Avoiding scams has become an everyday part of adult life. This essay exposes one such scams by sharing results from our study of fraudulent loans, and discusses how citizens deserve better protection from such practices.
Scammers are the new gangsters of late capitalism. You could open the ‘trash’ folder of your email right now, and discover at least three attempts in the last week to rob you of your money. We stumble our way through dozens of attempts to fool us every day, as we have grown used to participating in a system that is built on manipulation. Liberal economic theory assumes that individuals are rational, well informed and law abiding actors – three times wrong. Whole industries exist that prey upon our emotions and society has grown so complex and fake that barely anyone understands it. In the online era profiting of deception has become an epidemic. This can take pseudo-legal forms such as ‘pumping’ crypto currencies or fake business guru’s, as well as straight up crimes such as credit card scams.
In this essay we will first discuss the broader effects and social context of scams, before sharing the results of a sociological investigation my team conducted on fraudulent loans in Nuevo León, Mexico. Finally, we will use conclusions from this study to politicize the issues and propose some solutions.
Our society is well used to scams in the broad sense of profitable forms of lying. As I have discussed in previous essays, these practices have long been incorporated into our economic and political order. In this text we focus on scams as directly predatory actions, that are often targeted at stealing from vulnerable groups. Financial fraud itself is old, as for example so called ‘Ponzi schemes’ go back to 1920 when Charles Ponzi found a way to accumulate wealth without actually investing, by paying old investors with the money of new investors. Yet with the rise of the internet, scammers have gained both the tool of invisibility and access to the attention of ordinary people. Vulnerable groups can be found via targeted advertisements, and scammers can pretend to be anyone or anything without the risk of being punched in the face if things go wrong. While the direct damage that scams do to their victims is obvious, we should also appreciate to collective damage these parasitic practices do to society. To start with, given authorities, businesses and users expect to be scammed by default, we – normal citizens – need to wade through seas of bureaucracy and identity checks to do the simplest of operations. Since fraud is common, just like with theft it also drives up the cost of goods for consumers, as losses are incorporated into the price. Lastly, when large scams fall apart, such as the recent bankruptcy of a fraudulent crypto-currency exchange, vast amounts of wealth are destroyed. But the latter are rich people problems, in this essay we will focus on more everyday victims.
In the remaining part of this text I will narrate the conclusions from a research my team did into fraudulent loans that target mostly desperate citizens in Nuevo León, Mexico. The broader results and methodology will be separately published later, but it suffices to note that this is based on both our experiences from calling informal/fraudulent lenders and interviews with 35 victims.
Let us start with describing how the standard fraud works. People look for informal loans on the internet or on the street, and are referred to a phone number. The person answering the phone pretends to be a finance professional that does an investigation and grands them a loan, on the condition that they first pay a deposit (+-10% of the total cost) or series of deposits to proof their reliability. Once the deposit is paid, contact with the client is broken and it becomes clear there was no loan. Our research shows that while street advertisement exists, this is predominantly a cybercrime that uses social networks, in particular Facebook. The scam resolves around faking identities and preying on the desperation or ignorance of clients regarding the standard operation of credit, which never involves deposits. Important detail: while the victims know nothing of the criminals, they are requested to share detailed information to obtain the ‘loan’, including addresses.
Our research indicates that the main reason people contact these informal lenders in the first place is desperation. It is very common that people try to take out loans to deal with emergencies, such as paying for medical costs of loved ones. Another common reason is starting a micro-business such as a food stand. While various victims had entrepreneurial aspirations, it is equally common people do this as a survival strategy to gain some form of income, for example after losing their job. Regarding the latter, people sometimes also use credit to cover daily costs while suffering spells of unemployment. Our results indicate that it is this desperation that makes people overlook certain warning signs and fall into the traps. While not all victims are poor, the scams thrive because of broader structural causes of poverty, such as lack on unemployment protection or pensions and barriers to access medical services.
The consequences of these particular scams depend on how much money was lost. This can vary from increased debts and stress, to the loss of several months of income, as well as lost opportunities or having to abort educational plans. What stands out is that even when people are the victims of crimes, the vast majority did not seek legal prosecution. Besides a lack of knowledge on how to do so, this can be related to a lack of trust in the judicial power. There is also the idea that persecution is not worth the time and resources when it is unlikely people will recuperate their money. Lastly, people feel ashamed of being a victim of cybercrime, and often blame themselves.
We estimate that these type of crimes are very common given the high amount of responses we received to our modest advertising for this research. Yet at the same time they are invisible, as well off people would never seek or find such traps, and relatively little policy attention is paid to such issues, especially on a local level. Unlike a robbery, a scam is a less physically impressive event and people can blame the victims. Yet society has been tolerant for too long of these predatory practices. In what follows I will propose three ways to increase protection. I will disappoint some by saying ahead that legal micro-loans are not one of these, since unsustainable debt and payment problems are whole separate problems. What the fraudulent loans have in common with other scams is that: a) they work because of an asymmetry of information, preying on ignorance; b) they are hard to track for ordinary police; c) victim-initiated prosecution does not work. Society should push back on each of these:
1. Targeted information campaigns. While the government is aware of such scams and makes preventive information available, we are lacking targeted campaigns. The criminals go to length to pretend to be real financial institutions, but they are a) not registered actors; b) operate fundamentally different from legal lenders. Certain key points of information – such as that charging deposits for loans is illegal – could help people identify these traps. The challenge is to target this information via smart placement to the same group that the scammers target.
2. Anti-scam taskforce. Regular police is ill equipped to deal with scams, since this involves fake identities and there is (usually) not a physical crime scene. From what we can tell, criminals often operate from entire different states. Yet the scammers do leave important traces behind, such as banking information, phone numbers and other electronic traces. These can be investigated by specialized financial and cyber police in order to locate the criminals. For this to lead to prosecution (across state boarders), a task force must be made that links various capacities. For example, the federal government has already made progres through the cooperation of various agencies of the state in fighting particular scams, such as fake-kidnapping extortions from prison.
3. Assertive prosecution. Even if the previous point would work, people in general don’t report or try to prosecute cybercrimes, showing the limits of our liberal model of individual-litigation based justice. The state should not wait for individual demands to try to dismantle criminal groups, but instead take a proactive stance and go after the criminals on its own initiative. In other fields such as child pornography it is not uncommon for police to themselves search for and ambush criminals. In the case of scams, these are not hard to find – my team found dozens! And while I cannot myself afford to engage in scams for science, the police could easily participate and lay traps to arrest fraudsters.
The above mentioned solutions are – like almost all policy interventions – not free and would require political will. This is even more true for tackling the underlying causes that allow these scams to flourish, such as lack of adequate income protection in case of unemployment or old age. The political will can be summoned by politicizing and de-stigmatizing this issue and making visible just how common falling victim to scams is. What story can you share?
*The mentioned research was conducted at the UANL, in collaboration with Yessica Llanes-Garcia. An executive policy summery of this research is available upon simple request.
*If you have further questions about financial malpractices or need help with prosecution, such out the website of the https://www.condusef.gob.mx/