If fraud is like cockroaches, beware the next infestation
BNP Paribas is the latest bank to take a hit from fraud, and as financial conditions shift, it will not be the last
For those who worry about the fragility of the financial system, there is something oddly reassuring about fraud. If banks are going to face unexpected costs for loans going bad, it’s better that they are the result of a few “cockroaches”, as JPMorgan boss Jamie Dimon characterised them recently, than a broad, corrosive deterioration in credit conditions.
By that token, recent sightings should be irksome, rather than systemically concerning. The latest scuttled out from BNP Paribas, which took a €190mn charge over a fraud related to receivables financing. Regional US banks Zions and Western Alliance also recently claimed they had been defrauded, and authorities are investigating possible knavery around the collapses of auto-loan company Tricolor and car-parts maker First Brands.
But what happens if fraud does become an endemic part of the system? Certainly, the conditions that enable corporate grift are getting more favourable. Those are pressure, opportunity and rationalisation — the three points of what criminologist Donald Cressey in the 1950s called a “fraud triangle”.
For an idea of the pressure company managers might be under, thanks to high interest rates, tariffs and other kinds of uncertainty, look no further than corporate insolvencies. Those in Europe and the US are rising. In the UK, the level has lingered around a 30-year high for the past two years.
Opportunity is increasing too. Private credit firms are falling over themselves to allocate capital; banks are fighting to provide them with investment opportunities. Financial history shows all too well that in times of exuberance, standards tend to slip. Technology also brings more ways to defraud, fake documentation and bamboozle consumers and counterparties.
The real bogeyman is rationalisation — the “everybody does it” defence. There too, it’s hard to believe that the conditions aren’t worsening. In a decade-old study, participants in a dice-rolling game proved more likely to lie about their score in countries with a higher prevalence of rule violations. Wealth hardly engenders honesty: a Californian study found drivers of fancier cars more likely to enter a four-way junction when it isn’t their turn.
If Cressey was right, the US should be on particularly high alert. Alongside rising economic pressure and slipping lending standards, it isn’t hard to see how the cavalier approach of the Trump administration to conflicts of interest and enrichment of insiders might support rationalisation. On top of that, the deep cuts to anti-scam regulators like the Securities and Exchange Commission may reduce deterrents.
So if the corners of the fraud triangle really are getting sharper, what then? Companies, lenders and investors will have to spend more to raise their defences. But given the fertile conditions for corporate misbehaviour, the troubling conclusion is that cockroaches creeping into view today will turn out to be nothing compared with those yet to hatch.