Hey Government, Stay Away From Fraud!

A couple of brushes with fraud recently has me wondering about how the State has wormed itself into our thinking so that any intervention it imposes on our lives is simply accepted by the population.

The first fraud instance involves the Washington Nationals, who are facing a huge embarrassment. As reported by Sports Illustrated last week, one of the Nationals' shortstop prospects falsified his age and identity. The Nationals gave the shortstop from the Dominican Republic a $1.4 million signing bonus in 2006 -- twice the amount of the next-highest bidder.

Sports Illustrated reported that the size of the prospect's bonus and the close relationship among the various people involved in the recruitment drew the attention of the FBI and Major League Baseball's department of investigations.

As I was reading the story, I wondered ... just why is the federal government involved in this case? I can certainly understand the MLB's investigators being involved -- they've got skin in the game. If you simplify this situation to the basics, the prospect (whoever he is) violated the terms of his contract. At this point, responsibility for proving the facts of the dispute should -- in a world where the State hasn't seeped into every crevice of our lives -- fall to the aggrieved party (who could then either investigate the fraud, or assign an agent for the investigation). A judge would rule if the contract was, indeed, violated and issue compensatory redress.

Who do you think is more interested in locating the stolen money, and who is more interested in putting someone in jail? (Do you think the Nationals are more interested in recovering the bonus, or in seeing the guilty parties punished with jail time?)

One could charge that individual parties may not have the economic resources to hire investigators to resolve contract violations and, therefore, that justifies our enormous tax burden for federal, state, county, city, etc., officials to investigate fraud. To that claim, I say there is a free-market solution already operating: insurance companies, who are already guaranteeing many contracts, and would expand their service offerings accordingly.

The second case of fraud was a little closer to home: me. Last week, I was the victim of identity theft -- somehow, someone obtained my social security number and secured a state identification listing my name, address, and social security number -- with his picture. He was able to open charge accounts at multiple Home Depot branches, and walked away with over $4,000 in merchandise. (I have since found out that the impersonator attempted to open charge accounts at least eight different stores.)

I was notified by Citi, the bank that is Home Depot's financing partner. The person who contacted me (on a Sunday) was extremely helpful and informative about the steps I needed to take to lock down my credit file to prevent future theft by the impersonator. She also informed me that Citi's Fraud Investigation Unit would be pursuing the impersonator to recover the stolen material, and directed me to contact Citi's Identity Theft Solutions department when it opened the next day. Monday morning, I contacted the Identity Theft Solutions department; the Citi representative coordinated a teleconference with one of the national credit-reporting agencies, suggested actions I could take to obtain free credit reports (due to the fraud), and indicated she would follow up in a few days to inform me of the case status, and to provide additional assistance, if needed.

That Sunday evening, I was also contacted by the jurisdictional county police department, who was also investigating the fraud. The officer, though very nice, was clueless about any steps I could/should take to prevent further identity fraud. She also indicated that I would probably not hear from her again, unless an arrest was made (which she admitted was doubtful).

My point with recounting these details is not to offer a peek into one of the more annoying episodes of my life, but rather to compare and contrast the differing approaches of the two investigative parties. The bank's priorities were to assure me that I would not be responsible for the stolen merchandise, to assist my efforts to protect my identity and credit, and to recover the stolen merchandise. Given their financial stake in what happened, it was in the bank's best interests to reassure and help protect me -- which, not coincidentally, would further their own interests in helping reduce future losses.

Compare with the actions of the police department. The instinctual reflex of most people to whom I have recounted this story was to wonder, "What are the police doing?" Umm ... I don't know: they didn't ask me about how my identity might have been stolen (which might've helped them locate the imperonator), and offered zero suggestions about what I could do to prevent additional credit accounts from being opened.

These cases of fraud demonstrate that the State's priorities are wrong when it comes to this type of crime. (I have not extended my analysis to other crimes.) The victim stands a much better chance of being "made whole" when the investigator has incentives to assist the aggrieved party -- rather than meting out punishment.

People instinctively feel the State should be leading the charge for the righting of wrongs. Not necessarily -- not by a long shot, because the State's primary interests (punishing the criminal with fines to the State, incarceration, etc.) are not always aligned with the victim's best interests (justice and redressing of the crime).

The brilliant Murray Rothbard captured this concept in his libertarian manifesto For A New Liberty:

Every reader of detective fiction knows that private insurance detectives are far more efficient than the police in recovering stolen property. Not only is the insurance company impelled by economics to serve the consumer — and thereby try to avoid paying benefits — but the major focus of the insurance company is very different from that of the police. The police, standing as they do for a mythical "society," are primarily interested in catching and punishing the criminal; restoring the stolen loot to the victim is strictly secondary. To the insurance company and its detectives, on the other hand, the prime concern is recovery of the loot, and apprehension and punishment of the criminal is secondary to the prime purpose of aiding the victim of crime. Here we see again the difference between a private firm impelled to serve the customer-victim of crime and the public police, which is under no such economic compulsion.

Oh, I should add -- I have much, much more faith that the bank's investigators will locate the impersonator before the police even get a whiff of him.