Frauds come in a surprisingly small number of flavours.
Frauds come in a surprisingly small number of flavours.
Image: 123RF/ANDREYPOPOV

The events of October 29 1967, when Reggie Kray murdered Jack "The Hat" McVitie at a party in Stoke Newington, north-east London, are firmly lodged in British criminal folklore. The hit led to the crime boss’s arrest and the fall of "The Firm", the terrifying 1960s gangland empire he ran with his twin brother Ronnie.

What’s less well known is the reason The Hat earned the Krays’ displeasure in the first place. It turns out he’d taken £500 as down payment to murder Reggie and Ronnie’s accountant, didn’t do the job, and failed to return the money.

Why did the Krays want their bean counter dead? Well, it seems that as well as armed robbery, arson and protection rackets, they had a nice sideline in commercial fraud. Leslie "the Brain" Payne specialised in so-called "long firm" scams, setting up business ventures, buying stock on trade credit then suddenly folding the enterprise and absconding with the loot. The Krays had become convinced (correctly, as it turned out) that he was about to turn them in.

Why do we fall for this stuff? Well, partly because we live in high-trust societies.

The Brain’s story is just one of the many entertaining tales that litter Lying for Money, Dan Davies’s new book about financial frauds. Others include the case of Gregor MacGregor, the enterprising Scots financier who invented a kingdom in Central America, Poyais, and then sold bonds energetically on its behalf. Or Artur Alves dos Reis, an ambitious 1920s Portuguese swindler who diddled the London-based printer of Portugal’s banknotes into letting him issue a vast bundle without the central bank’s imprimatur.

But it would be wrong to see this book as just a jolly if amoral trot through scams past and present. Davies, a former Bank of England regulatory economist, sets out to explain both the dynamics of fraud and why it is vain to think we will ever stamp it out.

Frauds come in a surprisingly small number of flavours. You borrow money and don’t repay it (the "long firm"), or you counterfeit something (like Alves dos Reis with his bogus banknotes). Then there is exploiting the alchemy of the stock market with accounting fraud. Selling shares to the public "offers a way to acquire and spend years of future profits before you make them," says Davies. The sums extracted multiply agreeably the more you make the numbers up.

Last, there is control fraud, where an insider uses his asymmetric knowledge to rip off all comers. This is the world of the rogue trader, such as Nick Leeson, the man whose "lucky" 88888 account destroyed Barings Bank.

Why do we fall for this stuff? Well, partly because we live in high-trust societies. We’re sufficiently confident of the rules of the game not to do much due diligence. Then there’s our own cupidity. "Marks" often fall willingly into the fraudsters’ clutches, trapped by their own corner-cutting search for prosperity. Take the 1960s "salad oil" scam, in which a US businessman, Tino de Angelis, conned the American Express (Amex) bank out of millions financing stocks of vegetable oil in tanks that were mainly filled with seawater (salad oil floats). It worked because ambitious Amex executives were desperate to break into corporate lending. 

If there is a lesson from Lying for Money, it is that scams and cons will always be with us

Much of this might be eliminated were we just a bit more careful. But as Davies contends, it’s all too much hassle. Even the drug dealers on the dark internet can’t be bothered to use the escrow software they’ve developed to deal with the problem of non-delivery or payment — surely a genuine risk given the absence of legal remedies. “Although the technology was there to do without it, the dark market ended up reinventing most of the apparatus of conventional trade credit,” Davies observes.

His deeper point is that societies accept some fraud because the very trust that makes them vulnerable to cheats is what also makes them prosperous. The Victorian railway mania may have attracted many swindlers, but it also benefited society mightily through the rapid introduction of new technology.

Frauds may be a pain, but they aren’t a systemic threat to the economy. Each contains the Ponzi-like seeds of its own destruction: the need to find exponentially growing numbers of suckers to keep the fiddle aloft. Swindling is never a black and white business, and Davies is good on the shades of grey in fraud-land. Some fiddles are hard to spot until they suddenly aren’t. Who, for instance, would have thought that banks selling Payment Protection Insurance would be one of the biggest scams ever?

Then there are the market crimes which used to be legitimate practice. Cartels were endemic in America’s robber baron heyday, for instance. Or take insider trading, once a stockbroker’s perk, which was only criminalised in Britain in 1980. A broker himself, Davies argues that mores didn’t change because bankers became more moral; mass-market wealth made the retail public more attractive as a source of capital. Better to get them to invest, then "rob them blind through trading commissions and management fees".

If there is a lesson from Lying for Money, it is that scams and cons will always be with us, however intricate the regulatory machinery that we build. For each malpractice slain, a novel and doubtless subtler version will spring to take its place. "The cost of eliminating dishonesty is much more to do with the amount of legitimate business that never gets done," Davies argues. There is an acceptable level of fraud.

Which, of course, leaves the question of how to avoid the fraudster’s clutches in the first place. Davies suggests learning to spot the tells, of which the biggest is sudden, super-charged expansion. "Anything that is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before," he offers. Things that seem too good to be true very rarely are.

Lying for Money: How Legendary Frauds Reveal The Workings of Our World, by Dan Davies.

• Jonathan Ford is the FT’s City Editor.

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