Here
and
Now

opinions

How Volkswagen set the pace for new era of 'smart fraud'

8 Comments

Welcome to the age of smart fraud.

You've got to hand it to the masterminds at Volkswagen. With its elaborate plot to fool regulators on diesel car emissions, the German car company has set the pace for a new era of inventive, turbocharged cheating. The scam moved at the speed of light, with a brazenness beyond belief.

It was as hard to catch as it was profitable to execute. For seven years, Volkswagen got away with making pollution-belching cars seem environmentally friendly. It left consumers helpless and regulators stymied.

High-tech fraud seems to be taking place everywhere - from the shimmering towers of Wall Street to the seedy world of online adultery. Ashley Madison, the hacked hook-up site for people looking to cheat on their spouses, allegedly set up fembots that sent fake messages to fool male users into thinking that real live women awaited them if they paid a fee to join, instead of fancy bits of computer code. The Federal Trade Commission had evidently not noticed that what appears to be a giant swindle had been going on since 2001.

Smart fraud, such as VW's emissions scam or Ashley Madison's robot dates, began to be understood in the late 2000s, when something weird started happening on stock markets. At the moment of trade, large blocks of available stocks began to vanish, only to suddenly reappear at higher prices. An employee of the Royal Bank of Canada named Brad Katsuyama made it his mission to find out what was up. After much sleuthing, he was astonished to learn that an intermediary was jumping into his trades. It was happening in nanoseconds.

High-frequency traders with super-fast computers were engaged in an epic game of front-running right under the noses of the U.S. Securities and Exchange Commission and some of the biggest financial firms on Wall Street. Using sophisticated algorithms, they were able to stay split seconds ahead of everyone else, driving up prices and cheating savers and investors.

Katsuyama eventually quit his job and founded IEX, an exchange dedicated to fair play in trading, where high-frequency traders couldn't engage in financial arbitrage. The story was immortalized by Michael Lewis in his book Flash Boys. It spurred lawsuits and prompted the SEC to set up new rules for cybersecurity and monitoring, and also fine the New York Stock Exchange for oversight violations.

As recently as September, however, the U.S. Commodity Futures Trading Commission warned that the new SEC regulations were not nearly strong enough to rein in high-frequency trading. Regulators are hard pressed to even keep up with smart fraud, much less stay ahead of it.

Smart regulation, and the enforcement of that regulation by smart, determined people who have incentives to stick with their jobs instead of hopping through a revolving door, are critical to thwarting smart fraud. The revolving door between regulatory agencies and car companies spins particularly rapidly.

But we must also be able to rely on criminal prosecution to deter swindlers. Until high-level executives feel that they face a real threat of being locked up, they will likely continue to look on what they regard as relatively minor fines as the cost of doing shady business. For them, it looks more profitable to use their resources to create new ways of cheating instead of coming up with solutions or making better products. Fines can be paid with shareholder funds - other people's money - while executives can go right back to planning the next con. Fines might not mean much unless they are big enough to threaten a firm's existence.

So let's talk about the crime of the moment. In the case of Volkswagen, it was a crime to lie in an Environmental Protection Agency application and to tamper with monitoring procedures. Then there was the false advertising, fraudulent concealment and conspiracy. Somebody at Volkswagen - somebody very high up - signed off on the defeat-device smart fraud. That person or persons needs to do some serious time behind bars.

The Volkswagen scandal is also a golden opportunity for Justice Department officials to finally do what they have explicitly said they will do: put individuals on the hook for white-collar crimes.

The Justice Department said in a recent memo that it's hard to go after corporate crooks because top executives were really good at passing the buck. But the department said it would now set down guidelines to go after actual people, not just firms.

That's a start. Individual accountability will not make smart fraud disappear. But it may make executives think twice before getting sneaky with a bit of code. If high-tech scamming can land you in prison in a nanosecond, it may not be worth it.

© (c) Copyright Thomson Reuters 2015.

©2020 GPlusMedia Inc.

8 Comments
Login to comment

I understand the point of the article is to talk about businesses cheating government regulators, but with regard to Volkswagen I think the emphasis should be on the company's total disregard for public health. For a company to knowingly produce cars that further degrade already polluted environments is the biggest crime. In my opinion.

2 ( +3 / -1 )

The true fraud in automotive right now is Direct Injection engines that have issues with intake valve carbon/crud. =You need the injector in front of the valve to keep it clean. Only Toyota has a DI engine with also a fuel injector (Toyota D-4s)

<http://wardsauto.com/vehicles-technology/toyota-advances-d4s-self-cleaning-feature-tacoma >

I think people knew about the Volkswagen diesel issues, but there are very few diesels in the American market as compared to Europe or Japan. I would expect fines since the options to fix are slim (DEF system, catalyst).

0 ( +0 / -0 )

more clever than smart, cause they got CAUGHT!

2 ( +2 / -0 )

Yet the Republicans want no regulation...

2 ( +2 / -0 )

Smart regulation, and the enforcement of that regulation by smart, determined people who have incentives to stick with their jobs instead of hopping through a revolving door, are critical to thwarting smart fraud. The revolving door between regulatory agencies and car companies spins particularly rapidly.

Here's the exact point that needs special emphasis. As one comment notes: "Republicans want no regulation" What the global financial meltdown created under AWOL Bush, and the wars of Bush proved is absence of regulation and willful constructs of lies are the single most damaging factors in cataclysms of financial crime and moral failure Bush created.

Volkswagen may be a further expression of the pervasive and perverse drive to deceive and defraud for profit. Worst, as regulators are simply past or future employees of the very industries, whose standards and practices they are supposed to regulate, create the cancer of a political party that raves wild eyed at the elimination of all regulation.

As Lynn Stuart Parramore illustrates in industry, political parties like the American Shia-Tea are set on a course of destruction by providing the legislative muscle to crush justice, liberty and the pursuit of happiness once believed as the creed of a free people.

Currently, this example is playing out a drama of shutting down government unless forty of the most rabid of the Shia-Tea are allowed to dictate the rules and activities of Congress. Not one has mentioned that the electorate is not part of any of their plans to straight-jacket the Legislative process in the States.

While Volkswagen's deliberate and criminal acts will be addressed, how many are openly violating necessary and appropriate controls in industries of all descriptions with the sole goal of concentrating wealth into the hands of fewer and fewer without any oversight?

The sins of Volkswagen will seem ordinary under the efforts of the American Shia-Tea install Corruption 2.0 for the US Congress. This new and improved operating system it has the additional muscle of Religion as the force multiplier to create their vision of a Christian Nation without regulation except those the either protect their corruptions or deign public scrutiny of their dictatorship.

Even now these Freedom Caucus Forty are demanding allegiance of the next Speaker to their private demands which are not openly debated but enforced in secret oath ceremonies of deceit and silence that eliminates the Public from the halls of Government. A VW diesel puffer switch will seem tame poison compared to the star chamber of the American Shia-Tea's attack on the Constitution and Regulation in all its forms.

1 ( +1 / -0 )

Big business will always try and find ways of increasing profit and evading regulations.

1 ( +1 / -0 )

There seems to be little doubt the board of directors and the CEO of VW AG and a whole bunch more like Bosch GmbH knew what was going on. Heads need to roll, but let's not forget that punishing the company to its limits will also destroy the livelihood of tens of thousands of innocent workers.

-1 ( +0 / -1 )

As one commenter notes: "let's not forget that punishing the company to its limits will also destroy the livelihood of tens of thousands of innocent workers"

This, of course, isn't the goal of regulation. Volkswagen can be responsible for their deception without irreparable damage to the brand or its manufacturing excellence. What Ms. Stuart Parramore suggests of the environment of regulation is more important.

Whether business, by its nature, seeks advantage, isn't in and of itself damaging. The regulatory environment, however, is the business of the People and their elected Representatives.

In the American experience of the past decades, and presently in the Halls of Congress, the orchestration of threat to the People from organized corruption of regulation in the form of the American Shia-Tea Party, is a particularly sinister development.

This tiny group of forty who wield power through fear and threat have removed the process of Government from the light of day and now contend to find a new form of Government that no longer answers to the American People.

This may be the oligarchists' dream, appealing as well to the religious zealot, but it in fact means the end of regulation that protects the People from the excess of business as an end only for the wealthiest to enjoy. VW should not be the whipping boy that excuses the corruption rampant in the narrow interests of the political embodiment of these corruptions.

Ms. Stuart Parramore makes this clear as she observes: "The Volkswagen scandal is also a golden opportunity for Justice Department officials to finally do what they have explicitly said they will do: put individuals on the hook for white-collar crimes."

Of course this won't be possible if the American Shia-Tea is successful in shuttering the Justice Department as they shutter Congress in a campaign of allegiance to their ideology and not the well being of the American People. The Justice Department may well have it's work cut out from under it leaving Justice to a Freedom Caucus of Forty zealots.

1 ( +1 / -0 )

Login to leave a comment

Facebook users

Use your Facebook account to login or register with JapanToday. By doing so, you will also receive an email inviting you to receive our news alerts.

Facebook Connect

Login with your JapanToday account

User registration

Articles, Offers & Useful Resources

A mix of what's trending on our other sites