What are you reading these days?

I recently finished Lying for Money: How Legendary Frauds Reveal the Workings of Our World. I now understand somewhat better why bank heist movies are popular. It's a lot of fun to read about how these things worked. (There is little action, though.)

This book is by an economist who tells the stories of quite a few famous frauds, some I had already heard of and others I hadn't. I made a list of the more interesting frauds he writes about:

• Silk Road and online drug markets
• The Poyais fraud. (Poyais was a fictional country in Central America.)
• ICO's
• Canadian penny stocks
• ZZZZBest
• The New England Mafia (long firm fraud)
• EF Hutton (check kiting)
• The King of Salad Oil
• Medicare fraud
• Donald Trump's Atlantic City casinos
• How the original Ponzi scheme worked
• Pyramid schemes
• Bernie Madoff and hedge fund fraud
• Federal Reserve conspiracy theories
• The Portuguese Banknote Affair (counterfeiting)
• Bre-X (mining fraud)
• Theranos
• Counterfeit drugs
• Vioxx (scientifically unsupportable claims)
• Stratton Oakmont ("Boiler-room" stockbroking)
• Enron
• Rogue traders
• The Savings and Loan crisis
• Mortgage "robosigning" and the 2008 crisis
• Toxic waste dumping
• The Piggly Wiggly corner
• Jim Fisk and the Erie Railroad
• Swiss banks and tax evasion
• Plunkitt of Tammany Hall

In the introduction, he talks about four types of white-collar crime:

• Borrowing money and not paying it back (Such as by "long firms", businesses that disappear.)
• Counterfeiting
• Control fraud, where a business's management defrauds the owners and creditors
• Market crimes, which don't have specific victims but prey on the market in general

(These tend to be used in combination.)

And while I'm making lists, here are some techniques of accounting fraud:

• Completely fake sales
• Fake sales via economically meaningless transactions
• Up-front recognition of revenues
• Delayed recognition of costs
• Completely fake assets
• Unreported debt
• Overvalued or undervalued assets

A theme is that business procedures and human behavior have evolved to try to stop fraud, but not to try too hard because it's inconvenient. After discussing Silk Road and online drug trade, where Bitcoin escrow is possible but often not used:

The lesson from the darknet frauds is that you can build technical controls into the system, but fraud will work around them. Precautions are expensive, or inconvenient, or both, and trust is free. This means people will substitute trust for precautions up until the point at which the "shadow cost of trust"—the expected fraud loss—begins to exceed the direct cost of precautions. Since this trade-off is likely to involve a mixture of both, there will always be trust and therefore there will always be scams.

On why businesses use credit, and why I believe the cryptocurrency dream of eliminating trust can't work:

Most industries would be very different—almost unrecognizable, and certainly unable to operate at their actual scale—if all transactions had to take place on a cash-on-delivery basis. Every single stage in the production of this book, from the author's advance to the printers' payment terms to the retailers' sale-or-return, depends on the fact that businesses extend credit to each other to let payment be made when the money has arrived to make it.

Here are some quotes about why these crimes can be difficult to detect:

Even after it has been completed and the money stolen, a long firm often looks just like an honest business that went bust. Unlike most other kinds of criminal, white-collar fraudsters do exactly the same basic stuff as their honest counterparts. What makes the crime is the intent to deceive.

In particular:

The moment a car is stolen, its owner will be on the lookout for it, and its sale will be difficult and risky. But if a dozen cars are stolen by an automotive dealership acting as a long firm, the victim of the crime will expect to see them on the forecourt, being sold for cash to the public. The crime only comes into existence once the payment is overdue and the debt is in default. Fences for long-firm fraudsters always have the cast-iron excuse that the business did not look like a fraud when they were dealing it, because it did not, and in general, they have to screw things up pretty badly to end up being convicted.

Control fraud can be hard to detect as well:

A control fraud differs from the simpler kind because the means by which the value is extracted to the criminal is generally legitimate—high salaries, bonuses, stock options, and dividends, but the legitimate payments are made on the basis of fictitious profits and unreal assets, and the manager tends to take vastly higher risks than those that would be taken by an honest businessman.

Also:

A public financial market provides the same service to liars that it provides to honest businesses—it converts stories into cash.

And for market crime, it can be hard to tell whether it's a crime at all, and different jurisdictions may have different opinions.

It's a long book and a bit uneven, but definitely worth checking out if this sort of thing is of interest to you. And if you want to read more, there are recommendations at the end for further reading.