“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” — Wikipedia
Control fraud is the deliberate plundering of an entity, be it business or country, by a tiny few at the top. It is done by changing or ignoring the rules. The term control fraud was coined by William K. Black who contends that it is prevalent today, especially in financial institutions. Black was a federal regulator during the S&L banking scandal of the 1980’s and played a major role in exposing Congressional corruption. He is the author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry, and currently writes and speaks about control fraud in the current business and financial world.
The contrast between the S&L crisis of the 1980’s and the obvious fraud that lead to the real estate bubble, collapse, and now our current nasty recession is both striking and depressing. Several thousand bank executives went to prison in the 1980’s. But there have been virtually no criminal indictments, much less convictions, of high-ranking banking and real estate executives recently. Sure, a few hedge fund biggies have been convicted but so far not a single bank CEO has even been indicted.
Black writes extensively for the Huffington Post (and elsewhere) on corporate corruption, control fraud, the corrosive effects of campaign “contributions”, and our curiously passive federal regulatory agencies. He explains in a YouTube video how control fraud works. It’s actually rather simple.
- Grow like crazy.
- Make deliberately bad loans that aren’t going to be repaid because you can charge higher interest rates.
- Have extraordinary leverage.
- Don’t put on loss reserves in your accounting books. Thus you show a profit. And then senior management can take huge bonuses.
The FBI warned of mortgage fraud in 2004 and was ignored. 80% of mortgage fraud comes from the lender who did it by gutting underwriting standards, Black says. They then packaged the fraudulent mortgages into CDOs and sold them to investors. The senior officers walked away rich.
But, you say, isn’t this bad for the corporations? Of course it is. But that’s not the point. Black explains “Failure of the firm is not a failure of the fraud scheme.” This is the crucial point. Those doing the control fraud don’t care if the entity fails because they have looted it and are now wealthy.