AML Systems After Madoff: Ponzi-Identification Using “Complexity”
By J.B. Beckett
Consultant, New Fund Order
Could the use of complexity stop the next Madoff fraud? How can a Ponzi scheme be detected in a universe of money transfer transactions where attacks may be undetected for prolonged periods of time?
Eradicating the causality of Ponzi schemes is a Rubicon which regulators have failed to cross. Such schemes are perpetuated through the unassuming bank account. Can anomaly identification help prevent Ponzi schemes in future?
What is a Ponzi Scheme?
Ponzi schemes (named after the fraudster, Charles Ponzi) are investment schemes that attract cash deposits on the prospect of future returns but typically pay out existing clients using the deposits from new investors. Eventually these schemes run out of cash but can exist for many decades so long as clients are content and redemptions covered. Why did Madoff happen? I could cite you Orwell, Nietzsche or even Confucius; or any other commentator of the human condition, but it is more useful to consider what actually happened.
About Madoff
For those who don’t recall, Bernie Madoff ran the largest known Ponzi scheme in history; US$65 billion was defrauded from the US$177 billion deposited. The fact that the collapse of the Ponzi followed the credit crisis in 2008 only made the US nation’s reaction all the more dramatic. In 2009, something in the American psyche broke.
On 12 March 2009, Bernie Madoff pleaded guilty to 11 federal ...
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