Post No.: 0424
In general terms, fraud is an intentional deception, whether by commission or omission, which causes a perpetrator to realise a gain and a victim to suffer an economic loss.
When under a perceived financial pressure, for which the burden cannot be shared with others and appears impossible to resolve in any other way – even otherwise law-abiding citizens can commit fraud. There must also be a perceived opportunity to make an illicit gain and get away with it, and a rationalisation (justification or excuse) in the mind of the fuzzy fraudster to find it acceptable to commit such an act (e.g. that they deserved the money, it was owed to them because they were treated badly by their employer, they were just ‘borrowing it’, or it’s not their fault that the accounting or security practices were lax where they worked, etc. – you’ve probably heard them all before! Post No.: 0365 looked at more examples of excuses).
Because very few people who do bad things believe they are fundamentally bad people, fraud investigators might need to employ some social intelligence and approach suspects by not accusing them of being bad people but that they are good people but made a (series of) bad decision(s) somewhere. They may still deny it, plead ignorance or stupidity, and make excuses for their behaviours, but this approach has a better chance of getting them to open up and confess rather than get defensive. We might consider these types of fraudsters ‘accidental’ fraudsters.
Even employees who received seven-figure salaries and bonuses have risked their jobs to gain an extra few thousand dollars more through fraud! People rationalise, but they’re not always rational. The lesson is to not make assumptions that anyone is above the desire to gain a little bit more for themselves. Follow the evidence with an open mind. Critical thinking includes not jumping to conclusions, and challenging our own assumptions about what position in a company a fraudster will come from.
In businesses, fraud can be committed at any level and by anyone, but the typical demographic of a fraudster is male, well-educated, middle-aged and is a member of upper management. They’re a first-time offender and occupy trusted positions at work and in the community. This might simply be because these people have the greatest opportunity to commit fraud – those in upper management have the greatest authorised access to the funds and assets of a company and don’t have as many people above them watching them as lower staff do; and due to inequality, more men than women tend to be in these upper management positions, and of course you’d expect them to be well-educated and middle-aged to be able to get to be in these management positions. These people also have the greatest opportunity to commit large frauds (e.g. management might be able to override the internal systems of control that are designed to prevent fraud). Financial statement fraud often involves a high-level financial executive.
Reasons to commit fraud mainly revolve around either money (e.g. to tackle a debt problem or to just fund an extravagant lifestyle), an ideology (e.g. not believing in paying taxes or as a reaction to the CEO getting paid hundreds of times more than oneself), being coerced into it (e.g. a supervisor pushing employees to inflate the figures or paying bribes to secure an important contract otherwise one will lose one’s job), and/or ego (e.g. thinking that one can outsmart the system or is entitled to superior wealth and power). So watch out for people with big egos because such people will do anything to make themselves appear successful and important, including possibly using fraud to hide their crumbling ventures, or they may inflate an okay business to show that it’s growing year-on-year when a person who’s less egotistical will be more patient for growth or even understand that it’s not always important.
Although not in themselves evidence of wrongdoing, an employee who seems unusually close to a client, and doesn’t wish to delegate the work or even wish to take a holiday, might be trying to guard their fraudulent activities from other people looking into what they’re up to. A ‘wheeler-dealer’ attitude is a common red flag too, as is complaining about a lack of authority.
Whereas most people who commit fraud do so because they (rationalise that they) need the money, others are more predatory – they commit fraud simply because they’re greedy and think they can get away with it. These ‘predator’ fraudsters actively seek for opportunities via looking for weaknesses and vulnerabilities in an organisation or system to obtain ill-gotten gains. They don’t do it due to financial pressures (although they may still be influenced by situational pressures) nor do they need to rationalise their actions to convince themselves they’re doing it for a good reason because they know it’s not for a good reason (albeit those who nonetheless find it easy to justify their unethical behaviours are more likely to commit them).
Therefore the main thing for predatory fraudsters is the opportunity and the seeking of opportunities to defraud. Some people may start off needing the money but then get hooked on the gains and the lifestyle and so become predatory. Predators may start scheming early but don’t tend to commit their frauds too soon in their employments – it might take them 1-5 years. They tend to play the long game or long con by gaining the trust of everyone around them first – hence watch out for those who have gained your trust and seem to be in respected positions too. They tend to be organised people, more capable and more prepared to deal with any auditors or other oversight mechanisms. They also tend to be repeat or serial fraudsters, so research beyond their CVs/résumés because they’re not going to put that information on there. Potential red flags are therefore their personal integrity and their past behaviours and attitudes to ethical decisions (e.g. watch out for those who have little respect for anyone but themselves).
They tend to be more capable of recognising opportunities to commit fraud, executing a fraud and concealing the fraud. Especially for large sums over a long period of time, their cunning, position or function within an organisation, their ego in thinking they won’t get caught or will find it easy to talk themselves out of trouble if caught, and their ability to handle stress well, will help enable them to execute a fraud successfully. The largest frauds are committed by intelligent, experienced and creative people who have a solid grasp of the company’s controls and vulnerabilities, and who have the access to exploit the opportunities they find.
The key elements of fraud are the act itself (e.g. cheque kiting, embezzlement, false financial reporting), the concealment (e.g. destroying files, creating false records), and the conversion (turning the ill-gotten gains into a form that appears legitimate so that the perpetrator can spend it without suspicion e.g. by money laundering, off-shoring the money to a tax haven, spending it on foreign property or vacations). The latter two elements being present make it hard for the fraudster to claim that the act was unintentional. Woof!
Criminals will want to make their ill-gotten gains appear like they came from legitimate sources, such as an inheritance, a gift, a loan or gambling winnings – once that’s achieved, a criminal can do whatever they like with the money, such as invest it, without being questioned by the authorities about where the funds came from. Using cash to buy expensive items will arouse suspicion, as will a series of deposits of just less than the amount that’ll trigger a bank to report a transaction to the authorities. Money laundering is the disguising of the existence, nature, source, ownership, location and disposition of property derived from a criminal activity. Mixing illegitimate activities with legitimate activities so that it’s difficult for the authorities to tell what’s what is a common strategy. Apart from hiding or disguising the proceeds of crimes, people may want to hide money from bankruptcy creditors or from a spouse pending a divorce.
The International Monetary Fund (IMF) estimated that 2-5% of the world’s GDP was involved in the laundering of ill-gotten gains in 2006! And studies show that once the money is stolen, the chances of getting it back are slim. This would suggest that some criminal groups have more wealth, and therefore more power, than some small nations! Tax is typically also not paid on laundered money. Tax evasion has victims because those who do pay their taxes must make up the difference, thus it’s essentially a theft from everyone else rather than no one. Within an organisation, money lost to fraud means money lost for benefits, pay raises, new equipment or new employees, thus again it’s a theft from everyone else. And the proceeds of fraud frequently fund other crimes that harm society. Organised crime is a global network.
When money (value) is being moved around – the amount (volume), the speed it moves (velocity) and where it exists or who controls it (venue), matter. Money can be disguised because it can come in many forms (e.g. as property, precious metals, art, financial securities, illegal drugs, even air miles or other loyalty points, gift cards or prepaid mobile phone credit). Liquid assets are most often used in money laundering though because they can be quickly shifted.
The steps for money laundering involve the placement of the proceeds (e.g. at a financial institution, offshore company or tax shelter, under a bed as cash), layering (complex patterns of financial transactions will make it hard for investigators to track what money initially came from where – the more layering, the harder it’ll be for the authorities to trace the funds, especially if it has been moved offshore), and the integration back into the economy in such a way as to make it appear to be a legitimate business transaction.
Although it leaves a trail, electronic/wire transfers make moving money around the world easy and almost instantaneous to do, and can make fraud investigations difficult when money keeps moving from one legal jurisdiction to another. We should follow the money if we want to follow a crime – but tax havens make it difficult for investigators to track the proceeds of crime and corruption. Tackling fraud and corruption is therefore a global problem that requires global cooperation. The trails of most illegal funds eventually return to the person laundering the money though.
So a common component of money laundering schemes nowadays is off-shoring the money to a jurisdiction with lenient laws and enforcement, strong banking secrecy and lower taxes. Using shell companies that hide the true identities of their owners is another. And yet another is taking advantage of technologies like cryptocurrencies in conjunction with alternative remittance systems/parallel banking systems that facilitate the transfer/exchange of virtual/digital currencies that evade banking supervision and government regulations. To clarify, these components aren’t always used for illegitimate purposes, but they frequently are.
Regarding banking secrecy or secrecy in general, we want people’s privacy to be protected when it concerns something legitimate but not protected when it concerns something illegitimate – however, we won’t know what’s legitimate or not until we have a look(!) Some people will argue that the price of freedom is eternal vigilance but, in this context, does this mean vigilance against powers that pry into people’s privacy when they’re doing innocent things, or the vigilance of prying into people’s privacy when they’re doing guilty things that harm the freedoms of others in society?!
…I’m a dog, a sniffing borker, and on the side of catching crooked crims. We’ll look at what can be done to help combat fraud in your organisation in a future post. Meanwhile, I hope you’re a little bit more clued-up about the minds of most fraudsters and what they might try to do to get their grubby mitts on your assets!