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Fraud: downturn creates the perfect environment for a reckoning

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There is a special moment in the timeline of financial scandals when the key protagonist has made its gains but the victim has yet to feel a loss. This is the “bezzle”, according to US economist JK Galbraith, who coined the term in 1950s. It tends to coincide with high points in the economic and business cycle. When a downturn arrives, the bezzle comes to an end.

Shareholders in Wirecard know the feeling. The disgraced payment processor collapsed in 2020. This week, chief executive Markus Braun appeared in court, accused of one of the biggest cases of fraud in German history.

Cryptocurrency’s bezzle disappeared this year as scandals pummelled prices. Sam Bankman-Fried, founder of bankrupt crypto exchange FTX, has yet to explain where billions of missing dollars have gone. Terra founder Do Kwon is being sought by authorities following the collapse of Terra’s stablecoin.

Expect more horrors to be unmasked in 2023. Downturns erode excessive trust created during market highs. An estimated $14bn is thought to have been lost to crypto scammers in 2021 alone, according to US blockchain analysis firm Chainalysis.

Opportunity is one of the main drivers of fraud. The pandemic and resulting lockdowns triggered a rise in digital crime. Fraud accounted for 40 per cent of offences in 2021, according to the Crime Survey for England and Wales — up from 30 per cent in 2016.

“There is more fraud today than ever before largely because technology has made it so much easier for criminals,” says Mark Button of Portsmouth university.

Criminals were quick to take advantage of government schemes created to address shortages during the Covid-19 pandemic. In the UK, some £6bn was stolen from job retention schemes and a further £5bn taken via the bounceback loans scheme, according to HMRC estimates.

The idea “that everyone is at it” can be a powerful motivator. Eventually, however, victims start to ask questions. No bezzle lasts forever.

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