in which I draft a response to an epidemic of fraud

“The answer to your question is:  only prison sentences can deter the violations that caused the debacle.  We should, however, never rely solely on prosecutions to constrain crimes.  The criminal justice system needs to work with regulation not only to make regulation more effective, but also to prevent “private market discipline” from becoming a “criminogenic” oxymoron. To understand the vital role that the criminal justice system must play if we are to avoid the recurrent, intensifying financial crises that have beset this and many other nations for nearly three decades we must begin by understanding the epidemics of “control fraud” that are driving these crises.” (1)

The nineteenth century writer and philosopher Henry David Thoreau asserted that

“All perception of truth is the detection of an analogy”.

The epidemic of control fraud (2) is thus to be taken as a truth, not a metaphor.

Black contends that the criminal justice system and regulatory bodies must work together, but the analysis and control of epidemics would require a much broader cross-disciplinary approach; a complexity science approach to a complex problem. The objective is not just to respond to epidemics when they occur, but effective and continuous identification and containment of the infective agents to prevent or at least reduce single incidence of control fraud, and to prevent infection escalating into epidemic.

The first body of knowledge to be represented is that of experienced white-collar criminologists. Black and his peers have experience of identifying and responding to control fraud, and could supply descriptions of symptoms, vectors, and sources of contamination; and propose direction of study as well as responses. A form of vaccination may even be designed, developed and tested: not, of course, a chemical one; but a regulatory response to be deployed to create a herd immunity, or at least resistance  to fraudulent behaviour. Perhaps ideally, an inbuilt response: something which provides negative feedback to misbehaviour. After all, 

Even though a sense of propriety does not stop chicanery, it does curb it. Fewer people will take part, and those who do have to go to considerable lengths to disguise their actions, which increases the costs and time needed.” (3)

Knowledge and experience of how organisational behaviours emerge from interactions between individuals, and cultural behaviours emerge from interactions between individuals and organisations – of complexity in sociology – would be essential. Feedback loops – positive and negative – would need to be identified and understood. For at least four decades a culture of fraudulent behaviour (or at least, absence of propriety) has been evolving. Regulation and criminal prosecution – which should provide both positive and negative feedback to the system to discourage fraudulent behaviour – have failed or been removed. The same may be asserted for audit and accounting: the role of external consultants may also be in scope. The evolution of fraudulent behaviours and failure of resistance to fraudulent behaviour within and between organisations requires study.     

Epidemiology, and specifically network modelling of epidemics would be required to identify analogies between the spread of control fraud and of well-modelled diseases, and to build effective new models of fraud epidemics and fraudulent behaviour as a disease. Biological diseases spread over networks of contacts between individuals. To protect against epidemics of (control) fraud, the networks of contact between individuals and organisations would need to be modelled. This would be required at least at the organisational level, though a drill-down to individual level for board members may be required: certain organisations (or certain persons within them) may be identifiable as carriers, and some organisations may even be disease pools. (4)

This exercise would also require models of social and business networks and possibly IT networks at application level. (IT experts with knowledge of the sector). Strong degrees of association between individuals and organisations which correlate with fraud, or with activities which are identified as enabling fraud (5) could then be analysed.

It seems a tall order: a correction to behaviours of an individual salesperson and those organisations influencing policies of entire governments. But the frauds Black describes are not just costing jobs, careers, and business; not even just costing trillions of dollars, euros, and pounds: they are costing us democracy and even our societies and nations.      

1 United States Senate Committee on the Judiciary, Subcommittee on Crime and Drugs,  “Wall St. Fraud and Fiduciary Responsibilities: Can Jail Time Serve as an Adequate Deterrent for Willful Violations?” May 4, 2010 Testimony of William K. Black

2 “Control frauds” are seemingly legitimate entities controlled by persons that use them as a fraud “weapon.” See (1)

3 Yves Smith

4 Black contends that neoclassical economics itself is a source of control frauds. Academic institutions and think tanks which teach neoclassical economics may – inadvertently or perhaps even intentionally – be disease pools from which epidemics of financial fraud arise.

5 Black has proposed a number of executive actions which make fraudulent behaviour not just easier, but effectively unavoidable.


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