Profiling the Fraudster
Simon Padgett
Profiling the Fraudster
Simon Padgett – Forensic Accountant
Director
Forensic Services
ACFE, Las Vegas, June 2016
Introduction
• Current fraud trends
• Some examples / case studies
• The misrepresentation – counterfeiting vs. forgery
• Profiling the fraudster
• Characteristics of the fraudster
• Characteristics of a victim organization
• Cybercrime and its anonymity
• Q&A
Fraud Definition
In the broadest sense, fraud can encompass any crime for gain that uses
deception as its principal modus operandi.
More specifically, fraud is defined by Black’s Law Dictionary as:
A knowing misrepresentation of the truth or concealment of a
material fact to induce another to act in order to deprive them of
property or money by deception, or other unfair means.
Global Economic Crime Survey:
Some Canadian Stats
5
Elements of Fraud
Misrepresentation
Intention
Prejudice or potential prejudice
Legality
Fraud … all is not what it seems.
The misrepresentation
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Types of Fraud
Asset Misappropriation
Financial Statement Fraud
Corruption
What Is One + One?
Format “-1” without brackets
Format “1” to Text
1 1 1
1 1 1
Total 2 1 0
=SUM(B1:B2) =SUM(C1:C2) =SUM(D1:D2)
"Enron Executives Face Subpoenas"
“Criminal charges filed against auditor”
“Thousands of Enron employees jobless”
“Enron pensions vanish overnight”
“Enron executive found dead in car in
apparent suicide”
ENRON EXECS prepare
to testify before a
house panel.
ROARING’ GOOD TIME:
Director Rebecca Mark arrives at
an Enron party in Harley style,
belying her corporate image.
THE HOUSTON STRIP CLUB
Treasures, where Enron executives would
ring up thousands of dollars on private
dances and expensive champagne
Mercury Engineering Co. Ltd.
• Founded in 1948
• Family Owned
• 32 employees
• 20M turnover p.a.
• Accountant (Phyllis Wiesner) hired by
company founder in 1950
• 1999 Phyllis retires
The Misrepresentation
Counterfeiting vs. Forgery
Forgery ... Calligraphy?
Accounting and
Forensic Solutions
Check Fraud – Syndicate Style
Who Is This Man?
Beverage Division $65,114,000
Gaming Division $19,038,000
Entertainment Division $ 8,125,000
Insurance & IR $13,210,000
$105,487,000
Fraud Survey – Key Findings
In the last year:
2 in 3 had been defrauded
1 in 10 had more than 50 frauds
82% of frauds were committed by employees.
Half of the employees had over 5 years of service.
A quarter of the employees had more than 10 years of service.
A third of the frauds were committed by management.
The Two Faces of Fraud
The first face is one of systems or controls.
The other face is the human element.
Fraud Risk Assessment
A key differentiator between Internal Controls and Anti-Fraud
Controls is the Human Element inherent in the decision to
defraud. Failure to assess the Human Element can cause
frauds to happen in organizations that otherwise seem to have
a robust and comprehensive Internal Control framework.
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The Fraud Triangle
When an individual is under pressure and is presented with an
opportunity and is able to rationalize his planned actions, fraud
occurs. This hypothesis is better known as the Fraud Triangle.
FRAUD
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Fraud Risk Assessment Process
To be able to effectively analyze and prioritize fraud risks, organizations should evaluate
the Human Element in the fraud risk. This can be achieved by applying the principles of
the Fraud Triangle to the traditional risk assessment criteria of Impact and Likelihood.
LIKELIHOOD INHERENT RISK
IMPACT
Traditional Risk Assessment Criteria RATING
OPPORTUNITY SITUATIONAL ATTITUDE OR FRAUD RISK
Fraud Risk Assessment Criteria + IMPACT PRESSURE PERSONAL PRIORITY
LIKELIHOOD INTEGRITY
The Human Elements
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A Sound Anti-Fraud Program
It is important for organizations to consider the human element while
managing fraud risks. An anti-fraud program that considers the human
element might include the following fundamental controls:
• Establish a Code of Ethics/Conduct.
• Develop Fraud Policies.
• Invest in a communication and training program on fraud and corporate
fraud policies for all employees.
• Ensure proper segregation of duties for key activities and functions.
• Set up appropriate recruitment procedures, psychometric testing, etc.
• Set up policies for rotation of staff duties and forced vacations.
• Know your key fraud risks and controls. Monitor them regularly.
• Develop a Fraud Risk Assessment process.
• Set up a whistleblower hotline.
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1. Edwin H. Sutherland – 1939
Theory of differential association:
– Crime is not genetic.
– Learned from intimate personal groups
– These groups teach "definitions" (including skills,
motivations, attitudes, and rationalizations) either
favorable or unfavorable to the violation of the law.
Criminal behavior results when one is exposed to an
excess of definitions favorable to the violation of the law
over unfavorable definitions.
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2. Harvey Cardwell
Wrote a book in 1960 on the logic and language of auditing for
fraud
Found there are primarily three principal factors that contribute to
employees beginning to steal:
– The want for money – (early or late in life and the temporary urgent
need) “Years of honest service” become meaningless when presented
with time pressure.
– Aggrieved – stealing after years of honest work apparently when
hopes have faded, when honesty and effort have failed to produce the
expected measure of success. Deterrents of prior years are weakened
by extreme frustration.
– The ability to steal – has been deterred by fear of detection but
experience brings increased ability and self-confidence.
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3. Gottfredson and Hirschi’s General
Theory of Crime – 1990
Assume that individuals choose the behavior that
they wish to perform rationally. They will weigh the
potential pleasure of performing a behavior against
the potential pain of the behavior. When a behavior
is judged to be more pleasurable than painful, an
individual is likely to perform the behavior.
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4. Richard C. Hollinger – 1983
Hollinger-Clark study (1983) – Surveyed 10,000 workers:
1/3 had committed some form of fraud.
Many stole because of job dissatisfaction.
Employee perception of detection is important.
Employee thieves exhibit other deviances
– Sloppy work, sick-leave abuses, etc.
Increased security and controls might hurt, not deter.
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5. Donald R. Cressey – 1953
Other people’s money
A criminologist who studied embezzlers
Why people become “trust violators”
Developed the Fraud Triangle
Cressey’s three learning principles:
1. Perception that occupational situation can resolve the
problem
2. Non-shareable financial problem
3. Ability to rationalize the act(s)
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THE FRAUD TRIANGLE
The Fraud Triangle
Pressure
Pressure/Frustration
(Heat)
(heat)
Opportunity Rationalisation
Opportunity
(Fuel)
Rationalization
(Oxygen)
(fuel) (oxygen)
Opportunity is what a company has the most
control in order to limit fraud
Fraud Risk Model
High Risk
Medium
Risk Incentive/
Attitude/
pressure
rationalization
Opportunity
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6. The Triangle Extended: The Fraud Diamond –
Wolfe amd Hermanson – 2004
Pressure
Opportunity
Capability
• Position/function
• The Human Brain
• Confidence/Ego
• Cultural Issues
• Coercion Skills
• Effective Lying
• Immunity to Stress
Rationalization
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The Three Parts of Perceived Opportunity …
1. To commit fraud
Constant focus on
all three is,
psychologically,
2. To conceal fraud very hard work.
3. To avoid punishment
39
Iceberg Theory of Dishonesty
Overt Aspects
- Hierarchy Structural
- Financial resources Considerations
- Goals of the organization
- Skills and abilities of personnel
- Technological state
- Performances standards
- Efficiency measurements
Waterline
Covert Aspects
- Attitudes
- Feelings (fear, anger, etc.)
Behaviorial
- Values
Considerations
- Norms
- Interaction
- Supportiveness
- Satisfaction
40
Characteristics of a Fraudster
College educated, white male: ¾ of frauds are committed by
men; higher median loss.
Intelligent: The challenge of “secure systems” overcomes
boredom.
Higher degree or MBA: Smarter people, smarter frauds.
Egotistical: Feel worth more than their position.
Inquisitive: Curious about computer vulnerability.
Risk takers: Not afraid to fail; fails to consider consequences.
Rule breakers: Likes shortcuts; justifies infractions of laws.
Works in Accounting, not Internal Audit.
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Characteristics of a Fraudster (continued)
Age: 31 to 40
Hard worker: In early, out late, no vacations
Excessive overtime
Immune from stress
Financial pressure: Medical fees, bad marriage, gambling
Married
Management
Disgruntled: Feels abused, not promoted, underpaid
Big spender: Living beyond means
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Characteristics of a Fraudster (continued)
Sudden large purchases
Close relationships with suppliers or customers
Don’t like people reviewing work
Unable to relax
Often display drastic behavioral changes
Need turns to greed
43
Characteristics of a Victim Organization
Most costly abuses in organizations of less than 100 employees
Where fraud is not perceived a risk; management ignores
irregularities
Morale is low
Lack of training
Rapid increase in revenues and profits
Strong, egotistical leader
Profit is the ultimate goal to be reached no matter what
Salary structure tied to profit
Currently banking or financial services industry
44
Cybercrime
The Invisible Fraudster
The Anonymous fraudster
45
Bank of Africa – Disclaimer
“With Bank of Africa you can be totally (TOTALLY) sure that
under NO circumstances, under NO conditions whatsoever
will your deposits be touched and/or bothered at all!
Provided, understandably, that the source of your deposits
will be legally earned (something that we would largely
consider so, otherwise we would not normally accept to be
deposited), then NO ONE WHATSOEVER can learn,
bother, touch, inquire, alter, exchange, transfer, verify or
anything else without your absolutely verifiable acceptance!
Never!”
Note site address
Note different address
SPOOF SITE ... Who are you dealing with?
Genuine Passport?
FRAUD AND AML…
A Closing Thought on Fraud
HOW DID KUBLAI KHAN AND HIS MONGOLS BREAK THROUGH
THE IMPENETRABLE GREAT WALL OF CHINA ?
HE BRIBED THE GATEKEEPER!
57
Profiling the Fraudster
http://www.amazon.co.uk/Profiling-
Fraudster/SimonPadgett
58
Thank You
Simon Padgett FCCA, CPA, CFE, MBA
Director – Forensic Services
+973 6672 8363
simonpadge@gmail.com
Profiling the Fraudster
Simon Padgett
