There are many broader lessons to be learned from this startling case study in gullibility, greed and manipulation. There also several key lessons as well for the financial world – by casting a criminal lens over some of the reported activities and behaviours, we see some cautionary compliance themes.
Let’s look at some of the hallmark red flags.
1. Suspicious or incomplete information
This is financial crime 101. Full transparency kills most scams, as they thrive on the oxygen of deceit. From the delusional investment prospectus, to the Ponzi scheme that fueled the day-to-day payroll of the structure, non-disclosure was key. While it is always good to take assurance from what we know, it is equally important to be honest about what we don’t know.
2. Vague or opaque statements
Even when information was provided to prospective Fyre Festival investors – for example in the investor prospectus – we see hyperbole, nonsensical verbiage, and meandering non-sequiturs. The warning here is simple. When it sounds like nonsense, it probably is.
3. Offshore location (business venture and/or money flows)
While not all scams involve off-shore conduits, many do. And here we have two red flags intricately furled together, the event destinationandthe money flows surrounding the scheme.
4. Magical thinking – lack of track record for the current activity
There is an expression about faith that goes something like this: for those who believe, no proof is necessary, for those who don’t, no proof is enough. The promoter was clearly grossly unqualified for the venture being undertaken, and utterly lost in his own world of magical thinking. But he was never alone. Too many people that were dragged into the scheme were also prepared to suspend disbelief. Why?
There is of course investor FOMO — who wants to miss out on the next big thing? We are reminded that it is still cool to be skeptical, especially when the herd is stampeding.
There was the promoter’s powerful charisma. Charisma is a very powerful real-world force, however you don’t see much about it in compliance manuals. But the fact is, most financial crime schemes of any magnitude will have a charismatic figure at their core.
And charisma always needs to be questioned. There is an old Russian proverb, “Doveryai, no proveryai” that Ronald Reagan co-opted it in the 1980s: “Trust, but verify.”
5. Unregulated business activity – aggressive use of unregulated promotion channels (social media)
It is hard for financial crime to flourish using regulated channels. A large scale but still exclusive offshore high-end event satisfied the need to create something big enough to allow serious amounts of money to be moved around, while staying under the regulated radar that governs most legitimate investment schemes. It’s all easy to say in hindsight, but the fact that the scheme was not regulated was easy to see.
This is a lesson in and of itself. If an investment scheme is not regulated, thecaveat emptorfog horns should sound loudly, no matter how much opaque mist the investment promoter creates.
Eoin O’Shea is theChief Executive Officer of Temple Grange Partners, a global compliance, risk and regulatory consultancy firm. He’s the former global chief compliance officer at Credit Suisse.
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