I’ve been doing a lot of training for my Fraud Examiner cert. Plus, one day last week I was home sick and watched a bunch of American Greed episodes (my old Finance and Quant prof is in the second half of the embedded episode). It’s fascinating stuff. Almost all of these folks have some lethal combination of intelligence and persuasiveness.

But the interesting thing is that there is some upper limit to their brilliance. They can hatch these elaborate schemes, but they can’t make that one final leap of genius whereby they figure out that their scam will ultimately fail. There are just too many things working against them.

The biggest problem is this: a scam involves receiving money from others for what they believe to be a legitimate purpose; usually a supposed investment or a purchase. But, people are not prone to simply surrender money in any significant amount. At some point they will want to withdraw some of their “investment” or they’ll expect the good or service that they think they paid for. And even after they’ve figured out that it’s a scam, it’s not as if they’ll let go. There is always some kind of paper trail and if it’s enough money for you to risk being sent to prison for, it’s enough for them to spend good resources following the bread crumbs.

One of my favorite stories: A school district employee fabricated invoices for fake vendors and ran them through the district’s payables. She had business accounts set up for the fake vendors so she could cash the checks issued by the school district. She was finally caught when someone ran a program that compared addresses in the system and discovered a number of vendors that had the same address as this lady’s home address. It wouldn’t be super-difficult to do what she did, but it’s not easy either. Some amounts of guile and intelligence would be required. For all her genius in hatching and carrying out this scam, she couldn’t figure out to spend an extra $10 on a PO Box!

And then there’s my old prof. The guy is absolutely brilliant. He taught the toughest classes in the MBA program and yet we sought him out. He was that good. So it’s not difficult to imagine him concocting these schemes and persuading lots of folks to trust him with their money. Yet even his incredible smarts couldn’t seem to remember that Ponzi schemes never last. They may take off like a rocket at first, but eventually the expecations of early investors overcome the supply of new money and it all comes crashing down.

So, they are smart but now quite smart enough.