The following hypothetical separates the leaders from the followers: (From United States ex rel. O’Donnell v. Countrywide Home Loans, Inc.)

“A simple hypothetical presents the central issue in this case. Imagine that two parties — A and B —execute a contract, in which A agrees to provide widgets periodically to B during the five-year term of the agreement. A represents that each delivery of widgets, “as of” the date of delivery, complies with a set of standards identified as “widget specifications” in the contract. At the time of contracting, A intends to fulfill the bargain and provide conforming widgets. Later, after several successful and conforming deliveries to B, A’s production process experiences difficulties, and the quality of A’s widgets falls below the specified standards. Despite knowing the widgets are subpar, A decides to ship these nonconforming widgets to B without saying anything about their quality. When these widgets begin to break down, B complains, alleging that A has not only breached its agreement but also has committed a fraud. B’s fraud theory is that A knowingly and intentionally provided substandard widgets in violation of the contractual promise —a promise A made at the time of contract execution about the quality of widgets at the time of future delivery. Is A’s willful but silent noncompliance a fraud —a knowingly false statement, made with intent to defraud —or is it simply an intentional breach of contract?”

From the South China Morning Post of August 12, 2016:

“In papers filed in Manhattan federal court, lawyers for real estate developer Ng Lap Seng said the case appeared intended to silence his advocacy for a conference centre in Macau, which would have given developing nations a permanent meeting venue in China.”

Seng (aka David NG) has been accused of participating in a global bribery scheme. Notwithstanding another’s recent conviction, the NG case is pending. However, for an intriguing overview of the involvement of private, independent (NGOs), and public sector entities in the alleged commission of a global conspiracy to, among other things, launder financial resources see the this formerly sealed complaint.

Prosecutorial discretion is great and long been a topic of review among scholars and professionals. See this oldie but goodie from October 1975. See also this from January 2011, and finally this from December 2012. None of which bode well for the defense of NG based on abuse of the prosecutor’s discretion. Prosecutorial discretion is in a word formidable (by design and practice). The exercise of prosecutorial discretion in the public interest is hard to argue against, especially as investigations and prosecutions cannot be isolated from their political effects; i.e., they are political acts where directed by the police and/or public prosecutor.

The accountability of the prosecutor may be checked indirectly (e.g., the appointed may not be reappointed) or directly (e.g., the elected may not be reelected), but U.S. and its states’ courts do not commonly substitute their idea of the public interest in lieu of the prosecutor’s, at least not enough so to throw out indictments. Moreover, the accountability of courts may be more removed from the public than prosecutors (e.g., judicial impeachment of a U.S. judge is rare), so maybe this is the better of those two paths.

Officially, the 2016 budget for the European Union is approximately 155bn (EUR). The fraud risk was estimated and quantified at 3bn (p. 4), which would be approximately 2% of the 2016 annual budget. Other estimates have been made, including the Member States’ at 500m (EUR), which would be approximately .3% of the 2016 budget – a comparatively insignificant proportion even considering differences in periods of measurement and differences in annual EU budgetary expenditures. As the method(s) of estimation is not clear, approximations may be used for this article.

The criminal conduct risk, which would be inclusive of the fraud risk, was assumed to range between 2 and 20% (p. 90) of annual budgetary expenditures. These financial crimes risk estimates are admittedly not reliable (see also p. 90), but they are officially used. Why aren’t the true measures known? Why is the range so large?

Fraud and other criminal conduct acts are not generally transparent. Moreover, quantifying fraud and corruption risk is especially difficult on occasion. For example, where the public agency buyer is bribed to the extent of 2% of the contract value, is the amount at risk due to illicit conduct 2% or up to 100% of the contract value? Is quantification of fraud the amount overpaid as determined by the amount of the kickback or bribe and thus a calculation of comparative value received against a fair market value benchmark (i.e., what would the buyer have paid absent fraud?); or is the fraud risk measured as the entire contract value, as if all of the value received were tainted by the fraudulent conduct initiating and/or causing the transaction to be created by the parties?

Conceivably, if the criminal conduct risk arising from the EU budget were at 20%, the highest level of the range, a compelling argument could be made (in concert with other arguments well publicized in the lead up to the UK and Greece polls to vote on whether to continue participation in the EU) that there really is no need to support an organization’s expenditures where such a significant proportion is wrongfully diverted. Is the inspection and oversight so deficient that no one in authority knows the extent of the ripoffs?

Estimates of fraud in the U.S. are also uninspiring for the purpose of gaining an understanding of the extent of the problem of financial crimes risk, including theft by deception (e.g., here and here). Clearly, the treatment of whistle-blowers does not provide an inviting environment for those contemplating such treachery / honesty, with the result that public reporting of fraud is highly discouraged, understating the extent of the problem.

The questions of why and how financial crimes risk persists are less mysterious: Per Martin Wheatley on 01/07/2013:

“The fundamental nature of financial crime may not have changed over the years.  The characters who engage today in money laundering; boiler room scams; insider trading; and corruption are essentially modern day Victor Lustigs. No different from the con-artists, patent mongers and fraudsters of economic history.

“But the impact of their work is now far more quickly mutualised than ever before.  Money laundering and corruption on one side of the planet can fuel crime on the other in a finger snap. Pension pots can fall and mortgages rise in seconds on the manipulation of benchmarks like LIBOR. Increasingly high-tech Ponzi schemes now cross borders and time zones, collecting millions of victims along the way.”

Though opportunity allows some individuals to exploit the vulnerabilities of high tech marketplaces and corporate control systems, financial crime is not equally available to all: Position counts. Fraud and other financial crimes are wider and faster than ever, casting shadows actually immeasurable and contingent on the mind’s light of the interpreter. How much financial crimes risk can you see? Where is it concentrated? Why is it that your neighbor / colleague cannot see it?

From the Legislative Financial Statement (1.5.2) for the likely soon to be operational EPPO:

“The added value of establishing a European Public Prosecutor’s Office is mainly to be found in the increased number of prosecutions of crimes affecting the Union’s financial interests.”

Apparently, EU leadership lacks tolerance for the performance of the member states’ record of successful prosecutions from 2006 – 2011 (based on referrals from the European Anti Fraud Office – OLAF): 1,030 referrals and 199 convictions. See p. 18. Presumably, crimes against the EU budget will receive greater attention and a much higher rate of conviction, notwithstanding the use of the term “prosecutions” where “convictions” would more likely reflect the actual goals.

There have been exceptions to the member states apparent history of lackadaisical performance. Notably,

“For the alleged crime of exaggerating the deficit in favour of the creditors” a statistician from Greece was recently ordered by Greece’s supreme court to stand trial, with a prison term of up to 10 years facing him.

The call for the truth, the whole truth, nothing but the truth, and compliance with respect to the budget and the protection of financial interests is wonderful news for those in the profession of inspection and oversight of public funds. The stakes are higher. Auditors and investigators will be looking carefully; prosecutors will be able and willing to make a special priority of failing to treat revenues, expenditures, and assets as funds belonging to the Union and not the administering individual / official.

Now is the time to become adept in financial transactions and public sector budgets, as well as learn how to detect concealment of their true purposes. While many see the incarceration of Al Capone for income tax evasion as the result of peculiar justice in light of other crimes allegedly committed under his orders (e.g., murder), I respectfully hold otherwise: Financial crimes are not the accident; they are the reason. Most everything else is just support.

Immersed in instructing students how to learn, I forgot that machines learn. Next, I remembered that statistics may resemble GIGO (aka financial chicanery) and realized that remedial measures effectively used in the past may not operate effectively today. Indeed, public policies may be based on fictions, and there’s no one-size-fits-all panacea.

Knowledge of the attendant circumstances and understanding of the exogenous threats are key to effective financial analysis notwithstanding selective data accumulation, data mining, proof by data, etc. A new socially acceptable and artificial shell and its accompanying sets of financial models that appear so rational with their dependence on benchmarks, figures, graphs, and numbers have become the medium through which Wall Street and Main Street are interpreted by experts and lay persons alike, as if high technological modernity had liberated individuals from the usefulness and reliability of intuition and firsthand experience and observation, which are purportedly superseded by a new paradigm of what it means to be an intelligent human being. No more wars, no more systemic errors, no more fraud / irregularities…. Then, I awoke.

High tech and expensive but widely available higher education have not led to a higher moral plane of being and acting. Machine learning could improve these deficient present conditions, if its underlying formative and summative principles were designed with the goal of improving the general welfare and public domain, and if effective inspection and oversight of the implementation of such machine learning were operative. The promise of impartial machine learning should inspire, however the experience of biased programming should deflate any unrealistic expectations (e.g., here and here). Private ordering (aka capitalism) does not invariably result in public betterment.

What is the machine learning and what do the machine’s controllers endeavor to do with such learning – these are key questions. Just as students in accounting may exercise creativity without ethics, computer programmers may create an environment disadvantageous to those outside the beneficiaries of black box operations. Dr. Frankenstein’s monster lives; welcome to the machine.

For a brief description of the problems, including assurance of protection of civil rights, see this missive from the Missouri State Public Defender’s Office on August 2, 2016. However, this is hardly a newly discovered problem in the mainstream media and in academic scholarship (e.g., NYT August 2, 2016): Public funds are necessary to provide an abundance of goods and services that the private sector will not provide alone. The expression that you get what you pay for has relevance. Where public funds are not provided in support of public services such as inspection and oversight of the criminal justice system, injustice unsurprisingly often follows. Cf. where public funds are not provided in support of safe water.

The idea of not adequately funding units essential to the criminal justice system is especially cruel in light of the public funds generally used to fund the judiciary, public prosecutors, police, etc. Being tough on crime should require a little more than providing the functional equivalent of a nuclear arsenal to the offense and the functional equivalent of slingshots to the defense (though I’ve heard that this could work: Cf. David and Goliath), where the goal is something more than ‘lock ’em up and throw away the key.’ Error rates (e.g., the wrongly convicted) and failures in sense of proportion (e.g., excessive punishments for crimes without immediate and direct victims) are among the results of unenlightened toughness focused on those least able to defend themselves in a court of law.

As I noted in a prior post: There are good things and bad things to say about a federal conviction rate that routinely exceeds 90%. Public funding is essential for a just society: Austerity is not an evenly applied public policy.

Per the electronic NYT of August 1, 2016:

“The indictment (against Hi-Rise) does not address the long-held suspicion among many homeowners whose properties were battered by the storm that engineers, adjusters and out-of-state insurers colluded to minimize payouts. But court filings hint at how widespread the practice was at Hi-Rise, at least.”

Without intending to opine on whether the charged individuals were in fact engaged in a criminal conspiracy, I offer this newsworthy item as an exemplar of what goes on: There are routinely individuals (sometimes, formally known as victims) with knowledge and understanding of actual specific industry bad practices and actual cross-industry bad practices (herein, Group 1), and there are individuals (sometimes, formally known as defendants) that knowingly and in agreement with one another exploit the vulnerabilities of Group 1, as well as exploiting others without such knowledge and understanding about their victimization. The charged and uncharged wrongdoers are noted herein as Group 2. A question inevitably arises as to how to classify the states of mind occupying the individuals within Groups 1 and 2.

• The NYT uses the term “suspicion” in its preliminary evaluation of the states of mind of Group 1 presumably because officials have not secured guilty pleas from alleged wrongdoers (or maybe not even looked into or identified how and what they’ve done).  This seems fair, especially in light of the laws defining libelous communications, the likely low level of investigation performed by the holders of suspicion, etc. However, its fairness in polite society may be eclipsed by its inaccuracy; i.e., it may be fair to say but utterly lacking in truthfulness and in fact misleading to hold such false belief, however polite. The persistence of false belief only prolongs and protects bad practices.
• The Group 2 individuals are often described with such language as ‘eagerly anticipating their day in court’ or other such exaggerations and untruths. They usually do not confess, though some will plead guilty (especially where unable to afford an adequate legal defense), if charged. [Cf. does a federal conviction rate of greater than 90% for fiscal years 2001 through 2012 (p. 8) signal good things and/or bad things about the federal criminal justice system?] Then, it becomes fair to describe Group 2 criminal conspiracies for what they are – intentionally and widespread bad conduct. Thus, polite society may run a bit slower than the enlightened suspicious ones.

My point is this: One individual’s suspicion may be a far more accurate indicator of what’s going on than what is publicly acknowledged by polite but comparatively well endowed society. The ability and willingness to maintain suspicion, especially against the winds of polite society (as, after all, anyone can maintain suspicion where it is generally accepted) are essential attributes of the skilled investigator, auditor, journalist, etc. Effective inspection and oversight demands suspicion (cf. skepticism and objectivity). Of course, this tends to alienate both the wrongly doubted and the wrongdoers a step or two ahead of polite society, a hazard that makes the practice of effective IO, especially where the risks are high, a thing too rare.

Hat tip to one of my students – Kimberly Chen – who alerted me to this July 25, 2016 article by Bloomberg. The article rests on an academic paper discoverable here. Essentially, the article contains arguments that the Fed could have rescued Lehman under its emergency powers and political considerations were immeasurably important. These arguments are plausible and agreeable. However, like many articles on the public (U.S. Treasury), quasi-public (Federal Reserve System), and private (cf. Bear Stearns, JPMorgan Chase) sector treatment of the Lehman problem, which was superficially one of liquidity and/or solvency origin – a financial circumstance readily solvable by a lender with the resources of the FRS. The author of the paper was so close to imagining and conceiving the primary reason why Lehman was not rescued with this quote from p. 3:

“…policymakers did not fully anticipate the damage from the bankruptcy.” As we used to say in law school: Res ipsa loquitur.

The paper omits a discussion of the centrality of then newly enacted Chapter 15, which was designed to improve the administration of U.S. bankruptcy cases that involved international jurisdictions (e.g., Lehman and Australia). Policymakers needed to understand how the courts would interpret Chapter 15, especially in light of the superpriority given derivatives transactions, under which Lehman was a party / counterparty. 

Here is my summary using my grading rubric:

1. Timeliness – the nature of the conclusions reached in the paper, the path for which allegedly took four years, was not surprising. Making these general and specific conclusions public after these years diminishes the force and suasion of the paper and is not an exceptionally powerful set of statements.
2. Accuracy – the paper scores high marks here. It’s hard to disagree with the author’s contentions, given their limited reach.
3. Completeness – not touching Chapter 15 is a critical omission. Whether God plays dice with the universe may be debated, however I can assure the reader(s) that creditors, especially those with millions sitting atop billions of U.S. dollars and other financial resources and currencies, do not (at least with their own resources – see AIG and Other People’s Money). Domestic and international procedures for administering bankruptcies implicating Chapter 15 needed development. Lehman was the test case.
4. Creativity – again, Chapter 15. An essential skill in fraud examination, financial forensics, and inspection and oversight generally is to infer what nobody is telling you. If the author expected his interviewees and advisers to tell him some cold and calculating truths, then…, especially in light of the author’s own observation:

“Fed officials have not been transparent about the Lehman crisis.” (p. 210.) Cui bono?

The Panama Papers investigation provides much (course) material, and its publishers are justifiably proud (e.g., see this TED talk). Using a grading rubric for some of my courses, I offer the following brief assessment without summary numerical scores, especially reminded of the power of the U.S. DoJ in the Zarrab indictment:

1. Timeliness – the story broke, peaked, and is presently ebbing outside of the U.S. election cycle. The U.S. matters a lot. See Zarrab for the potential reach of its prosecutors. Where U.S. dollars are used, the DoJ may lurk nearby, rightly or wrongly.
2. Originality – Panama has long been under the purview of the DEA. Its notorious acceptance of U.S. dollars to facilitate transactions has been especially helpful to those (inside and) outside of law and regulation. Concealment as a means to further wrongdoing is not new.
3. Accuracy – this is the publishers’ highest level of achievement. The documentation and follow-up, including making the files available online in the public domain are admirable actions.
4. Completeness – the results and outcomes from the Panama Papers publication have not to date approached its publicity. See the anonymous whistleblower’s statement. The mainstream focus on venues outside of the U.S. masks what should be the key finding of the Papers: U.S. dollars are used and concealed globally (i.e., domestically and internationally from the perspective of the U.S.) in nefarious schemes lacking transparency notwithstanding the apparent involvement of public officials with the private sector.

As such way more could be done, including rewriting laws and regulations and dedicating more public sector resources in inspection and oversight to provide assurance that ethics and integrity (e.g., honest services) in the provision of public and private sector goods and services characterize the winners (cf. official conduct) in the socioeconomic games commonly known as development and redevelopment.

From Working Paper #51 by Aren, DeLuca, Ni, and Bates (Nov. 2015):

“While most variation in district fiscal stress is explained by factors largely outside local decision-makers’ control, local decision-making does matter. Our results indicate several ways in which local resource allocation decisions (larger class size, lower teacher salaries, lower administrative spending) increase district fund balances and thereby reduce fiscal stress. We do not, however, attempt to assess the impact of such measures on the quality of education services.” (pp. 25-26)

This academic paper is helpful in many respects, including indicating how financial management and accountability may be used to rank and rescue (or allow to sink) public schools, however the relationship between expenditures and quality of education was not examined. This, of course, is not due to perceived difficulties in measuring expenditures, which are generally and initially fairly transparent, but likely due to the complexity and controversial issue of measuring quality of education.

Education functions in many ways:

• As a signalling device to society at large, including prospective employers (e.g., wearing the badge of the Ivy League);
• As a means of leveling the playing field (e.g., practicing legally approved preferences), or
• As something else (e.g., a means of imparting vocational skills to students).

If education’s contents and delivery were fairly reducible to a known and accepted set of affordable across-the-board means and methods such that the poor through the rich received an otherwise adequate education independent of whether the student lived in Detroit, MI or Mountain Lakes, NJ, variations in spending would hopefully be of secondary concern. As education tends to be assessed by outputs and outcomes, including performance scores on standardized tests, the process often gets measured and tainted or praised by the ends. Adding to the complexity of tying quality of education to outcomes is the nature of scarcity in the context of the U.S. economy: If everyone were to become adept in maths, possessing the demonstrable skill of statistical analysis would be monetarily worth a lot less.

In practice, knowing which variables and inputs to use in an Excel spreadsheet goes a long way, especially as the GIGO principle seems ignored, deliberately, recklessly, or negligently in many (cheerleading) contexts. What is obvious to many, should be obvious to a lot more, but as a student of mine recently noticed – butler lies are not limited to instant messaging.