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    Solving Modern Crime in Financial Markets: Analytics and Case Studies
    Solving Modern Crime in Financial Markets: Analytics and Case Studies
    Solving Modern Crime in Financial Markets: Analytics and Case Studies
    Ebook1,166 pages11 hours

    Solving Modern Crime in Financial Markets: Analytics and Case Studies

    By Marius-Cristian Frunza

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    About this ebook

    This comprehensive source of information about financial fraud delivers a mature approach to fraud detection and prevention. It brings together all important aspect of analytics used in investigating modern crime in financial markets and uses R for its statistical examples. It focuses on crime in financial markets as opposed to the financial industry, and it highlights technical aspects of crime detection and prevention as opposed to their qualitative aspects. For those with strong analytic skills, this book unleashes the usefulness of powerful predictive and prescriptive analytics in predicting and preventing modern crime in financial markets.

    • Interviews and case studies provide context and depth to examples
    • Case studies use R, the powerful statistical freeware tool
    • Useful in classroom and professional contexts
    LanguageEnglish
    PublisherAcademic Press
    Release dateDec 9, 2015
    ISBN9780128045329
    Solving Modern Crime in Financial Markets: Analytics and Case Studies
    Author

    Marius-Cristian Frunza

    Dr. Marius-Cristian Frunza's consulting work with investment banks and asset managers allowed him to specialize in risk management, derivative pricing and hedging. His research activity encompasses topics around environmental finance like forestry, energy, and weather derivatives. He graduated from the Ecole Polytechnique in Paris and holds a PhD in mathematics from the Sorbonne university. He is also a partner in Schwarztal Kapital, an independent advisory and investment firm in environmental finance.

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      Book preview

      Solving Modern Crime in Financial Markets - Marius-Cristian Frunza

      Crime

      Chapter 1A

      Innovation and Crime

      Abstract

      The increased use of innovative technology and products such as cryptocurrencies, social media, and spread-betting platforms as propagation vectors for financial crime not only brings technical questions about the surveillance and detection of such activities, but also requires a higher level strategic overview of the tends in this area. Technology is the key to growth in the twenty-first century, and digital-based economies will have a bigger share in the total global GDP. But with these opportunities come many threats linked to financial crime. The relationship between crime and technology is multi-dimensional, involving many industries and activities such as gambling, cryptocurrency, social media, and investment funds.

      Keywords

      Social media

      Crypto-currency

      Hedge funds

      High frequency trading

      Outline

      1 Background   3

      2 Technology Leveraged by Crime   4

      3 Crime-Driven Technology   4

      4 Outlook   5

      1 Background

      The relationship between crime and technology is relatively recent, starting in the 1990s and the Internet era. This area includes three types of crime: First, there are the traditional crime syndicates that migrated toward the technology zone because of circumstances. Second, there are types of crimes that originated from technology and exemplified by hacking and cybercrime. The third typology of crimes involves groups of individuals within organizations that developed abnormal or fraudulent behavior during the period of massive technological influx.

      A few things should be noted for the first type of crime. Traditional crime syndicates have very precise and strict rules that have been in place for decades and some for centuries. These codes by their very nature restrict criminal activity, thereby increasing the occurrence of racketeering, smuggling, heisting, trafficking, etc. Activities involving technology were disregarded due to the fact that in theory are an easier target for investigators. Throughout history, criminal syndicates did not exert direct activities on the financial markets, but instead used individuals and groups less noticeable to law enforcement. The case of Michele Sindona who was involved with Italian American and Sicilian organized crime is a good example. At the fall of the URSS the old circle of thieves in law (vhor v zakone) also subsidized cyber scams to the young but less challenged and respected hackers across the Eastern block [1]. But the change in structure of modern society inevitably brought changes in the structure of crime. The second type crimes concerns a class of educated individuals that fell into the web of illegal acts with the hope of quick returns. Hackers are probably best known to the large public but scammers involved in online gambling, digital currency, or investors relations using social media are also included. This new class covers the old world of crime and new technology entrepreneurs.

      The last type of crime concerns individuals for which technology and generally speaking innovation represent a kind of no man’s land in which they think everything can be tolerated. These individuals do not have a criminal curriculum. High-frequency trading is a relevant example, as many people in this area thought no one was watching. Manipulation such as spoofing¹ or tax arbitrage on short-term trades are other examples of this type of crime.

      Table 1 shows a brief SWOT analysis of the role of innovation in criminal acts.

      Table 1

      SWOT Analysis of the Role of Innovation in Criminal Acts

      2 Technology Leveraged by Crime

      As noted in the previous section, one of the major mutations in criminal activities occurred with the development of new technologies and more precisely with electronic communication infrastructures. Telecommunications, Internet services, and online banking changed not only the day-to-day life of our society but also brought new challenges and opportunities to the criminal world. This reshaping of crime also affected investigation procedures, especially after 9/11. Thus, in 2001 the Bush administration passed the Patriot Act in 2001, which stipulates in Title 5 that a federal agent is able to request under subpoena any information or to wiretap without the approval of a federal court, thereby helping officials to track perpetrators faster.

      Most of our technological progress has been leveraged by criminals. Before analyzing large-scale scenarios such as cyber terror it should be noted that even small deviances like diffusion of non-public information in insider trading cases is much easier today than it was in the past. Organizations do use filters and tracking devices to monitor communication but the wide panel of tools and communications services make it almost impossible to keep up with the vast electronic ocean. Financial criminals use technology and innovation at all levels, from simple communication tools and social media and to high-quality fiber optics for high-frequency trading, which has a double-edge. For example, when technology is used for an illegal purpose, officials can track the whole scheme electronically, but this means the criminals can use it too, often in an attempt to throw investigators off their trail.

      3 Crime-Driven Technology

      One of the most sensitive and highly controversial topics is crime-driven technology, i.e., technology propelled by criminal interests. It is easy to imagine an eBay service for purchasing illegal goods and services or security software such as Bitdefender or Kaspersky, that can also be used in harmful ways, such as to generate malware. In fact, these products do exist and are available to the public. Furthermore, some innovative products such as online gambling or betting platforms or various forms of digital currencies have been created by groups formed by criminal organizations. A good example is Liberty Gold, which used digital currency to clear illegal funds. There are similar suspicions about Bitcoin and other cryptocurrencies. The case of online betting is slightly more complex due to the fact that betting is legal in many countries, which makes its detection being a complex task. In December 2014 the Federal Bureau of Investigation busted a gambling start-up in Las Vegas with alleged ties to the organized crime and money-laundering activities, operating via Macau high-profile gamblers (junkets), online sports betting, and high-stakes poker.²

      4 Outlook

      The first conclusion we can come to is that the current framework of regulation and surveillance will very soon fail to keep up with the fast pace of innovation. Therefore, we will face a one-step behind paradigm. While as depicted in Figure 1, regulations as well as investigation methods do target technologies and products at a time in order to address current issues, there is less tendency to use a forward looking approach, often due to lack of means. By the time regulators and investigators do understand and propose ways to tackle crime in relation to technology K.0 a new technology K + 1.0 appears. New technology along with its new panel of products often go under the radar of regulations issued from the experience the previous wave a technology. This is also true for regulation of traditional financial

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