control Fraud

Financial Control Fraud

By Jim Macklin
Secure Document Research

When a person or persons who own or oversee the operations of a seemingly legitimate business or Governmental Agency uses that business or agency as a “weapon”, it is known as a control fraud. The term was coined by UMKC Professor William Black (The Best Way To Rob A Bank Is To Own One, Black, 2005). The “weapon of choice” in a financial control fraud is accounting. More losses occur in financial control frauds than any other form of property crimes …combined!

In the early stages of our most recent financial crisis, the FBI had correctly identified the presence of the type of fraud, yet, the Bush administration failed to effect any real consequences, and so the fraud was swept under the rugs of the administrations’ offices. De-regulation and the advent of hyper-bonuses helped to encourage the practices of the ratings agencies, hedge fund managers, and CEO’s of the Wall Street elite, while the AAA rated “junk bonds” went out for sale with a frenzied push for more paper. Never before, in the history of Wall Street, had a AAA rated bond gone into a default. Remember, these ratings agencies hadn’t even bothered to sample the veracity or viability of the loan files upon which these ratings were issued. This is a control fraud in its’ simplest and purest form, with all of the key players indemnified against losses through trust agreements. This is the smoking gun.

The professional credit rating agencies whos’ responsibility is to assess and identify credit risks were turning a blind eye to the fundamental process of verifying the loan files! All this was done to generate obscene profits and bonus structures for the agencies and all the myriad “intermediaries”, with the losses expected to be filtered down to the true principals of the transactions…the Borrowers and the unsuspecting investors of mortgage backed securities. The borrowers would absorb the losses through equity losses in property values and payments already made, while the investors would carry a loss as a decrease in income stream derived from the REMIC Trusts. All of which would be cleaned up in foreclosure and the imminent REO sales of the now impaired assets of the trusts.

The synthetic CDO’s, derivatives, and exotic financial vehicles that were sprung from this fraud were created by the industry as an even bigger launch pad for the frauds’ controllers to disguise, perpetuate, and otherwise develop an even more egregious systemic fraud.

The whole scheme was premised on a simple lie… that toxic, non-viable loans could be AAA rated and sold to unsuspecting, un-sophisticated investors as RISK-FREE! The resulting scramble for more paper to sell only exacerbated the fraud into one of massive proportions, ultimately imploding, as all Ponzi type schemes do.