Financial Crime and
Fraud Investigation:
Historical Perspectives
Learning outcomes
Understand the historical context and
perspective for business and financial
crime
 Appreciate the impact of an industrialised
economy on business crime
 Note the changing attitude of the judiciary
to such crime
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2
Antiquity
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Ancient Greek commercial crime is testified to by
the fact that the Parthenon’s architect had to flee
Athens to escape charges of embezzlement
Roman law decreed that dardanarii those who
conspired to raise the price of grain, oil, bread,
meat, or salt by the detention of vessels the
suppression of provisions or similar practices
were to be fined.
3
Antiquity
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Roman law foreshadowed today’s suspicion of
corporate entities Rome’s rulers (according to
Gibbons)
“viewed with the utmost jealousy and distrust
any association amongst its subjects and .. the
privileges of public corporations though formed
for the most harmless or beneficial reasons were
bestowed with a sparing hand”
4
Middle Ages
The development of trade in Europe in the
middle ages brought in a range of
punishments to restrict fraudulent
practices by the growing merchant classes
 In 1469 Louis XI of France promulgated an
act to curb fraud in the sale and delivery of
market produce
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5
Middle Ages
Early English law decreed that any person
who conducted business had to bring
witnesses before the king’s deputy who
could testify to the detail of the transaction
 In the 13th Century rules were enacted into
statute outlawing 3 specific marketplace
actions: forestalling, regrating and
engrossing
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Middle Ages
These were acts that tried to artificially raise the
price of commodities
Spreading false rumours
 Buying and selling the same article in the
same market for a higher price
 Buying foodstuffs in the marketplace
before the specified time
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The acts outlawing these practices were
repealed in 1767 as it was felt that they were
restricting free trade
Adam Smith published The Wealth of Nations in
1776 a free market exponent his treatise was
published at the dawn of the industrial revolution
Most frauds prior to this time were related to
food products within the agrarian society. This
changed with the expansion of trade
8
Concern over increased fraudulent acts
was expressed in 1602 by Sir Edward
Coke who said,
 “Fraud and deceit abound in these days
more than in former times”
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Attitudes
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The dominant position through the ages marked
by the failure of the law to protect people against
exploitation was expressed by an English judge
in 1703
The case involved a man charged with obtaining
money from a debtor by pretending that he was
the agent of the man to whom the money was
owed.
The judge was scornful “ Shall we indict one
man for making a fool of another?” it was agreed
that they should not
10
Attitudes
Same indifference in an 18th century case
where the defendant is charged with
misrepresenting a purchase of 16 gallons
of amber as 18 gallons
 “what is it to the public whether Richard
Webb has or has not his 18 gallons”
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11
Changing Times
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In the years following the “Glorious revolution” of
1688 England experienced a revolution in public
borrowing transforming the economy and creating
opportunities for “swindlers”
The Bank of England was created in 1694 to
finance the national debt and the government
securities or funds issued by the bank and traded
on the stock exchange became a source of
investment for the wealthier classes. As a result
they were also a source of white collar crime
12
Changing Times
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Sir Henry Furnese 17th Century director of the bank took
part in a number of schemes for artificially lowering the
price of the funds and then purchasing as much as
possible at the lower price
In 1697 Parliament found that numerous stock brokers
“unlawfully Combined and Confederated themselves
together, to raise or fall from time to time the Value of
such Talleys, Bank Stock, and Bank Bills, as may be
most Convenient for their own private Interest and
Advantage”
13
Changing Times
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New instruments of trade proved vulnerable to
abuse. The first fraud in Exchequer Bills
occurred within a year of their creation
In days of unreliable news false rumours could
greatly affect the value of government securities
and was a common fraud in the 18th century
In 1711 rumours of the death of Queen Anne
caused a sharp fall in the funds allowing some to
make good profits
14
Attitudes
In Jonathan Swift’s Gullivers Travels of
1726
 “ The Lilliputians look upon fraud as a
greater crime than theft … honesty hath
no fence against superior cunning … the
honest dealer is always undone, and the
knave gets the advantage.”
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15
Changing Times
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In 1803 reports that the British and French had
concluded a peace treaty caused a rise in
securities though in this case the bargains were
declared void and a reward offered to discover
the perpetrators of the hoax
1814 Charles de Bereneger pretending to be a
French colonel spread a rumour of French
defeat by throwing pamphlets from his carriage
in the City. Government funds rose quickly and
de Berenger and his accomplices, including an
MP, made a profit of £10,000
16
Financial Markets
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During the 18th century brokers conducted
most of their business in Jonathon’s coffee
house in Change Alley, little regulation
The “Wickedness” of speculation caused great
anger
Daniel Defoe (1719) A System of Stock
Jobbing “proving that scandalous trade as it is
now carried on to be knavish in its private
practice and treason in its public”
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Financial Markets
Samuel Johnson defined stock-jobbers in
his dictionary as “ a low wretch who makes
money by buying and selling shares in the
funds”
 Reputable dealers established the modern
Stock Exchange at Capel Court in 1801
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In 1734 Sir John Barnard’s Act was
passed
 This measure sought to prevent the
practice of “stock jobbing” and provided
that wagers on the price of the stock were
to be void and penalties were also levied
on those who sold stock to which the
vendor did not have possession or title.
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Corporate
Structure
In 18th century joint stock companies were
quite few only large organisations used
this structure such as the East India or
Hudson’s Bay companies
 The South Sea Bubble 1720 showed how
they could be fraudulently used
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South Sea Bubble
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The company was chartered in 1711 but did not
do much business just a little trade with the
Spanish colonies this stopped when war with
Spain started in 1718
The directors then devised a scheme for
converting government funded debt into South
Sea stock This would allow the government to
reduce its debt while increasing the company’s
capital and its prestige
Directors bribed MPs and court officials to
instigate this and South Sea stock rose very high
21
South Sea Bubble
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This caused a multitude of other companies to
start up of dubious background ie one
advertised “ to carry on an undertaking of great
advantage but nobody to know what it is”
The promoter opened his office and closed it on
the same day running off with £3000 in deposits
The South Sea company was worried about
competition and lobbied for the passing of the
Bubble act of 1720 forbidding further company
formation without Royal Charter or act of
parliament
22
South Sea Bubble
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Shares in the South Sea company and others
were over subscribed and as demands for
further payments were called for, speculators
who had borrowed to buy sold out, prices fell
and the bubble burst
The crash brought ruin to thousand of humble
investors, the directors fled abroad
This catastrophe caused a psychological
restraint on joint-stock organisation for over a
century
23
Industrial Revolution
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The industrial Revolution speeded up the pace
of earlier financial developments
It was the joint stock company which provided
the legal form through which business could be
pursued
The Joint Stock Companies Act 1844 created a
registrar of companies and the ability to start up
quickly
Replaced the Royal Charter or Act route
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Industrial Revolution
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The railways was Britain’s most ambitious
capital project ever which had to be met entirely
by private investment
Although not permitted to incorporate under the
1844 act
25
Industrial Revolution
This need would require investments to
reach a much expanded audience
 This was achieved by offering higher
returns than alternative government bonds
 Thus emphasising possibilities for
considerable personal wealth
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Railway Mania
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Central to the 1840s boom was that a sequence
of good harvests had flooded the market with
surplus capital
Ensured promotions of new companies were
met enthusiastically
The desperation of investors to make money
promoted empty and asset led “bubble”
companies alongside the legitimate rail schemes
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Railway Mania
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In turn this encouraged the spread of “evil and
plethoric speculative mania” (Evans 1859)
This ultimately precipitated the 1845 share
market panic
In 1845 The Bankers Magazine warned that as
many as 75% of investment opportunities were
intended to “rob and delude the public … and
swindle their subscribers”
28
Railway Mania
This in turn placed pressure on legitimate
schemes who had to overstate value on
their own shares in order to entice
investors
 By October 1845 panic ensued and the
market crisis loomed
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29
Railway Mania
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With the coming of the railways big business fraud was
here to stay, Railways transformed English finance.
The aristocracy and gentry became heavily involved as
they were often given large tranches of shares as
compensation for lines going across their land
This mania affected large numbers of the moneyed
populous who held these shares
The phenomenal growth of the Victorian railways
network and the corporations gave rise to numerous
fraud possibilities
30
Railway Mania
The company explosion started by the
Railway Mania of 1845 was extended by
the limited liability act of 1855 and the
Companies Acts of 1856 and 1862
 These acts set in train the vehicles for
greater levels of business and financial
crime
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Criminal Liability
Earliest manifestations of the perceived
need became apparent from 1846 when
some company directors became the
subject of criminal investigation on
account of their activities in the boom
 These were “intrusions” into business
dealings
 Intrusions into “gentleman’s agreements”
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Criminal Liability
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The private system of prosecution in 19th century
Britain left victims of crime to pursue criminal
proceedings
Within this private context there is evidence of
involvement from “City interests” of a collective
nature
This appears to have been a very powerful
influence in determining responses to financial
crime
A compact of landed aristocracy and capitalists
33
Victorian Bank Crises
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For most of the Victorian era the English
banking system was riddled with fraud and
mismanagement the financial crises of
1857 and 1866 and the collapse of the
City of Glasgow bank in 1878 were high
water marks in an age of widespread
commercial dishonesty
34
Victorian Bank Crises
1855 three London bankers Strahan,
Bates and Paul were tried and convicted
for the embezzlement of monies entrusted
to them as bankers
 Sentenced to 14 years transportation
 Straightforward criminal act ie
embezzlement
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35
Victorian Bank Crises
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The Royal British Bank case 1858
This trial acknowledged by the judge as “the
first… of this nature”
City of Glasgow Bank case 1878
Both banks’ directors were rumoured to have
made inappropriate loans and sought to cover
them up by falsifying published balance sheets
All directors were convicted
36
Victorian Bank Crises
The prosecutor in the Royal British case
stated
 “Wide-spread ruin has been scattered over
the whole of the country, houses have
been brought to destruction, families have
been plunged from affluence to poverty,
the hard earnings of industry, collected by
long labour have been completely lost”
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Victorian Bank Crises
The defence of John Stapleton a Royal
British director
 Based upon his “good family” background
 That he was a “west end director”
 “Utterly ignorant in banking”
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He was fined and discharged
38
Victorian Bank Crises
The directors of Royal British received
sentences of between 3 and 12 months
 With the directors of City of Glasgow
receiving between 12 and 18 months
 Appreciation that the potentially criminal
activity did not have deliberate dishonest
intentions i.e. intent hard to prove
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Victorian Bank Crises
The way in which prosecutors and judges
looked to men of commerce for guidance
in the criminalization of business, suggests
that City interests had a substantial hand
in determining what amounted to
acceptable business conduct
 This pointed to an emerging culture of selfregulation
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40
Victorian Bank Crises
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One could say that in the two cases mentioned
Royal British and City of Glasgow the directors
were considered outsiders
Contrasted with the collapse of Overend and
Gurney in the 1860s
The directors were charged on almost identical
charges in an identical situation
The directors were acquitted
41
Victorian Bank Crises
Directors regarded as merely “careless”
 The collapse “unfortunate”
 The criminal proceedings were declared
by the judge to be vexatious and
inappropriate
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42
Stock Market Frauds
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A Committee of 30 formed in 1802 had the
power to grant quotations on the exchange but
not with a mind to the investing public
Therefore fraudulent firms found it easy
Was termed “thieves kitchen”
A number of fraudulent issues in 1860s and
1870s gave rise to parliamentary investigations
43
Contemporary Perspectives
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The opportunity to commit white collar crime has
expanded in response to the globalisation of
commerce and financial transactions
The extensive white-collar crimes of the 19th
and 20th centuries resulted from the financial
revolution that radically altered English finance
during the early 18th century
The growth of a securities market and
experiments in company organisation created a
new world of opportunities for dishonest
businessmen
44
Contemporary Perspectives
The nature of global business is highly
competitive and company officials may not
interpret their actions as criminal.
 Nelken states that people are “… caught
out in serious offences quite often for
behaviour which they did not expect to be
treated as criminal, and for which it is
difficult to secure a conviction”
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Contemporary Perspectives
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Stuart Green “ What is interesting and distinctive
about [white-collar crime] is that, in a surprisingly
large number of cases, there is a genuine doubt
as to whether what the defendant has alleged to
have done was in fact morally wrong”
Suggests that this is because “act” or offence
results from a course of conduct that is
otherwise legal and even socially productive
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Some key texts
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Geis, G. (2007) White-Collar and Corporate
Crime, Pearson Prentice Hall.
Johnstone, P. (1999) Serious white collar fraud:
historical and contemporary perspectives,
Crime, Law & Social Change, Volume 30, 107130.
Robb, G (2002) White-Collar Crime in Modern
England: Financial Fraud and Business Morality,
1845-1929, Cambridge University Press.
Wilson, S. (2006) Victorian Experiences of
Financial Crime, British Journal of Criminology,
Volume 46, 1073-1090.
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Other Readings
Evans, D.M. (1859) Facts Failures and
Frauds, Revelations Financial Mercantile
Criminal, Groombridge and Sons
 Green, S. (2004) Moral Ambiguity in White
Collar Criminal Law, Notre Dame Journal
of Law Ethics and Public Policy, Volume
18, 502-513.
 Nelken, D. (1994) White Collar Crime,
Dartmouth Publishing
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