After taxes and agent fees, professional athletes collectively earn approximately $6 billion every single year. Based on a study of 2,400 cases of fraud by the Association of Certified Fraud Examiners, 5% of earnings is estimated to be lost annually to fraud - equating to $300 million lost to athletes every year.
Even more alarming, BrightLights believes this $300 million loss is a low estimate due to the lack of checks and balances on athletes’ finances.
As I detailed in a previous blog post, there has been very little quantitative data and information on professional athletes’ finances to detail the extent of financial fraud in that industry. I made a parallel between professional athletes and occupational fraud to help approximate the potential problem in professional sports. It’s not a perfect parallel, but it’s the closest I have found to date.
With the problem and parallels of fraud established, it was time to quantify the problem from a dollar perspective.
NFL + NBA + NHL + MLB = $12 Billion in Salaries Per Year
According to data obtained from Spotrac.com and BasketballReference.com, the four major sports - NFL, NBA, NHL, and MLB - pay professional athletes a total of approximately $12 billion per year1. (Update in 2018: It's now $13 billion).
After taxes and agent fees (approximately 38% federal + 6% state + 4% to agents2), professional athletes collectively receive $6 billion in cold hard cash every single year.
I think that it’s important to differentiate between pre-tax earnings and after-tax earnings because the lion's share of athlete’s money susceptible to fraud is after-tax money.
There are about 4,200 professional athletes across the NFL, NBA, NHL, and MLB:
- 445 NBA players - Average after-tax earnings of $3.2 million a year;
- 788 NHL players - Average after-tax earnings of $1.5 million a year;
- Approximately 2,000 NFL players - Average after-tax earnings of $630,000;
- 935 MLB players - Average after-tax earnings of $2.1 million a year;
- Highest Salaries: Steph Curry $40mm, Patrick Kane $10.5mm, Derek Carr $25mm, and Giancarlo Stanton $25mm.
This is a LOT of money, and even more so after understanding that all leagues are very top-heavy in compensation. For example, in the NBA, the 75 highest-paid players (accounting for 15% of the entire NBA) make 50% of the $3.7 billion in annual salaries paid, averaging roughly (pre-tax) $18.7 million a year!
The Cost of Fraud
Using this after-tax $6 billion figure, consider - per a previous blog post detailing how and why I am approximating these findings with pro athletes’ finances - that 5% of athlete’s earnings may be lost to fraud each year. Therefore, $300 million of pro athletes’ earnings may be lost to fraud every year.
A 5% loss to fraud on approximately 4,200 professional athletes comes to an average of $71,428 lost per athlete per year. Take that average with a grain of salt as there are many athletes who are not defrauded each year and there are also many athletes who are taken for much more.
The risk and the cost of fraud becomes very different as you focus on individual players. Although the 5% loss does not change, as players’ salaries increase, the cost (and risk) of fraud increases from a dollar perspective because there is more money at stake and little to no additional oversight. For example, 5% of Blake Griffin's after-tax salary is $930,204, while 5% for Zach Lavine's after-tax salary is $65,119.
Imagine you're a fraudster, and you have a choice to manage the money of either Athlete A who makes $2 million a year or Athlete B who makes $16 million a year. Both athletes rarely review or understand their finances and have no checks and balances in place. Whose money are you managing?
Athlete B, of course, because it will be much more difficult for Athlete B to realize if money is being stolen because he has so much more of it. Put more simply, imagine you have $100 in your wallet. Now imagine you have $800. Which wallet would you be more likely to notice if $50 was no longer there? This is why athletes making more money are at a higher risk.
Consider this tweet from NFL Reporter Jason Cole, the individual who broke the story on
advisor Jeff Rubin:
Cole’s figure was attributable in part to a massive $40 million fraud (as charged by the SEC) by NFLPA Registered Advisor, Jeff Rubin, and private investments numerous athletes made in an Alabama casino and development property. This disaster was also fully detailed on 60 Minutes.
More recently, there was a Sports Illustrated article on Clinton Portis' struggles with bankruptcy in the wake of Rubin's fraud, claiming that Rubin and two other disbarred advisors took him for $11 million.
If Cole's $300 million fraud figure just applies to the NFL, this gives you an idea that BrightLights estimated annual fraud costs to athletes might not be that far off.
$300 Million Lost to Fraud Is a Low Estimate
This $300 million estimate is based on the 5% figure of annual fraud losses in revenue which primarily involved companies with compliance departments. As I argued in my previous blog post, athletes are similar to corporations yet they typically do not have a compliance department. Without a compliance department, this 5% figure can only increase.
In all my years of experience as a financial regulator, one thing proved true over and over again: If we weren't regulating a certain product or enforcing a certain rule, financial institutions had no real financial interest in adequately self-regulating those things themselves either. Because why allocate their money to comply with laws that the regulators do not seem to care about when these institutions could allocate that money elsewhere to generate revenue?
How does this apply to you, Mr. Athlete? You have to view yourself as a regulator of your own personal finances. Ask yourself: are you regulating your financial advisors and money managers adequately by reviewing and understanding your investments and banking activity? If the answer is no, my experience tells me advisors and money managers know they can do what they want with your money with little oversight. Fraud may occur, advisors may churn or switch your investments in your account, your money manager may be sending cash to an LLC owned by him, and on and on.
When and if the music stops for these fraudsters - as it did for Jeff Rubin - it's usually too late for you to get back your money because the damage is done and the money is gone or protected overseas. The earlier you identify a problem, the less severe that problem is. Furthermore, the ACFE study indicated that the presence of compliance and anti-fraud controls was correlated with lower fraud losses and quicker detection.
These numbers - supplemented by documentaries and articles on athletes being scammed and defrauded, and going bankrupt, - paint a very ugly picture about the current state of professional athletes’ finances.
Still - It's Just an Estimate
The only way to understand your own risk and potential of fraud is to check under the hood and understand your finances. My Resources page provides a ton of free information to help you get a firm understanding on your own.
If doing this is too burdensome or difficult, BrightLights is here to work as a consultant to protect your finances with only your best interests at heart. Review BrightLights Home page, Services page, and About page to understand its aims to help bring finance back into the light.
Contact BrightLights for your free consultation.
1 - Salary figures obtained from Sportrac.com and Basketball-Reference.com. For the NFL, the salaries were calculated by including guaranteed and practical guaranteed money (as calculated by Spotrac) and does not include contracts yet to be signed for the 2017 season. If all NFL contracts - guaranteed and non-guaranteed - were included, the total figure would increase to $14 billion, but this is a messy figure to calculate and better not to include. For the NFL, NHL, and MLB, the calculation of total salaries per year was calculated by taking the average salary per year of the athlete's total contract - so this does not take into account front-end and back-end loaded contracts.
2 - This figure is somewhat in the middle of agent commissions which vary by sport. Generally: NFL 3%, NHL 4%, NBA 4%, MLB 5%, and FIFA 10%.