I’ve been screaming from my mountaintop for over 18 months that the cost of fraud across professional sports is enormous, to the tune of $300 million per year. No doubt, that figure sounds crazy and inconceivable, but we’re dealing with 1) an industry that pays its NHL, NBA, NFL, and MLB players $13 Billion in salaries per year, and 2) financially illiterate kids with no experience in the real world, and sometimes reality, too young to understand that their perceived invincibility shields them from the darkness of the industry and the muck of corruption and deceit.
But $300 million in fraud per year? C’mon, you say.
It's Not Just Me, Anymore
Ernst & Young recently released a report titled Athletes Targeted by Fraud which received very little publicity by anyone in the sports industry despite its staggering results. The report stated pro athletes alleged $500 million in fraud-related losses from 2004 - 2017, and 68% of that amount, or $334 million, was from 2014 - 2017!
The real headline was how much more in fraud-related losses have not been identified and/or reported. As the report states,
In light of the difficulty in detecting fraud and the reluctance of victims to acknowledge it publicly, that’s [the $500 million in losses] likely not the half of it...Our research identified only alleged frauds that became publicly known through criminal or civil proceedings. It’s likely that more instances of fraud have not have been identified publicly due to a variety of reasons, including private resolution...athletes did not want to, or we unable to, pursue claims…[and] perpetrators successfully concealed their crimes.
The majority of professional athletes put 100% blind faith in their financial advisors and money managers with no oversight or understanding of what’s going on in their accounts. Because they’re continually making more money during their short careers, they only see their net worth increase so they assume all is well. I can’t overstate how problematic this is.
Imagine you’re an NBA player making $20 million a year. Let’s cut 50% to account for taxes, agent fees, business manager fees, etc. The player chooses to get paid out throughout the whole year, so he’s making $384,615 every two weeks. Do you know how easy it is to steal from someone who is making that much money who doesn’t even look to see what you’re doing in his accounts?
This all leads to what Ernst & Young’s reports are the most common types of frauds against athletes:
- Imposters posing as financial professionals improperly used the athletes’ funds for personal expenses such as cars, jewelry, taxes and debts.
- The athletes’ advisors used their access to make unauthorized and overly risky investments on the athletes’ behalf, while also enriching themselves.
- The athletes’ advisors or family members used their access to the athletes’ bank accounts or power of attorney to make unauthorized cash withdrawals to enrich themselves.
- Advisors used cash for personal expenses rather than stated investments.
- Misappropriated earnings. Most athletes designate someone to control and manage cash inflows. In these cases, the designees did not properly distribute the athletes’ earnings, and instead kept and used them for themselves.
- Advisors misled athletes with false or misleading financial information, such as inaccurate historical investment returns, misclassified risk profiles, and fake investment suggestions.
- Trusted advisors make recommendations to athletes based on an undisclosed conflict of interest, such as ventures in which the individual has an investment, or a financial advisor from whom the trusted individual receives a kickback.
It almost doesn’t matter how much someone steals, the player is not going to identify it. The only time fraud is discovered is when these guys get divorced, and the ex wants as much in alimony as possible, so lawyers comb through all the financial records. Tim Duncan ($7.5 million) and Kevin Garnett’s ($77 million) frauds were both identified because of divorces.
$500 million lost to fraud is the tippy top of the iceberg, a minion in a minefield of fraud against pro athletes.
Fraud Is On the Rise
The report also states that fraud is on the rise:
Even more alarming, that incidence of fraud in sports is trending in the wrong direction, as the number and value of known cases have steadily increased nearly every year for the past decade. Clearly, athletes are becoming a bigger target of fraud.
Why would fraud against pro athletes be increasing? Professional athletes continue to make more and more money:
And the amount of revenue (estimated annual revenue across the entire sports industry is expected to rise to $78.5 billion by 2021) in pro sports rises:
Which leads to frauds with many victims across the leagues and sports:
Why Is This Happening and What To Do?
The report’s reasoning for why fraud is is happening to athletes and what they should do to prevent fraud are the same reasons and solutions I’ve been spouting for a while now, so I won’t be a broken record.
Where Is The Urgency?
This is the billion dollar question that rings through my head day after day. I have yet to meet anyone who doesn’t agree that fraud in pro sports is a serious problem, yet very few are willing or wanting to change an industry because its making a lot of people very rich.
So where is the urgency? It’s seemingly washed away because 13 billion dollars is in play.