Crisis and fraud
| Pages | 60-70 |
| Published date | 01 March 2003 |
| DOI | https://doi.org/10.1108/13581980310810417 |
| Date | 01 March 2003 |
| Author | Pascal Blanque |
| Subject Matter | Accounting & finance |
Crisis and fraud
Pascal Blanque
´
Received: 6th March, 2002
Caisse Nationale de Credit Agricole, Dept of Economics and Banking Research, 91 Boulevard
Pasteur, 75710 Paris, France; tel: +33 143 23 5202; fax: +33 143 23 5202
Pascal Blanque
´is Chief Economist with
Credit Agricole SA in Paris. He previously
served as an asset allocation strategist
with Paribas Asset Management in
London, and as Deputy Chief Economist at
Paribas in Paris. Mr Blanque
´holds
degrees from Ecole Normale Supe
´rieure
and Institut d’Etudes Politiques, and
earned a PhD in finance at the University
of Paris-Dauphine. A member of numerous
economic and banking organisations, he
serves on the Economic and Monetary
Affairs Committee of the European Banking
Federation. He has published in trade and
academic journals, and is an economic
and financial e
´ditorialiste with Le Figaro.
ABSTRACT
This paper discusses the relationship between
fraud and financial crises. Fraud is envisioned
historically as a violation of trust, and the clas-
sic triangle of smuggling, contraband and enfor-
cement sheds light on developments in the
financial sphere. Schematically, fraud emerges
with economic prosperity, grows in a financial
crisis when prices fall, and culminates in crash
and panic when the scandal is revealed. Kindle-
berger points out that the propensity to defraud
increases with the speculation that accompanies
a boom. Fraud is recognised as a coincident
indicator of prosperity.
The paper considers the implicit consensus
view that fraud and the cycle are linked, with
long cycles including alternating phases of liber-
alisation/globalisation and contraction. If fraud
is part of the cost of learning to deal with new
fields and new frontiers in the appetite for risk,
then fraud and crisis will inevitably find a
fertile breeding ground in globalisation.
Topics discussed include the distortion of
decision-making, the structure of incentives,
information and regulatory implications.
INTRODUCTION
Theory — which determines the rules —
can hardly be expected to start by looking
at the exceptions. Unsurprisingly, neither
fraud nor crisis figures high on the list of
topics in the literature of economics, and
even less has been written on the relation-
ship between the two. Still, there is no lack
of reminders of their largely intangible,
hard-to-quantify and fundamentally elusive
nature: crisis and fraud are concepts that
are often forged by situations recognised as
such only after the event, once the mischief
has created a grey area that is eventually
declared off limits. With the notable excep-
tion of Charles Kindleberger,
1
the theme
has been largely avoided by mainstream
economists.
AN ELUSIVE CONCEPT
Kindleberger’s characterisation of financial
crisis can be readily extended to encompass
the relationship between financial crises
and fraud: ‘like pretty women [. . .], hard
to define but recognizable when encoun-
tered’.
2
Crisis and fraud have a long-stand-
ing but paradoxical association.
Page 60
Journal of Financial Regulation and Compliance Volume 11 Number 1
Journal of Financial Regulation
and Compliance, Vol. 11, No. 1,
2003, pp. 60–70
#Henry Stewart Publications,
1358–1988
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