One might say “It’s all just a little bit of history repeating” and shrug one’s shoulders when it comes to fake news. History is full of incidents such as the Ems Dispatch or the Gleiwitz incident, so what characterizes fake news in finance and why is this an important problem?

Thanks to the internet, it is far easier to spread fake news today, than in the 19th or 20th century. Anybody with internet access and a social media account can participate in online discussions with faraway people – but also try to influence them by spreading fake news. If they wish, other participants speak up against positions they disagree with, hence providing the public with a critical balance which did not exist until recently when classic media and governments controlled the flow and content of information. This control, also called “gatekeeper function”, narrowed down the information, leading to a better-informed public in the ideal case. In the worst cases, this leads to mere government propaganda, leading to wars, such as in the examples of Bismarck and Hitler. This means the internet is a catalyst for the marketplace of ideas but in in its shady corners, participants offer fake news, the commercial version of rumours.

This article serves as a review of an interview conducted with Oliver Pahnecke (PhD, MDX; LLM, CEU). His research focuses on sovereign debt and human rights, because of which his research interests overlap with the rule of law, corruption, money laundering and the dissemination of information that has an impact on debt and investments, for example, market manipulation via fake news. Together with Oliver, we opted to delve into the issue of fake news within the finance industry.

«For each dollar invested in the attack, the victim has to invest between 2 and 5 USD to compensate for the damage»

What makes the internet particularly interesting for fake news activists is the low price of generating content. While there is no price limit for sophisticated campaigns, the basic release of fake news on a free social media account does not require more effort than uploading the message. But not only the generation of content is cheap – it is costly for the victim to set the online record straight. Research of the Information Security Institute at the European Academy of Sciences of Ukraine shows that for each dollar invested in the attack, the victim has to invest between 2 and 5 USD to compensate for the damage. Another factor favouring the initiator of fake news campaigns is that not all readers have sufficient time and means to research the facts of the case and the trustworthiness of a homepage.

"Unfortunately, even established official publications sometimes resort to tabloid journalism. I recently addressed the Times of Malta, which published several articles connecting the Maltese financial institution Papaya to money laundering, although to date no law enforcement agency has issued press releases confirming this. For now, there is no proof that a fake news campaign was financed by a different party – but we can say that the Malta Times’ reporting was rather yellow press journalism"

Low price, outreach and speed are facilitating factors of fake news and artificial intelligence is expected to accelerate the problem, but defining fake news legally is a difficult task. The National Endowment for Democracy (NED) points out that propaganda, disinformation and fake news frequently overlap. They follow the Soviet definition of disinformation as the “dissemination (…) of false reports” in media “intended to mislead public opinion”, while propaganda “generally connotes the selective use of information for political effect.” Although fake news can have a political dimension, it is usually not driven by political motivation but is chiefly profit-oriented, as maintained by the NED. Fake news, therefore, could be called “disinformation for financial gain”. This means fake news stands for the dissemination of false reports in the interest of the originator or other beneficiaries or to cause damage to third parties, frequently for profit. This fake news definition can serve as a starting point for discussions on the implications of fake news in the finance industry. Yet, it is not always a fake news campaign, that harms the reputation of businesses:

"The distortion of information may be attributed, in part, to the lack of professionalism among journalists. Let's revisit the Papaya case and the article published in the Times of Malta. Journalists could say 'We are issuing an opinion. We make a commentary, and then in the commentary, they could maybe even say 'We have no facts, but we assume that Papaya has a connection with money laundering'. But the article is not identified as an opinion, as an op-ed, or a commentary or something like that. So the reader would fully expect that an article like this is an objective report. And because of this, the product that we are talking about is most likely something you could call a 'yellow press' article, like a tabloid paper or Boulevard paper quality"

A growing body of articles in economic journals shows that scientists take the problem of fake news in the finance industry seriously. Based on their research the impact of fake news on the stock market can be confirmed. Shimon Kogan, for example, could demonstrate a significant impact on stock prices in the case of smaller companies, including hints of insider trading, but not for large companies. The authors explain the difference in price reactions after fake news between small and larger companies with the more efficient markets concerning large companies, meaning more independent analysts looking into developments there. It's worth noting that the Maltese financial institution Papaya is not listed on the stock market and falls under the category of small companies within the EU. Based on Kogan’s paper this means less scrutiny from analysts but also from regulators. In 2017, for example, the SEC charged companies and individuals for the fraudulent promotion of listed stocks. Measures of that kind are necessary as a lot of money could be made by causing sudden market movements and placing the trading strategy accordingly. Accordingly, Papaya’s smaller size and the fact that it is not listed could expose it to increased reputational risk as there is no stock market to be protected. Simultaneously, a negative campaign could remain undetected, for example in an attempt to gain market shares at the expense of the target. Likewise, reports based on poorly understood anti-money-laundering investigations might result in a bad reputation and poor market performance. Therefore, we sought an official comment from Latvian businessman Dmitrijs Panurskis, who owns the fintech company Papaya to explain how the AML investigation was conducted in practice:

“Our office of Papaya in Malta was indeed subject to an inspection request at the end of February this year. However, there are no allegations against our financial institution from law enforcement authorities, the inspection was centred on another case, which had actually been spotted by Papaya: several years ago, we detected suspicious transactions involving one of our clients. Following internal AML protocols, we promptly suspended their accounts and notified the relevant regulatory bodies.

For entities within the European fintech system committed to adhering to AML procedures, this incident is a standard protocol. It represents routine practice and reflects the conduct expected of reputable financial institutions that operate with transparency. However, someone sought to sensationalize this routine occurrence for their own purposes. Therefore, I view this as a deliberate campaign of disinformation, likely instigated by individuals with vested interests and access to resources.”

Based on the research conducted by Maria Cristina Arcuri, negative fake news seems to have a larger and longer effect (up to a week) on the stock prices while the impact of positive news evaporates within a day. Moreover, in the short term, fake news has a negative impact on market returns. Interestingly, Acuri and her colleagues did not find any difference between the impact of traditional media outlets and social media.

Fake news can be defined as the dissemination of false reports, frequently for profit or to harm another party. As research has shown, the use of fake news in financial markets can distort the stock market and may lead to unjustified losses. Consequently, fake news in the finance industry poses a threat to clients and investors alike. 

At the moment, Morgan Stanley’s wealth management is probed by U.S. regulators because there are doubts that the bank had sufficiently investigated her clients’ identities and the sources of their wealth. Reuters reports that following this news, Morgan Stanley shares dropped by 4.8% following this news. This report is not an example of a fake news campaign, but it illustrates how big an impact financial news can have on the stock market, even on major established institutes. The influence on start-ups can therefore be actually much more severe.

What neobanks and fintech companies need, therefore, is a level playing field. However, these new financial institutions should not wait for improvement coming from a system that has been created for conventional banking. They should rather support policymakers and other stakeholders in keeping abreast with the rapidly changing digital environment and develop strategies on education, oversight and enforcement. This can best be achieved when these financial service providers enhance their rapport with the press for fact-based reporting and jointly address regulators and governments, to increase their impact on policies and also to improve their cooperation with law enforcement agencies. Research showed that improved regulatory frameworks can make markets more resilient against deceptive practices. It would therefore only be logical if neobanks and fintech companies demanded that the existing regulations be supplemented with modern IT-compliant guidelines.