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The History of Financial Crime: Exploring Examples of Modern Money Crimes

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Financial crime has been around since the invention of currency.  Some would argue its origins begin even further back in history, with the advent of trade.  If true, we can imagine the first instances of fraud involved trading wormy fruits, soured wine, or sick livestock. During those times, any exchange that knowingly defrauded the other side of a transaction was, in fact, financial crime. 

Once currency was established, things got even trickier.

Today, the team at BusinessForensics is taking a look back at the history of financial crime. We’ll cover the earliest known examples and explore financial crimes during the Bronze Age and Antiquity. We’ll then look at more modern money crimes during the Victorian Era and through the Twentieth Century. Finally, we’ll take a look at modern financial crimes in the Information Age. 

Know the story we present here is entirely secular. But some of the oldest texts we can summon are religious. 

The Earliest Examples of Financial Crime

Humans began smelting copper roughly 8,000 years ago, and so began The Bronze Age. We can only guess at the instances of ore-swapping that probably occurred.

  • Fast-forward 4,000 years, and we know for sure that financial crime existed during Biblical times.
  • How old are those texts? Scholars suspect the Old Testament / Hebrew stories to be about 4,000 years old, but the oldest hard copy we have found — The Dead Sea Scrolls — is probably half that age. 

That’s not to say fraud and theft weren’t happening in Ancient Egypt, India, or Ancient Central American Civilizations. We know, for instance, that ancient Egyptians had laws and we see depicted punishments. But we don’t have a copy of their code of law.

Reading the ancient texts we do have, we find the oldest instances of financial crime manifested as:

  • Dishonest weights and measures meant to defraud trade customers
  • Dishonest money-changing among different nations and tribes (related to our modern currency exchange scams)
  • Exorbitant usury (today we call them interest charges and fees)
  • And plotting to steal someone’s inheritance — a forefather of life insurance scams, property inheritance scams, and senior extortion, today.

The Jewish Virtual Library says punishments during these early eras were mostly corporal. Think “an eye for an eye.”

  • Public stoning, beatings, and whippings, “slaying,” strangulation, and crucifixion were commonplace!
  • Interestingly, human greed was a more powerful drive than fear of, say, losing a hand or an eye or even a violent death in the streets. 

We’re not exactly sure what brought about the end of The Bronze Age. The History Channel suggests it was a combination of famines and earthquakes. But we know financial crimes continued through the Iron Age and Antiquity

Financial Crimes in the Graeco-Roman Period

The Romans took banking out of religious temples and formalized it in distinct buildings. This was the beginning of banking as we know it. And thus began a new era of financial crime, mostly associated with moneylenders profiting from taking in and lending money and centuries of land grabs.

The First Known Case of Insurance Fraud

One of the first known instances of insurance fraud happened around 300 CE when Hegestratos, a Greek Merchant, took out a loan using his ship full of corn as collateral.

  • This sort of loan/insurance policy was called “bottomry,” referring to a ship’s keel or its bottom.
  • He planned to sink an empty boat, keep the loan, and sell the corn.
  • Ultimately, his plan failed.
  • He drowned, trying to escape the sinking ship, and was caught in the act.

While this is the first recorded instance, we can imagine this sort of fraud was rampant at the time. 

After the fall of Rome, banking in the commercial sense was largely abandoned. It didn’t revive until the crusades when powerful bankers emerged from the Holy Roman Empire. Remember, the ancient texts saw usury/interest as immoral. 

The Return of Banking

Eventually, commerce expanded. Bills of exchange were needed to avoid the risks associated with transporting large chests of treasure. Though it wasn’t until the sixteenth century that banks were commonplace again. So we’ll spin the globe 1,300 times and gloss over centuries of burglary, robbery, counterfeiting, and kidnappings for ransom to arrive in the Victorian Era because that’s when our modern concept of “white-collar crime” takes root. 

The Victorian Era & White Collar Crime

The first documented instance of white-collar crime appears in 15th-century England. We note that England was the first society to industrialize, and therefore the birthplace of Capitalism.

The First Case of Embezzlement

  • In 1473, a Flemish merchant hired an English carrier to transport bales of wool.
  • The English carrier instead took the wool for himself.
  • He was arrested for larceny but not convicted. The bales of wool were in his possession, willingly supplied to him by the Flemish merchant.
  • The judge found that even though the law didn’t recognize the defendant’s actions specifically as theft, it was still against the laws of nature.

Thus, embezzlement became a crime.

  • At this point in human history, small-scale financial crimes are an everyday occurrence for the next few centuries.
  • Envision them as private moneylenders charging exorbitant interest and applying physical violence when payments are missed or fall short.
  • In the business world, both insurance fraud in the merchants and shipping industry and issues with weights and measures among the less educated consumer are commonplace.

In the New World — the pioneer days of the Americas — cash is in short supply. The puritan population is spread thinly across the East Coast. Though a great deal of gambling on “gentleman’s” games of chance and bloodsports like dogfighting, cockfighting, and bear-baiting were happening in barns and backyards.

Across the Pond, Financial Crime in Early America & “Ye Olde Sopranos”

Wherever there’s gambling, there’s sure to be an element of financial crime. It may have been in the form of illicit pawn-brokering with a market for stolen goods or a steep vig — the interest charged by a “bookie” who hasn’t received funds owed. We’re confident that petty financial crimes were rampant. But what about the big crimes?

The First “Pump and Dump” Investment Scam of the US

According to Investopedia.com, America experienced its first fraud in 1792, only a few years after achieving independence. Back then, American bonds were much like junk bonds today. They fluctuated wildly in value with every tidbit of news about the individual colony that issued them. Like today, the trick of investing in a volatile market is to stay one step ahead of the news.

  • Secretary of the Treasury, Alexander Hamilton, was busy restructuring finance by replacing outstanding bonds from the various colonies with bonds from the new central government.
  • William Duer, a friend of George Washington and assistant secretary of the Treasury, was in the perfect spot to profit from insider information. 
  • Duer knew everything happening in the Treasury.
  • He would tip off his friends and make trades before leaking information to the public that he knew would drive up prices.
  • Then, he’d sell for an easy profit. 
  • After years of this, Duer finally left his post but kept his inside contacts.

Ultimately, Duer ended up in debtor’s prison, where he died in 1799.

Just 120 years later, Americans had to deal with another kind of financial crime.

An organized crime concept with two men shaking hands while one man is secretly slipping an envelope filled with US Dollar banknotes onto the other man's suit.

Organized Crime in the US

“The mafia” and its examples of financial crime is a topic worthy of an entire blog, and that’s a story for another day. While we can’t give it the full attention it deserves here, this piece wouldn’t be complete without acknowledging 100 years of organized financial crimes.

For now, know that:

  • The American Mafia, an Italian-American crime network with a foundation in New York and Chicago, rose to power through its success in the illicit liquor trade during Prohibition.
  • Next, the Mafia moved into other ventures, including legal and illegal gaming, sex trafficking, drugs, and infiltrated labor unions.

Today, the business of the five leading families of the Mafia are either mostly disbanded, mostly legitimized, or so well-hidden under paperwork and DBAs, it takes a financial/business forensics expert to unearth them.

This leads nicely into our final section: modern financial crimes.

Financial Crime in the Information Age

Of all the eras of human history, none are more complicated than today.

Modern financial crimes are happening right now in the forms of:

  • Life insurance fraud
  • Property insurance fraud
  • Cargo fraud
  • Embezzlement
  • Illicit loan-sharking
  • Money-laundering
  • Identity theft and benefit theft
  • Senior citizen extortion

Our global economy and the advent of Cryptocurrencies only make these transactions more difficult to track and unravel.

The COVID-19 pandemic has changed the way we shop, entertain, and educate ourselves. Your prospective clients are eager to do their transactions from handheld devices, and the next generation of money-launderers and identity thieves are eager for it, too. All the more reason for financial institutions and insurers to Know Your Customer (KYC), perform Customer Due Diligence (CDD), and develop a relationship with them. 

If you’d like to learn more about BusinessForensics and our mission to cancel financial crime, contact us. Email our team at info@businessforensics.nl, and stay tuned for the next article in this series: “The History of Financial Crime: Know your Customer.”

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Equipo comercial

El equipo comercial de BusinessForensics consiste en la comercialización, el desarrollo de negocios y las asociaciones. Trabajamos en equipo para hacer las cosas, y ayudamos a difundir la conciencia sobre la prevención de los delitos financieros.