One of the many unintended consequences of the government’s response to the Covid-19 pandemic may well be a significant increase in financial fraud. This is due in part to the central banks lowering of the prime interest rate to zero percent. With money this “cheap” companies and individuals are encouraged to borrow money, which is all well and good until the money must be repaid. And when money is cheap, individuals may use the money they have borrowed recklessly, taking greater risks of loss.
Financial fraud occurs when an individual or corporation offers to provide goods, services, or financial benefits knowing that that these things do not and may never exist. In these situations, the victims of financial fraud trade money for these benefits, but never receive what’s been promised to them. This is because the perpetrators of the financial fraud know that the benefits do not exist, were never intended to be provided, or were misrepresented. Typically, victims give money but never receive what they paid for.
Possibly the most famous historical example of financial fraud occurred in the 1870s and is referred to as a “Ponzi scheme.” Charles Ponzi was a businessman and financier who created the Securities and Exchange Company. Using this as a front to defraud, Mr. Ponzi took money from investors, and then, after a mere 45 days, promised to return to them a 50% profit. Trouble was that the money was never “invested.” Ponzi simply took the new money he was being paid today to pay off the older investors. Also called a “pyramid scheme” a Ponzi scheme can only last so long, and like all Ponzi schemes, it eventually collapsed.