Resilience in sophisticated financial crime networks: a social network analysis of the Madoff Investment Scheme
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Resilience in sophisticated financial crime networks: a social network analysis of the Madoff Investment Scheme John Hardy1 · Peter Bell2
© Springer Nature Limited 2020
Abstract Despite numerous investigations and studies, the resilience of Madoff’s scheme from at least the 1970s until its collapse in 2008 is poorly understood. This study applies social network analysis (SNA) to the Madoff Investment Scheme in order to identify key factors which support resilience in networks that are engaged in a sophisticated criminal enterprise. The SNA identified four clusters of individuals who performed vital functions within the network: a core leadership group, a compliance group, a capital group and a facilitators group. The study then examined the network’s response to exogenous and endogenous shocks, finding that the Madoff network had been resilient to both exogenous shocks, such as Securities and Exchange Commission examinations, and endogenous shocks, such as significant investor withdrawals, prior to its collapse in 2008. These findings suggest that monitoring network responses to exogenous and endogenous shocks could assist investigators in identifying Ponzi schemes in the future. Keywords Social network analysis · Financial crime · Fraud · Madoff · Organized crime
Introduction Since the turn of the century, numerous high-profile financial crimes have dominated headlines and captured the public’s imagination. The Madoff Investment Scheme was one of the most significant cases of the 2000s, overshadowing the Enron Scandal in its longevity and in its financial, personal and social impact.
* John Hardy [email protected]
Peter Bell [email protected]; [email protected]
1
Rabdan Academy, Abu Dhabi, UAE
2
Griffith Asia Institute, Griffith University, Nathan Campus, Brisbane, QLD, Australia
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J. Hardy, P. Bell
Recent investigations into sophisticated organised crime have demonstrated that the social organisation of perpetrators often involves complex legitimate and illegitimate networks (Athey and Bouchard 2013; Morselli 2009). While numerous criminological studies have focused on the illicit, or ‘dark’, networks (Raab and Milward 2003; Bakker et al. 2012) that commission offences, relatively few have focused more broadly on the overlapping networks involved in organised crime (Morselli 2010). The Madoff Investment Scheme, which operated for decades without detection under the cover of a genuine dealer–broker business, is a key example (Hurt 2009; Smith 2010). The Madoff Investment Scheme was a shocking white-collar crime that involved one of the most respected financial services firms in the United States (US). It was a multi-billion-dollar scheme that lasted several decades and defrauded more than 4000 people (Hurt 2009). Several studies have explored the procedural and structural elements of the case, unpicking the tapestry of criminal activities that Madoff had woven over the course of decades (Arvedlund 2009). While there are no clear answers as to why the scheme persisted for so
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