Uncovering Fraud and Market Dynamics Through Forensic Finance

Discover the hidden underbelly of financial markets in today’s episode featuring Professor John M. Griffin, a leading forensic finance expert and the James A. Elkins Centennial Chair in Finance at McCombs School of Business at the University of Texas at Austin. Tuning in, you'll learn how forensic finance exposes illicit activities in crypto markets, revealing how entities like Tether (a cryptocurrency pegged to the US dollar) facilitate scams and money laundering. We also delve into the disturbing world of pig butchering scams, which have stolen more than $75 billion from victims globally, and how the victims of these scams have helped John study the flow of illicit funds in crypto markets. Find out how John uncovered massive fraud in the Paycheck Protection Program during the COVID-19 pandemic, and how this exposed the central role of fintech lenders and social networks in spreading fraud. We also discuss the importance of rigorous academic research and its practical implications in uncovering financial fraud, emphasizing the need for robust oversight and transparency in both emerging and traditional financial systems. Tune in for a thought-provoking discussion that challenges established practices and calls for greater scrutiny in financial systems!

Key Points From This Episode:

(0:05:23) An overview of John’s research,  the definition of forensic finance, and what sets forensic finance research apart from more traditional finance papers.

(0:09:55) The economics of pig butchering scams and how the victims of these scams help John study the flow of illicit funds in crypto markets.

(0:14:42) How crypto exchanges fail to monitor for potential scammer activity.

(0:18:44) The role of so-called legitimate crypto exchanges in criminal activity; why Tether (a cryptocurrency pegged to the US dollar) is the most important cryptocurrency in scam activity. 

(0:21:43) Unpacking the $75 billion figure in John and Kevin Mei’s paper on Pig Butchering and how it finances slavery; how this compares to fraud estimates from firms like Chainalysis. (0:26:25) How the methods in John and Kevin’s paper can be used to improve the monitoring of crypto exchanges, and how the crypto community has responded to their paper. (0:29:14) An overview of John’s paper on Tether with Amin Shams and how often fraud and misinformation are associated with asset price bubbles.

(0:30:52) What Tether is, the difference between it being demand-driven or pulled, and supply-driven or pushed, and why Tether creators want to inflate the price of Bitcoin.

(0:34:46) Decentralization in the crypto space and why decentralized finance is a misnomer, how to test whether Tether is pushed or pulled, and investigating Tether’s relationship to Bitcoin.

(0:35:56) How to test whether Tether is pushed or pulled; investigating Tether’s relationship to Bitcoin and how it can be exploited by bad actors.

(0:42:05) Tether’s response to John’s paper and why he tries not to listen to nay-sayers with vested interests.

(0:46:10) John and his co-writers’ findings on the prevalence of fraud in the Paycheck Protection Program (PPP) during the COVID-19 pandemic.

(0:48:05) The role of fintech lenders and social networks in the propagation of PPP fraud and the impact PPP fraud had on real estate prices.

(0:56:07) Policy implications and recommendations for future financial relief efforts.

(0:59:47) John’s personal journey and his profound definition of success.

Links From Today’s Episode:

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemind

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/ 

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Prof. John M. Griffin — https://www.mccombs.utexas.edu/faculty-and-research/faculty-directory/john-griffin/

Episode 260: Prof. James Choi: Practical Finance — https://rationalreminder.ca/podcast/260

Papers From Today’s Episode: 

‘Is Bitcoin Really Un-Tethered?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195066

‘How Do Crypto Flows Finance Slavery? The Economics of Pig Butchering’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4742235