Budget cuts kept Madoff in business - and who knows who else?
In retrospect, it's easy to point out that a consistent 10 percent rate of return is almost impossible and should have raised a few flags. However, most of Madoff's customers weren't money men; that, after all, is why they hired him. No matter how prominent they may have been in their chosen fields, they were simply not prepared to effectively evaluate Madoff. For that matter, his credentials as a former NASDAQ Chairman and a businessman with over 40 years of experience seemed to speak for themselves.But what of the experts? Well, in 1999, financial anlyst Harry Markopolos informed the SEC that Madoff's returns were mathematically impossible; later, in 2006, Madoff himself appeared before the SEC to answer questions about his business. Eventually, the case was closed with the statement that Madoff's actions "were not so serious as to warrant an enforcement action."
Much has been made of the fact that Madoff's niece Shana was married to an assistant director of the SEC's Office of Compliance, Inspections and Examination. Others have noted that Madoff, and later his brother Peter, sat on the board of directors of the Securities Industry and Financial Markets Association (SIMFA), the main securities industry trade association.
Apart from these personal relationships, however, there is a big question about whether or not Madoff would have been caught. After all, as SEC Chairman Mary Schapiro testified before Congress, the agency lost 10 percent of its employees between 2005 and 2007. Even after that, funding levels continued to cause staff attrition, although the Bush-era hiring freeze was lifted in 2007.
Eventually, the SEC found itself attempting to police "30,000 registrants including 12,000 public companies, 4,600 mutual funds, 11,300 investment advisors, 600 transfer agencies, and 5,500 broker dealers" with a staff of 3,600. To put it mildly, some infractions fell through the cracks. It hardly seems coincidental that Madoff managed to get off scot-free at a time when the SEC was epically understaffed.
Still, while it is clear that the SEC was ill-equipped to rein in Madoff, it seems strange that nobody else caught on to the scam. One particularly troubling tidbit is the fact that Madoff's customers were making regular payments to the IRS on trades that weren't really occurring. According to its website, the IRS has 2,800 special agents who are tasked with enforcing "tax, money-laundering, and Bank Secrecy Act laws." It seems strange that nobody noticed that the agency was collecting billions of dollars of fraudulent taxes.
Then again, the IRS also had a tough 2006. $100 million was slashed from their budget, resulting in a massive drop in enforcement. According to IRS commissioner Mark Everson, this was equivalent to losing 565 enforcement employees.
With Madoff behind bars and government officials tracking down the scattered pieces of his empire, it is all too easy to believe that the worst is behind us. However, if the Madoff case illustrates anything, it is the ease with which one can manipulate the financial sector, particularly when enforcement is massively underfunded. It is all too easy to imagine how a con artist could present himself as a legitimate businessman and use nonexistent trades to launder money. While not as dramatic as a bank account in the Caymans or Switzerland, a "fund" with a consistent return in the 10% range could scrub a lot of drug cash and terrorism money.
Somehow, it seems like the nightmare might just be beginning.