Spotting a Fraudster

Most company owners do not realize that the average business loses around five percent of its annual income as a result of fraud/embezzlement. Statistically, losses from bigger fraud schemes are usually attributable to highly valued, experienced, senior management/executives.                                                          

Research has revealed that there are certain behavioral traits, which, if identified in conjunction with other factors (such as issues with bookkeeping, controls or accounts), should give sufficient cause for making some discrete enquiries. Some examples of noteworthy behavioral clusters are:

• Overbearing conduct (this may indicate the person is trying to deflect attention away by imposing a communication barrier),
• Secretive conduct and keeping work hidden (hiding notes, documents or files would normally be perceived as meaning the person does not want others seeing the content–for whatever reason),
• Not taking holidays (when persons in positions of responsibility steadfastly refuse to relinquish control of their responsibilities, it could either be as a result of great pride in their work, or that they need to retain control in order to maintain a certain façade or cover-up),
• Leading a lavish lifestyle (an employee who appears to be living beyond their income should be cause for concern) and also being overly likeable or often prying (although in some ways the opposite of being overbearing, such behavior may be displayed for the same reasons.)  

These behaviors should be considered particularly interesting if displayed by members of senior management, who are between the ages of 31 to 45 years and who have been with the company for over five years. Statistically, male fraudsters outnumber female fraudsters two to one. Working in regions like the Middle East and North Africa (MENA), with multicultural and multilingual work places, we must also be culturally sensitive and aware of how different societal norms affect people’s conduct. This complicates the matter, for although the behaviors described above still remain indicators, they may be perceived differently within different cultures. In particular cases, one needs to spend time understanding which behaviors are cultural norms and which are personality traits, before becoming too suspicious and possibly insulting someone or embarrassing oneself.

Of course, we are all only human and most people in the work place who display some (or even all) of these traits are not necessarily criminals, but that’s not to say it would hurt to keep a close eye on them and do a little investigative work: some subtle cross-checks to make sure.

Arguably, the uncovering of fraud is a science, whereas uncovering the fraudster is an art. The fraudster is the Janus (man or woman), the two-faced being masquerading around the work place like an actor on a stage. Nonetheless, the core psychology of the fraudster is relatively simple, but usually very well disguised and tricky to uncover.

In its training manual, the Association of Certified Fraud Examiners (ACFE) refers to a “Fraud Triangle” when discussing the root causes of the crime. The three sides (or aspects) that create the triangle are: Motivation, Opportunity and Rationalization. The most recent fraud theory refers to the “Fraud Diamond,” adding the factor of Capability to the triangle: the potential and skill to undertake the fraud.

Motivation may be either internal or external. It may take the form of in-house pressure to achieve financial targets or domestic pressure to bring home more income to pay for lifestyle or other expenses.

Opportunity relates to positioning within the company as well as proprietary knowledge and/or having a high level of authorization (a sufficiently high level to avoid scrutiny.)

Rationalization is, in my opinion, the most interesting aspect–this is where the psychology of self-deceit is to be found. The perpetrator may be reconciling the criminal behavior by saying to themselves something like: “The company owes me,” or “I deserve more and it won’t matter if I just take it,” or “I’m not being unreasonable, anyone in my position would do the same thing.”

Capability refers to having the ability to lie continually, deceive and cheat and hide the evidence of their actions.

Fraudsters tend to fabricate a personal scenario that they rely on to justify to themselves their deceptive criminal conduct. The art of uncovering the fraudster (or the fraud) is in getting behind the lies and discovering the truth. The examiner needs to find the seam between reconciliation and reality and prize it open. Even so, unlike in the movies, not all investigations end with confessions. Sufficient evidence usually takes the form of a blend of real physical evidence, circumstantial and testimonial evidence and maybe some admissions by the perpetrator.

Interestingly, even after having been made aware of the Fraud Triangle (or Diamond as is now widely accepted) and the work behavior indicators, many business owners still do not feel inclined to take a closer look behind the scenes. Those indicators are free and easily observed, if you’re looking for them. A cursory investigation behind the scenes may bring something interesting to light and cause a red flag to pop up. The behaviors may just be personality traits, but they may also be signs of an underlying deception; however if one doesn’t look, one may never know.

Statistically, most frauds are only discovered once they have been underway for between 12 and 18 months and they tend to escalate in number over time as the perpetrator’s needs (greed) increase. Schemes tend to progress, sometimes exponentially, to a point where the true facts can no longer be concealed by false bookkeeping entries or other deceptions and direct signs of fraud become apparent.

A 12- to 18-month monetary leak could mean irreparable damage to a company’s financial buoyancy; possibly resulting in far reaching issues such as cash-flow and debt problems, tax and regulatory/legal issues, brand damage and adversely affected customer/client confidence impacting the business’ value, and of course, costly litigation.

One cost-effective method of addressing and minimizing fraud risk is to perform background checks on key staff, vendors and suppliers. The good news is that business owners don’t need to try and become Sherlock Holmes or Dr. Watson, because there are already reputable, ethical professionals out there, whose skill is to perform discrete, thorough, background checks on key staff and vendors. Making such background checks company policy is one of many best practice corporate governance controls that should be implemented in order to reduce the risk of fraud. There are numerous fraud risk assessment techniques that can be applied to any business, from a corner shop to multinational corporate–the trick is to actually follow through.

Of course one could perform some of those checks oneself, but having them performed independently can bring a more objective, analytical angle to the information obtained.

In a recent case the branch manager of a national distribution company in South Africa was caught out after 20 months of double-billing legitimate transportation invoices against his own ghost company. Twice a month double payments were made for distribution; one for the real vendor and one for the ghost vendor. This eventually came to light after a long overdue stock-counting exercise revealed that the warehouse was greatly over-stocked. Only half the amount of stock booked as having been distributed had actually been moved.

You may not be too surprised to read that the manager had, on two prior occasions, successfully foiled attempts to perform stock-counts at his warehouse; and that when the count did finally go ahead, he was off sick for a few days. That is surely proof that it is true that stress can make you sick!

Examination of the business’ vendor list with background cross-checks to determine details of vendor owners’ names and letters to confirm their banking details, revealed that the branch manager himself was on the list via his ghost company. In 20 months he had syphoned USD 275k off the books.

Interviews held with the warehouse staff revealed that the manager had been displaying many of the classic fraud behavior traits: in the preceding three years he never took vacation leave, he held final authorization on all payments at his branch and had full access to the entire bookkeeping system, he was always ingratiatingly nice to everybody, he was known to spend a lot of his time gambling and had bought a car disproportionate to his salary. He was 33 years old and had been with the company for seven years at the time.

The case described above shows textbook hallmarks of those behavioral clusters being closely associated with bookkeeping, controls and accounts issues. Staff fraud awareness training, together with a robust and well-advertised Whistle-Blower Hotline, may have encouraged a staff member to report their concerns much earlier. In fact, the crime may never have even been committed if there had been a proper vendor onboarding policy and procedure, regular background checks and cross-referencing of vendor bank account details against the staff’s bank accounts. According to the ACFE report mentioned above, even ensuring key staff either take their annual holidays or spend some time on job rotation can reduce the duration of a fraud scheme by as much as 60 percent. Governance controls like these should be implemented and adhered to as a bare minimum of fraud prevention.

A little prevention can go a long way and periodically calling in the experts to assist you with performing a fraud risk assessment, prevention and awareness exercise will always be worthwhile. After all, prevention is better than cure.