Books to read to understand financial crime | Hacker News Reader

Books to read to understand financial crime

economist.com

304 pointspseudolus99 comments

Every book Nomi Prins writes is a worthwhile read, such as "Collusion" and "All The President's Bankers":

There's also a good book on global money laundering (2005), "The Washing Machine", by Nick Kochan, which goes into a lot of interesting details:

https://www.theguardian.com/money/2005/jun/05/business.globa...

I haven't read this but there's a 2022 book out on a specific example of the above, about HSBC doing money laundering for Mexican cartels (with no criminal consequences):

(2022) "Too Big to Jail – Inside HSBC, the Mexican drug cartels and the biggest banking scandal of the century" by Chris Blackhurst

https://www.thenationalnews.com/opinion/uk/2022/06/08/hsbcs-...

Bill Browder's book about the rise of Putin, oligarchs taking over state resources and corruption and financial crime in the USSR Red Notice is fantastic, as is his followup book Freezing Order.

https://www.goodreads.com/book/show/22609522-red-notice

https://www.goodreads.com/book/show/59366154-freezing-order

I also liked Harry Markopolos' No One Would Listen detailing his years investigating and reporting Bernie Madoff.

https://www.goodreads.com/book/show/7740121-no-one-would-lis...

The Smartest Guys in the Room, covering the rise and fall of Enron, is also fantastic: https://www.goodreads.com/en/book/show/113576.The_Smartest_G...

Red Notice is excellent!

My favorite part is where he describes this (paraphrased):

"I couldn't figure out why the oligarchs would do things that hurt both me and themselves. Then I heard about the Russian myth where a farmer finds a genie in a lamp. The genie tells him 'you can have whatever you want but your neighbor will get double'. The farmer thinks and says 'I want you to poke out one of my eyes'."

I read Red Notice and found myself really annoyed by the author's enormous ego and self-righteousness. He talks about how Putin and his cronies have corruptly siphoned of massive amounts of wealth for themselves at the expense of ordinary Russians. Which is probably true. But then, without a hint of self awareness, has paragraphs about his 1990s investments in Russia like:

    “Tell me, Mr. Prutkov—how much does one of those boats cost?” I asked,

    “We got them for twenty million dollars new out of a shipyard in East
    Germany,” he answered.

    “How many do you have?”

    “About a hundred.”

    “And how old are they?”

    “Seven years on average.”

    ...

    I was amazed. These people had hired me to advise them on whether they should exercise their right under the Russian privatization program to purchase 51 percent of the fleet for $2.5 million. Two and a half million dollars! For a half stake in over a billion dollars’ worth of ships! Of course they should! It was a no-brainer. I couldn’t understand why they needed anyone to tell them this. More than anything, I wished I could have joined them in buying the 51 percent.

Where does he think deals like this come from? His buddy Prutkov was obviously paying someone off. He also tries to paint Khodorkovsky as some kind of a saint which is not true at all (the only reason he owned Yukos to begin with was because he bought it for 90% off in a rigged auction). Later I found some reporting from Der Spiegel which casts some doubt on his side of the Magnitsky story too. I don't know if this guy just gets off on writing opeds and getting profiled by the WSJ or what but I get the impression he's not telling everything about his little "adventure" in Russia.

When I first heard there was going to be a movie "Red Notice" on Netflix, I was hoping it was going to be based on Bill Browder's book. Sadly it was not!

If people want to know about financial crime (and regulatory dysfunction) in the US, I absolutely second Markopolos's book with no caveats. It's a bit technical but deserves to be more widely read.

I typically recommend Browder's book with the caveat that he comes off as promotional and I think he exaggerates and makes stuff up in the first half when he was doing relatively tame things like being a consultant. This is unnecessary and hurts credibility somewhat later. However, the book is worth reading because there are extremely good insights in the latter half -- e.g. how he in effect was doing Putin's dirty work in the late 90s / early 2000s by publishing and documenting malfeasance of oligarch companies (short theses) which weakened many oligarchs and helped Putin's position vs them. Once Putin had enough clout he took down Khordokovsky; at this point, someone who pushes transparency (Browder) becomes a hindrance to the Kremlin, and things go downhill from there.

This is one of the most interesting and rather unknown "contribution" of Russia and Putin himself to drugs sales in Europe. At the time when he was associate of Anatoly Sobchak, Mayor of Saint Petersburg he was responsible for making sure that some ships from South America are "overlooked" by the authorities.

In this way Saint Petersburg become one of the central points of drugs smuggling, Putin, Sobchak became one of the most powerfull drug lords.

Years later Sobchak was murdered by Putin (obviously official investigation led to usual heart attack conclusion) since he knew too much about Putin businesses in his "Petersburg era".

contrast to Oliver North in the USA .. interesting stuff

Seconding Red Notice, great book!

There’s a netflix documentary on the HSBC fiasco. It’s in blood money I think?

It’s S01E04 “Cartel Bank” of Dirty Money:

https://www.imdb.com/title/tt7909188/

Treasure Islands and Moneyland[1] are both terrific books. For me it shed quite some light on post colonial finance structure which we are currently living through. History of eurodollar, pivotal (and shady) role played by Bank of England and how it doesn't answer even to British government, the fascinating story around City of London (I didn't even know such a thing existed), and so on. Highly recommended.

[1] https://www.theguardian.com/books/2018/sep/09/moneyland-oliv...

Moneyland is excellent

Just read Bulloughs follow up book - Butler to the World

Would thoroughly recommend it - takes a good look at how the British legal system enables all sorts of dodgy money schemes

I also came to praise Treasure Islands.

Also highly relevant with the Russian invasion in Ukraine ongoing is Kleptopia. The author also battled a defamation lawsuit against him in the UK which was dismissed in March.

https://en.wikipedia.org/wiki/Kleptopia

Yeah came here to also say that I was glad to see Treasure Islands at the top of the list.

It's the most fascinating, and yet angering, book I've read in a while..

Highly recommend Flash Boys by Michael Lewis (author of The Big Short which was also a great film adaptation). It follows the trail of High Frequency Trading to uncover how this was used to front load orders and along with other unsavory tactics like dark pools essentially turn the stock market into a rigged game. Of course they’re effects have been dampened in the decade since, due to regulatory pressures once it was more generally understood what HFT firms were actually doing.

I’m not sure to what extent it constituted financial crime versus just being an ethical grey zone, and the book is of course not without its share of criticism, but it was certainly an enjoyable read.

I couldn't disagree more on Flash Boys. After reading it, it was clear that Michael Lewis did not understand the microstructure of markets. He collected a bunch of stories from his hedge fund buddies about how the people who were eating their lunch were somehow "front-running" them (which they are not), "distorting the market" (pushing off-exchange trading to legitimately established dark pools rather than your circle of golf buddies), and "breaking the rules" (without citing any exchange rules).

From someone who used to be in the industry, there are lots of things to complain about, and HFTs engage in lots of unfair practices (eg PFOF). Michael Lewis doesn't understand them or what they are.

Could you elaborate on what's wrong with payment for order flow? It seems to enable zero commission brokers with prices (bid-ask spreads) that are reasonable, and at any rate better than the national best bid offer, as required by law.

PFOF allows market participants to selectively hide information that was historically important for stock prices (retail demand) from the rest of the market, which may result in larger spreads due to price uncertainty. The other side of the zero commissions is that retail investors are almost certainly paying for larger spreads than they would otherwise get on the open market (if not, buying order flow wouldn't be worth it for order flow buyers).

As an example, I once A/B tested interactive brokers vs robinhood on their execution quality. With notional volumes of a few thousand dollars per trade, the IB commission was very much worth it compared to the poor execution quality from RH.

The issue is that many consumers don't understand that a free brokerage can actually be more expensive for them than a more expensive brokerage.

> The other side of the zero commissions is that retail investors are almost certainly paying for larger spreads than they would otherwise get on the open market

All brokers are obligated to fill orders within the National Best Bid Offer spread. A retail trader can't get a better price on the open market.

> As an example, I once A/B tested interactive brokers vs robinhood on their execution quality.

IB sells retail orders to market makers too. This has more to do with Robinhood being awful than with PFOF being detrimental by itself.

The stylised facts seem to be that historically, brokers would charge a commission, receive PFOF, and give a large chunk of that PFOF back to the customer in the form of a better price (smaller spread).

Robinhood then did away with the commission, but pocketed the PFOF, offering consumers a worse price.

Thus: retail consumers with very small orders would be better off at Robinhood, but with even orders of a few thousand dollars it would have been advantageous to go with a small fixed fee, but execute with a better price.

(Note that all of the above is within the NBBO, but that is not a tight benchmark, apparently.)

You actually can get a better price on the open market. There are often traders in dark pools offering better prices than the NBBO and there are things like iceberg orders that do not affect the NBBO but do allow you to trade at a price inside the NBBO. All that means that transferring your order to a public forum will often get a price better than the NBBO.

Also, IB tells you where your orders go - you can see if they went to a PFOF vendor or some other venue. You can also decide where to route your order, although this costs a bit of money.

Good points.

However, wouldn't it be fair to say that the underlying problem is not PFOF (which does seem to benefit small retail customers), but market microstructure, and specifically the issue of order routing, and that there is not one market place, but many (many of which are "dark")?

If I were to design markets, I'd seriously consider:

- obligation to trade on one central exchange

- a Tobin tax (ie a minuscule tax on all transactions)

- not continuous trading with a LOB, but an auction approximately every 5 minutes or so with stochastic cutoff time

The central exchange idea might make sense, but exchanges themselves are a business. Creating a central one is tantamount to mandating a monopoly, which doesn't often result in good things. If I were the SEC, I would do the following:

* Remove reg NMS as it applies to brokers and broker-dealers, allowing them to trade anywhere they want. Keep the requirement that brokers must give a price to customers at or better than the NBBO (but let them trade how they want on the exchanges). This should make brokerage fees cheaper and reduce spreads.

* Require brokers to provide execution quality reports to the public the way that brokerage fees are reported to the public. Brokers would then have to say: "$0 commissions, 0.1% average spreads" or something along those lines. The market for high-fee high-quality brokers would likely develop around that: "$5 commissions, 0.01% spreads" is compelling to people who trade large blocks. Hedge funds and big money traders already test brokers like this.

* Allow and/or require crossing auctions for retail market orders that get to an exchange. Privileging retail orders on exchange and having brokerages advertise their slippage should give "high-commission, low-spread" brokerages the incentive to send most customer orders to an exchange, and a mechanism to get the best possible price from the broader market.

Also, a tiny Tobin tax does currently exist - it funds the SEC. However, adding higher transaction taxes has been tried in Europe, and turned some exchanges into wastelands.

> a free brokerage can actually be more expensive for them than a more expensive brokerage.

I agree with this comment, my question is whether anyone is obligated to inform people of this. If you are an adult and have the resources to be investing in stocks, you ought to at least recognize that nothing in life is "free."

Nobody is obligated to inform you. I think a lot of people expected that free brokerage was the same trade as Facebook and Google - data for services. It's not.

As I understand it, they're paying to trade with people who probably have their own reasons for trading that have nothing to do with any market-changing news. They want to trade with "random" traders, not sharks.

It's not obvious why this would result in larger spreads. The reason for it is to be able to offer smaller spreads due to lower risk.

> Part misguided hit piece on High Frequency Trading, part hagiography of Brad Katsuyama and part native advertisement for the IEX stock exchange: Flash Boys is utterly without merit. Michel Lewis valiantly tries to project large institutional investors as heroic victims while repeatedly making the unsubstantiated claim that the markets are rigged. Even putting the bias aside, the book could be cut down to a long-form article while conveying exactly the same amount of information. Would not recommend.

While it’s been a long time since I read it, I definitely did not come away with the conclusion that he tried to “project large institutional investors as heroic victims” by any means

Let me guess, you work/worked for a HFT?

As someone with experience of markets microstructure, the book was interesting/insightful and definitely not "utterly without merit".

Interesting.. As someone with pretty close ties to what Brad built prior to starting IEX.. I found the book "Brad's resume" as well as propaganda for IEX.

The book should have some sort of "paid advertisement" disclosure.

It is interesting how your opinion seems to be anyone who is critical of this book "works for HFT's"?

hagiography - THIS accurately describes the book!!

The life and death of Ivar Kreuger https://archive.org/details/lifedeathofivark00stonrich

If you liked reading Lewis check out this book from 1932. Ivar Kreuger tried to buy up all the match factories in the world and create a monopoly for himself.

Corruption is the oldest and largest ponzi scheme in the world. Only with the difference that once you participate, even a tiny bit, your balls belong to someone else unless you come clean and incriminate yourself. That's why I don't participate in any business activity that isn't 100% legal. I even quit my previous job because of a kickback scheme my employer was pulling off in my project, despite promising me to not do it.

Tip: Make sure you have a new job lined up before you quit the other one, because there's a risk of e g. a global pandemic starting.

> That's why I don't participate in any business activity that isn't 100% legal.

That's not always a choice for many people. Well, you always have a choice you might say. If your choice is to pay the protection racket or have horrible events occur to you or your family, do you have much say at all, much of a choice??

> I even quit my previous job because of a kickback scheme my employer was pulling off in my project, despite promising me to not do it.

Promised from employers mean shit if not in writing. Even then you need to assume the worst.

>If your choice is to pay the protection racket or have horrible events occur to you or your family, do you have much say at all, much of a choice??

It doesn't even have to be that "bad", what if the choice is do something unethical or your kids aren't going to have enough to eat or a place to live?

> because of a kickback scheme my employer was pulling off in my project, despite promising me to not do it

So you were involved in a business that you found out was slightly shady ? And you opted out the moment you found out ?

Don’t commit financial crimes. Ever. It’s not worth it. Losing everything you own and your reputation is better than spending a meaningful chunk of your life in federal prison.

Burning Bellatorum is an excellent example of how hubris and an economic crisis (Covid) drove a great business into the ground, damaged countless lives, and will likely lead to prison time for the CEO. Definitely worth reading if you’ve ever raised capital or plan to in the future.

https://www.amazon.com/Burning-Bellatorum-Priceless-Investor...

The lesson from 2008 is that you should never commit financial crimes on a small scale. Do it bigly. If you go big enough, you'll never get punished.

Maybe Bernie Madoff's problem was that he didn't scale up further...

I think actually it's: do it bigly AND do it in coordination with other folks across a number of institutions.

If it's just you doing it bigly, then you're in for a bad time (see Nicholas William Leeson [1])

[1] https://en.wikipedia.org/wiki/Nick_Leeson

You might be taking this a little bit far. What Madoff was doing was plainly, and blatantly criminal. There really wasn't a business at all. I don't know how he'd "scale up" without imploding, and am skeptical that people would intentionally ignore and obvious Ponzi scheme.

So I guess another way to put it is that Madoff really didn't pretend to be legit, at least when you popped the hood. Honestly, I'll admit that I know less about the criminal side of the housing crisis (vs. Madoff), but I think even after the fact, stakeholders where claiming "nothing to see here, I did nothing wrong"; this is a much harder case to make when all you're doing is stealing people's money.

The analogy might work if he was actually doing some investment, misrepresenting these investments to the customer, but wound up doing really well anyway, and getting big. This is more like what Shkreli got busted for. Of course, he didn't get away with it, but that could be because of his notoriety.

There are jokes this that go like this:

- lawyer to defendant [in private]: tell me the truth. how much did you steal?

- defendant: not much, just [enter small sum]

- lawyer: then i won't be defending you

Madoff's issue was that he stole from rich people. If he had only stolen from poor people, he probably would have been fine.

Seems most people who do big financial crimes, get away with it. Perhaps they get a slap on the wrist, with a few exceptions like Bernie Madoff.

Cheap debt and steady economic growth has made it easy for bad actors to fly under the radar. That may change if there’s a prolonged economic downturn.

https://www.cnbc.com/2022/07/13/inflation-rose-9point1percen...

Just read any recent SEC regulatory action. You'll get things like:

* JPMorgan participated in an illicit scheme for a profit of 5M so they got a 200k fine

* Citadel engaged in fraudulent mislabelings of orders for a total of 280.000 actions of the same type over some three years, got a fine of 100k (for some 30cents/infraction).

* and so on and so forth.

Past a point, it's just the cost of doing business.

If you're curious about the seedier underbelly of financial crime and money laundering through casinos and real-estate in Vancouver, Willful Blindness by Sam Cooper (https://www.amazon.ca/Wilful-Blindness-network-tycoons-infil...) is a pretty shocking expose. Be warned that the complicity of the British Columbia and Canadian governments is rage-inducing.

Not to excuse financial crime, but Canadians have become corrupt in their naivety when it comes to these stories. The success of drug trafficking to and from Canada laid the foundation for other types of illicit activity. Only a matter of time before we legalize corruption.

I'm currently reading "Davos Man" by Peter Goodman, and am finding it quite enlightening. It's not a deep dive on financial crime, but it's a starter for those not already in know. I'd recommend it!

https://www.npr.org/2022/01/20/1074378185/davos-man-is-an-an...

Not quite what I expected, the recommendations are more high level. For a more "operational" perspective, I highly recommend "Financial Shenanigans" which covers different ways to manipulate financial statements. "Quality of Earnings" is a good complement to that.

Dan Davies: Lying For Money.

This is the book on fraud and how it works, generalised.

The author likes the 2021 US edition more, but you should also try to obtain the 2018 UK edition for stories not in the US edition, e.g. the Kray Twins carefully noting all their crimes down in ledger books despite their accountant frantically begging them not to.

> The author likes the 2021 US edition more

Do you know why? I thoroughly enjoyed the older UK version.

The arguments are sharpened up a bit more.

the UK edition is fantastic, I've not read the US version - is it worth it?

yes, it's got new stories in it. Also the author feels the arguments are a bit sharpened up.

Everything mentioned here is good.

If you’re looking for something practical, ComplyAdvantage (https://complyadvantage.com/insights/) has some good reports on Financial Crime, and AML for Startups. NB - I work for ComplyAdvantage.

Also, the podcast Dark Money Files is fantastic. https://www.thedarkmoneyfiles.com/

I would like to recommend Lying for Money by Dan Davies. It covers the workings of several frauds and makes very good points about the necessity of trust.

Seconded. https://www.amazon.co.uk/Lying-Money-Legendary-Frauds-Workin...

(Dan is a blogger who I've respected for years)

The normally cantankerously toxic Nassim Taleb offered this hilarious blurb for the book: "If you want to learn to fend fraud, read this. And if you want to commit fraud ... don't. But if you absolutely must, first read this."

He also makes the good point that the optimal amount of fraud is not zero.

The Creature from Jekyll Island : A Second Look at the Federal Reserve by G. Edward Griffin

https://www.amazon.com/Creature-Jekyll-Island-Federal-Reserv...

The history of the foundation of the banks, central banks, and Wall Street and how corruption is embedded in the foundation itself.

-----

Bank Robbery: The way we create money, and how it damages the world by Ivo Mosley

https://www.amazon.com/Bank-Robbery-create-money-damages/dp/...

A much shorter version of the above book with less historical context.

----

Central Banking 101

https://www.amazon.com/Central-Banking-101-Joseph-Wang/dp/09...

This is not a book on financial crime but explains how banking works in detail

"The Best Way To Rob A Bank Is To Own One," by Robert Prasch. Here's a good summary: https://link.gale.com/apps/doc/A151201230/AONE?u=googleschol...

That book was written by William K. Black, who was involved in prosecuting the 1990s S&L collapse. It is supposed to be good. The Robert Prasch article that you linked is a review of the William Black book, written by Prasch. Bibliographic info about the book is here:

https://books.google.com/books?id=m44cAgAAQBAJ

I don't know how it compares to the ones on the list, but I thought Lying for Money by Dan Davies [1] was quite good. I wrote a review last year. [2]

[1] https://www.amazon.com/Lying-Money-Legendary-Frauds-Workings... [2] https://tildes.net/~books/w4x/what_are_you_reading_these_day...

Lying for Money is excellent - I highly recommend it (my review[0]). I wish it had more information on crypto-scams but there are other books on that topic.

[0] https://sheep.horse/2021/3/book_-_lying_for_money_by_dan_dav...

Can you recommend any in particular that go into the crypto side of things?

Attack of the 50 Foot Blockchain by David Gerard is an excellent summary of the crypto landscape. The author takes the view (which I agree with) that crypto is a scam in its entirety, so there is a lot of ground to cover.

The book's only flaw is that it was published in 2017 so it misses all of the recent drama.

Author's Site: https://davidgerard.co.uk/blockchain/book/

My Review: https://sheep.horse/2019/12/book_-_attack_of_the_50_foot_blo...

Lying for Money was excellent and extremely accessible. Highly recommend that one.

I have read a lot of financial crime books and can’t recommend Billion Dollar Whale enough. What’s so astounding is the immediacy with which he went on one of the biggest spending sprees ever. A case study in how to disprove people who say, “you could never spend that much money in a lifetime”. The fact he used stolen money to finance The Wolf of Wall Street is the cherry detail on top.

Dark Towers is an excellent read; while it is focused on a single bank, the practices certainly were not unique to Deutsche Bank: https://www.goodreads.com/book/show/45730424-dark-towers.

"The World for Sale" by Javier Blas and Farchy, 2021, is also an interesting read. The 200 pages of the book deal not directly with financial crimes, but rather are a deep dive into the 70-year history of the shady world of giant commodity-trading commpanies.

Fooling Some of the People All of the Time: A Long, Short Story by David Einhorn is one of my favourite books.

Wilful Blindness: How a Criminal Network of Narcos, Tycoons and CCP Agents Infiltrated the West by Sam Cooper

https://www.cbc.ca/books/wilful-blindness-1.6136088

If so many people are caught for financial crimes, and given the vast sums of money involved and how blatant the crimes often are, how many people do you think are never caught? I think the world of finance is absurdly large, opaque, and basically not policed.

“Business is a good game — lots of competition and a minimum of rules. You keep score with money.”

I enjoy the International Handbook of White-Collar and Corporate Crime[1].

[1] https://link.springer.com/book/10.1007/978-0-387-34111-8

Octopus is very good for a slightly different perspective.

https://www.amazon.com/Octopus-Israel-Secret-Streets-Wildest...

https://www.amazon.com/Confidence-Game-Fall-Every-Time/dp/01... is an interesting read

Related to this, https://www.imdb.com/title/tt6483026/ is a good watch (it's on netflix)

https://www.amazon.com/Confidence-Game-Fall-Every-Time/dp/01...

Would add Paul Erdman's The Set-Up, Zero Coupon and the Swiss Account as amazing thrillers. Complex topics explained so well a high-schooler can understand it.

The American Trap by Frédéric Pierucci.

A bit broader than financial crime, nonetheless very educating.

And yea, the Economist will never recommend this book.

Except that they did: https://www.economist.com/business/2019/01/17/how-the-americ...

They still didn't recommend it, rather mentioned along lines saying the author is not an angel and was well aware of bribes. Although I do find it surprising The Economist even mentioned the case.

Thank you for pointing that out.

They didn't recommend the book as such, but they did discuss its contents, concluding that American authorities did not behave well.

https://archive.ph/npfpu

You are right - thank you for pointing that out.

Is it wrong to say that most financial crimes boil down to scamming and fraud?

Corruption plays a large role. And then of course the laundering of any proceedings of other crimes.

Thanks for the reply! Moving away from legal definitions, isn't laundering just fraud (lying) with extra steps?

What forms of corruption don't boil down to deceit?

From what I understand corruption can take place without deceit, kind of in bright daylight/in the view and in the known of the public if they, the public have not feasible way of preventing the corruption. One could imagine someone buying a law that reduces taxes for their business. Now is this Legal? Depends, Maybe.. or you could bribe a judge to find a judgment that some Moldavian Bank actually belongs to you… this would probably kinda sound illegal, but then again is it illegal if no court will or can convict you? The interested population will know that this happens, yet what should they do, they will for sure feel quite powerless..

Also worth reading are Red Notice and Freezing Order by Bill Browder.

Witch one would you recommend to read first?

Red Notice! Freezing Order is basically part II.

Red Notice

not a ‘financial crime’ book per se but i found’guns traders and money’ by satyajit das to be quite excellent.

Two come to mind:

The Big Short

Confessions of an Economic Hit Man

naked, short and greedy

Nothing can replace practice!

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