Fraud has evolved over the centuries from a more limited undertaking, marked by a few famous cases, to a widespread endeavor enabled by technology that nets billions of dollars a year.
Part 1 of this history of fraud covers the period from 593 BCE to the 1800s. Now we carry on with the modern era of fraud in the 20th and 21st centuries.
The dawn of modern mail fraud
In 1920, the original Ponzi scheme was developed by Charles Ponzi, who ended up costing investors as much as USD $20 million in eight months. He was charged with 86 counts of mail fraud when he was arrested.
Another well-known fraud also got its start in 1920 when P. Crentsil sent the first “419” or advanced-fee fraud letter to a contact in the British colony of the Gold Coast, today’s Ghana. Crentsil signed himself “P. Crentsil, Professor of Wonders.” He was charged in 1921 with three counts of violating section 419 of Nigeria’s criminal code, and a whole industry was born.
Rinse and repeat
Often with more interesting types of fraud, the crime itself overshadows the person who committed it. Most people have heard the saying, “selling the Brooklyn Bridge,” but far fewer know that in the 30 years leading up to 1928, George C. Parker sold the Brooklyn Bridge to tourists up to twice a week for a range of amounts (the highest figure allegedly being USD $50,000).
The match king – Ivar Kreuger’s not-so-safe safety match empire
March 1932 saw the suicide of a man who was thought to be one of the world’s most successful financiers just a few weeks before. Swedish businessman Ivar Kreuger was at one point so rich he was lending money to European governments, which were still recovering from the Great War and the Great Depression. His lies and forgeries included badly forged signatures on GBP £28,668,500 of fake Italian bonds — even the printed Italian portions were poorly written. One of many dodgy dealings that came to light during the stock market crash of 1929, the Match King Hoax is another example of a financier who kept a stable of companies afloat by having them lend money to each other. An investigation in the 1930s by Price Waterhouse led to the drafting of today’s securities legislation.
In 1936, advertisements went out that claimed anyone with the surname Baker might be entitled to a portion of “The Baker Estate,” owned by a recently deceased millionaire. This fictitious estate consisted of almost all of the land underneath Philadelphia. Enough people were fooled into sending the small fee that could help them “claim back their inheritance” that the people running this scam netted around USD $25 million.
The audacity of the con artist
In just a few years of criminality, Frank Abagnale Jr. made quite a name for himself — using names that were rarely his own. Starting in 1963 at the age of 15, Abagnale used false identities to open bank accounts, forged and duplicated cheques, and posed as an airline pilot to get free flights. Disguised as a security guard, Abagnale convinced employees of airlines and car rental companies to hand over their daily cash deposits to him instead of putting them in the drop box that he had labelled, “Out of Service.”
Abagnale was first arrested in France in 1969 and escaped several times before finally serving over four years at a facility in the U.S. He was released early on the condition that he help federal authorities investigate other cases of fraud. He has served as a consultant for the FBI, and his career as a con artist was dramatized in the 2002 movie Catch Me If You Can.
The modern face of (getting away with) fraud
As computers started to play a part in banking and finance, the size and speed of the stock market grew rapidly. Incidents like the insider trading scandal of 1986 are unusual not in their content or execution, but rather in the way that the guilty parties managed to wriggle out of serious consequences. Insider trading by Ivan Boesky and Michael Milken came to light, but Boesky did a deal with prosecutors, and Milken managed to salvage his reputation to eventually become a philanthropist.
In another case that changed the face of legislation, canny fraudster Charles Keating took advantage of the loopholes in the legislation governing U.S. savings and loan companies in 1989 by making a series of shaky investments designed to enrich senior officers of these companies. Several U.S. senators were implicated in the cover-up.
The start of technology-mitigated fraud
While plenty of other scams used technology, it was really only in the late 1980s that fraud based entirely in the electronic realm started to become common. One early scam that revealed holes in the legislation around premium-rate telephone lines tried to get people to call expensive premium-rate numbers.
In many cases, small children were targeted — there were even TV ads that used dial-tone signals on the TV to enable children too young to dial to be targeted.
By 1994, the dawn of eCommerce opened the door to the first online credit card fraud. An early example saw fraudsters making high-value purchases with cards made out to a celebrity. Before cards were instantly checked online, there was a short window when this tactic was viable. This started a race between vendors and fraudsters to stay one step ahead of each other that lasts to this day.
Fraudsters hit the jackpot with identity theft
With large amounts of money changing hands in casinos, it’s no surprise that they’ve been a prime target for grifters. The case of the Roselli Brothers is not well documented through official sources, but it appears that they employed hackers to steal credit history information from people with multiple accounts and good credit scores. They then used these stolen identities to take out loans and credit lines from casinos, while also maintaining steady cash balances to avoid suspicion. They gambled like high rollers, which led to the casinos extending them more and more credit. Finally, in 2000, they made one final trip to Las Vegas, cashed out all of their accounts, and disappeared with nearly USD $40 million.
The 21st century sees a boom in fraud of all types
The Enron scandal kicked off the new century in 2001, seeing Ken Lay, CEO of the 22,000-employee behemoth, caught out when $101 billion in claimed revenues turned out to be false. The investigation that followed also took down Enron’s accountants.
Data breaches burst onto the scene in 2004 when an AOL employee stole information for 92 million accounts and sold it to spammers. Since then, the Privacy Rights Clearinghouse has recorded over 9,000 incidents in its database, starting with 136 breaches in 2005. Personal information leaked in data breaches is often used to open new accounts, take over existing accounts and impersonate people for financial transactions.
Homograph attacks were first reported in 2005 — attacks where non-Latin characters that look like Latin letters are used to spoof URLs and email addresses in the course of committing online fraud. Fifteen years later, this is still a common problem.
Ponzi schemes aren’t dead either, and one of the best known took place in 2008. Bernie Madoff’s scheme collapsed after previously avoiding detection even when investigated by the SEC. The world’s biggest Ponzi scheme swindled its investors out of USD $64.8 billion.
Branching out from banking and finance, a huge bribery and corruption scandal overtook FIFA, football’s governing body, in 2015. Fourteen FIFA leaders, sports marketing executives and a broadcasting head were charged with racketeering, wire fraud and money laundering after they were discovered arranging kickbacks in exchange for lucrative television contracts.
The financial industry sees its share of modern fraud
Credit card fraud has advanced since the early days of celebrity impersonation, and the spoils can be significant. In 2016, an astonishing 1400 ATM machines across Japan were hit in a coordinated attack using 1600 forged credit cards bearing stolen South African card numbers. The scheme netted the thieves USD $13 million in less than three hours.
Cryptocurrency may leverage new technology but it’s vulnerable to age-old avarice. The Bulgarian-based OneCoin was first flagged as problematic in 2015, but they were still operating in 2017 when an investment pitch meeting in India was raided, resulting in the arrest of 18 representatives. The founders of OneCoin claimed to be selling educational material for trading, but the cryptocurrency turned out to be — you guessed it — a Ponzi scheme. OneCoin’s worldwide take is estimated at USD $4 billion.
Banks are often victims of fraud, but in some cases they’re the perpetrators. Wells Fargo was called on the carpet for opening millions of bank accounts and credit cards for customers without their consent. The fraud was exposed when customers noticed they were being charged unexpected fees and receiving lines of credit they hadn’t applied for. In 2017, Wells Fargo agreed to pay a penalty of USD $3 billion to the U.S. Department of Justice and the Securities and Exchange Commission (SEC).
The vulnerabilities of healthcare
The value of the global medical market now stands at over USD $9 billion globally, and it’s not immune to defrauders. The U.S. exposed its largest healthcare scam to date in 2018, when 601 people were charged, including doctors, nurses and other medical professionals, with crimes such as fraudulent billing and the illegal prescription or distribution of opiates. The losses totaled over USD $2 billion.
Healthcare was also the fraudulent foundation that Theranos was built on. Its founder, Elizabeth Holmes, was the darling of the venture capital world until her lies finally caught up with her. The rapid testing technology that claimed to diagnose medical conditions with just a few drops of blood turned out to be too good to be true, and investors lost almost USD $1 billion. In 2018, Holmes and another company official were charged with massive fraud and conspiracy by the SEC and the Northern District of California.
Today and beyond
Advances in digital authentication and computer security serve to protect us all from fraud in many cases. However, large data breaches still happen. In 2019, over 100 million Capital One accounts were compromised, in a giant data breach that will likely lead to new account fraud and takeovers for years to come.
The global economy can make fraud cases very complex. Huawei, a Chinese telecom company, and its CFO Meng Wangzhou, were indicted in 2019 for bank and wire fraud in attempting to circumvent U.S. sanctions against Iran. Meng was detained in Canada and is currently fighting extradition to the U.S.
The COVID-19 pandemic has spawned many types of scams all over the world as swindlers look to take advantage of this global catastrophe. Phishing attempts try to capture credentials by mimicking health organizations and businesses selling supplies, fake masks and drugs are peddled online, charity scams raise donations on false pretenses, and fraudulent stimulus claims aim to bilk governments.
Even where we manage to set up effective digital safeguards, there’s no way to prevent human stupidity from shining through. One last example? A Lithuanian hacker was recently jailed after tricking tech giants like Facebook and Google into paying around $120 million in fake invoices over the course of five years, proving that even the biggest companies aren’t completely safe from the simplest of frauds.
All types of online and digital fraud are growing exponentially as technology advances. The fact that fraudsters can communicate with each other and potential targets instantly and virtually for free means we’re likely to see new forms of fraud emerge consistently for the foreseeable future.
How to prevent fraud
Much of today’s common fraud involves computers. The amount of data we share with online stores, social media platforms, dating apps and more is too enticing for fraudsters to ignore. PII, or personally identifying data, can be used to commit all kinds of identity fraud, either by ripping off a consumer’s details wholesale and stealing their identity, or by creating entirely new consumers with a combination of personal data from different sources in synthetic identity fraud.
Synthetic identities are the tactic behind credit bust-out fraud, also called sleeper fraud because of the long period between creating the identities and using them to rip off financial institutions. The fraudster builds up a legitimate financial history, using credit cards paying them off regularly, gradually getting more cards with higher credit limits. When it’s time to “bust out,” the fraudster maxes out all the cards and makes off with the proceeds, abandoning the identity in the process. One fraud ring based in New Jersey made off with over USD $200 million after building up 7,000 credit profiles.
New data privacy laws such as the GDPR and CCPA are aimed at safeguarding valuable PII and protecting both businesses and consumers from identity fraud. For example, the GDPR dictates that data breaches must be reported within 72 hours, and the CCPA allows for consumers to collect damages for leaked data under certain circumstances.
Fraud prevention technologies are also always improving and expanding. Identity verification uses reliable data sources to spot anomalies in identity data. Information from mobile network operators helps verify account holders and flag those that are higher risk. Authentication methods help prove that a customer is who they say they are using behavioral data, historical data, multifactor authentication, ID documents combined with live selfie analysis, and biometrics. Businesses can also analyze their data to detect fraudulent patterns.
Trulioo GlobalGateway helps protect businesses from the financial and reputational losses of fraud. With identity and business verification, organizations can make sure that their customers are real, legitimate customers and not bad actors waiting to take advantage.