Ponzi Scheme the Flaw in the Virtue of Human Trust



Contributing Writer at The New York Times and keynote speaker at the 23rd Annual ACFE Fraud Conference & Exhibition, June 17-22 in Orlando

Why do you think it is important for anti-fraud professionals to understand the psyche of fraudsters like Bernard Madoff?

It is essential that all of us, especially fraud fighters, understand how ordinary a Ponzi schemer’s personality can seem. Because we only define them as Ponzi schemers in hindsight, it is very hard for us to put ourselves back into the pre-revelation mindset to appreciate what made these characters so appealing. A scholar whose work I admire described a Ponzi schemer as someone who can perfectly impersonate an honest person. Sometimes anti-fraud professionals underestimate how credible these crooks are since they typically intervene after a crime has already occurred. If we ever hope to move in the direction of early detection, fraud fighters have to learn the early signs of a Ponzi scheme.

Another important lesson about the psyche of a fraudster like Madoff is his capacity for self deception. The first and most important lie that a Ponzi schemer tells is to himself: that he can get away with it. His capacity to tell lies is impacted by his own capacity to lie to himself. As I say in my book, The Wizard of Lies, a Ponzi scheme is the crime of an egotist, not a sadist. Ponzi schemers are a different kind of criminal than other white-collar criminals. They don’t recognize they are hurting people until the music has stopped. They don’t even think they have victims, but rather they have beneficiaries. You can always tell yourself that the day of reckoning will never come.

Bernie Madoff brought the term "Ponzi scheme" back into the limelight after his confession and now we see a new scheme uncovered almost every day in the news. Why do you think the Ponzi scheme still continues to "work?"

The Ponzi scheme is an ancient form of fraud. It is nothing but a liar with a bank account. Given how simple it is, the rest of it is just window dressing. It’s like a Shakespearean play, just with different costumes, mannerisms and stage sets. You can dress it up in real estate investment language, foreign currency language, elaborate derivatives, etc. Because it is so simple, it has been able to constantly reinvent itself.

Another reason it continues to thrive is the inherent capacity of human beings to trust one another. This is a good thing; we do not want to eliminate this from human life, but it is also a liability. To some extent a Ponzi scheme is the flaw in the virtue of human trust. We can never afford to cut off the oxygen Ponzi schemes live on: trust. We would never want a society without trust. With frauds like embezzlement or bribery, you don’t need trust. With embezzling, trust is largely replaced with process and the criminal just finds a way around the process. With bribery, trust is never part of the equation, except for the infamous "honor among thieves." But only someone we trust can lure us into a Ponzi scheme -- without trust, the crime is not even possible.

What do you most hope attendees will take away from your address?

I would most like attendees to leave with a broader perspective of a crime that anti-fraud professionals often underestimate. They underestimate its emotional complexity and its durability. Anti-fraud professionals can be dismissive of a Ponzi scheme as a primitive crime, but it works and it continues to work for a reason. I hope attendees will walk away with a fresh set of eyes to look at these schemes and take away an enlarged sense of the qualities of this kind of crime. I hope that they will emerge with an appreciation for the timelessness of the lessons that Madoff holds for us. What has rendered this gigantic scheme so fascinating are those timeless lessons. It really isn’t about finance or fraud; it’s about human trust and betrayal, a story as old as Cain and Abel.

Read more about Diana and the other keynote speakers at this year’s ACFE Annual Fraud Conference here.