One day, I’d like to write a short book titled How to Crime. I’d probably dedicate it to Donald Trump and Paul Manafort, and perhaps some others from their orbit.

It wouldn’t be a how-to guide to becoming a criminal mastermind.

The purpose would be to help us wise up to criminal activity, especially white-collar crime.

If I can do anything to encourage better identification and greater support for enforcement against white-collar crime, I’ll feel like I’ve made a contribution to the world.

My aim would be to protect good, scrupulous people – and society at large – from the worst, most unscrupulous people on this planet.

One of the reasons I want to get in the head of white-collar criminals like Donald Trump and Paul Manafort is because their conduct is so alien to me. It’s like they’re operating a fundamentally different operating system in their brain.

Call it morbid fascination.

I also think it’s important: if you want to deal with “black hats”, you need to understand how they think. To be a good “white hat” you need to think about what you’d do if you were unscrupulous.

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Anyway. In the title of this article, I promised to talk about how to blackmail while retaining a veneer of respectability.

And for this, you don’t need to look further than the late Jeffrey Epstein, financier for the rich and powerful, and associate for Donald Trump. Oh, and convicted sex offender and alleged sex trafficker.

Back in July, New York Magazine wrote an article titled “Real hedge-fund managers have some thoughts on what Epstein was actually doing”.

It put into words my own suspicions about how Epstein may have made so much money as an investment manager without the same type of profile that many other successful investment managers acquire.

The key point:

“the hedge-fund managers we spoke to leaned toward the theory that Epstein was running a blackmail scheme under the cover of a hedge fund”

If true, Epstein was basically transferring wealth from blackmailees via management fees he charged them on an ongoing basis. 

It’s one thing to ask a wealthy person for a lump sum of $10 million, or $1 million per year in perpetuity, in exchange for not releasing evidence of some of their salacious conduct.

But in this day and age, it’s a hard thing to do. For one thing, anti-money laundering (AML) and counter-terrorist financing (CTF) regulation goes a long way towards making it hard to transfer large amounts of money to other people (especially non-family members) without raising red flags and alarm bells.

Even at this level of wealth, it’d also probably be hard to keep large “gifts” like this from your wife (or husband, if I’m being woke…). That’s the sort of thing that might raise marital red flags and alarm bells, too.

So how would you do it?

I guess you could engage your blackmailer for over-priced “consulting” work. I suspect this isn’t uncommon. Although here, you’d need to be able to justify to the taxman that this hefty consulting fee was a genuine expense, since you’d be deducting it against the income of one of your business entities. (Or you could choose not to claim it – but again, if you’re not claiming it as an expense… that’s a red flag because it starts to look more like a gift than an actual engagement.)

A good way around these issues might be to operate a managed fund with high fees.

Maybe you can’t get someone to pay you $1 million per year as a direct payment or for consultation fees or similar.

But you can get someone to invest $50 million of their wealth with you, for you to invest, and charge them, say, 2% per year in management fees. 2% of $50 million equals… $1 million.

If you operated a very simple managed fund, investing the underlying assets in, say, low-fee index-based funds or simple term deposits, this could get very profitable for someone like Epstein very quickly.

If you want to blackmail people with the level of wealth of people in Jeffrey Epstein’s orbit, this would be an excellent way of transferring wealth into your pockets, without raising the standard red flags and alarm bells.

It’s clever. Sinister and ugly, but clever nonetheless.

It’s also a rather sad indictment of managed funds that charge high fees

Ultimately, I’m describing how you’d use a managed fund as a way to transfer wealth from one person to another.

This can be for nefarious purposes, like blackmail. But it can also be for motives like the desire to extract wealth by charging exorbitant fees – whether or not you’re creating value in the process.

It’s not criminal in any technical sense.

In a colloquial sense? Maybe.

(For more on the topic of unnecessary fees, read “‘Fees never sleep.’ – Warren Buffett’s bet”.)

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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