Interest Rate Effects on Fraud

Low-interest rates have been beneficial for many groups and people in an economy. However, there has not been much research into the unintended effects of a low-interest-rate environment regarding fraud. Interest rates can secure financial markets differently than most people think about them. A few articles in the past have explored the relationship between fraud and interest rates. One is a Washington Post article about seniors trying to better protect their wealth with higher returns. Another article claims fraud might fall initially during lower interest rates, but it is a data blip that might not sustain. This will be especially important if inflation does not decrease and more people look for alternatives to protect their wealth. As seen, this is a little-discussed topic, and not a firm conclusion can be deduced from the effects on fraud levels. The longer interest rates are kept low may further perpetuate any ongoing fraud in the economy.

An investigative look into why low-interest rates cause higher fraud rates will be detailed below with some examples. First, an understanding of interest rates should be reviewed to see where they get their authority from. With any modern economy, the central bank can control many levers by adjusting the interest rate. This level of control is supposed to provide stability and security within an economy by changing the money supply. Having a low-interest rate makes it easier for many to get loans and requires less capital to build a business. A higher interest rate environment could stifle growth as the money supply is tightened.

To see how fraud might increase during low or negative interest rates, we can review examples of why they might aid bad actors. First, the due diligence of any loans will be less during lower interest rates. Banks and financial services must make up for the low-interest rates with greater volume. Companies that do practices such as Buy Now Pay Later (BNPL) have flourished in the last few years. Unfortunately, they also brought in high rates of fraud. A change of interest rate will weed out many fraudsters who are essentially running Ponzi schemes with these different providers. They can take out loans and even pay them off, only to eventually bust out if they think the game is turning against them. 

Another problem gone unnoticed due to low-interest rates is fraudulent companies with little hope of making any profits. Many public and private companies in the past decade have been able to stay on life support only due to the easiness to borrow more capital. If the interest rates would normalize, it could cut the cord on many fraudulent companies providing little economic benefits to society. Operating a company that makes a profit is much more complicated than one that can be run in perpetuity at a loss. Fraudsters typically run a lean business, and any change in the way they reveal their financials to investors or review by regulators/banks would reveal the true motives. A predictable business environment works for scammers as they know exactly what will happen with their financials to keep the fraud going. Once their financials are changing, things will look a lot more chaotic as they try to either masquerade any fraud or dig in with even more illegal activity. 

In review, rising interest rates might be a beneficial force in flushing out fraud throughout the economy. Not only will financial fraud be discovered, but other cyber risks can be discovered by companies that operate as shells. Setting up fake identities and committing different financial fraud is easier when the markets mask many malicious actions within a sea of volume. Interest rates can extract significant change from companies in how they look at fraud. Therefore, this will be another factor that professionals should pay attention to in the coming year. The trouble will be balancing out new fraud that actually increases due to inflation and higher interest rates to that which is exposed by weakened financial conditions. I predict the new fraud will be ones that are more easily identifiable versus current trends, which are well-hidden schemes.