Deconstructing a Fraudster

What part of committing fraud is a good idea? For fraudsters, in the short term, the answer is everything. However, in the long run, the answer is nothing. The reason for this is that over time the weight of deception will cause a fraud to collapse. On the surface, a fraudster has the advantage of being proactive in building their spin and deception. Invariably, they succeed at exploiting the window of opportunity to sell their fraud scheme to their victims. Below the surface, as the threads of fraud are pulled and unraveled by either victims and/or investigators, the fraudster is at a disadvantage because the window of opportunity closes and the deception is exposed.

If fraud is ultimately destined to collapse and fail, why do people commit fraud? The answer is that, for whatever reason, they do not consider the consequences of their actions or they do not believe the consequences apply to them. If individuals inclined to commit fraud understood that inevitably they would actually deal with the consequences of their fraudulent actions, and that such consequences would be negative, they would more likely be deterred from committing fraud.

Deconstructing a fraudster to prevent and/or disrupt fraud requires understanding. You must understand the fraud risk, the mindset of a fraudster, the attributes of a fraudster, the fraud crime problem and the consequences of fraud. When you can place risk, mindset, attributes, the crime problem and consequences in context with each other, you can develop detective and preventive measures to deconstruct a fraudster.

Understanding Fraud Risk

In our personal and professional lives, we are all susceptible to falling victim to fraud for a variety of reasons. We tend to be gullible about “too good to be true” schemes and are prone to lack situational awareness for the warning signs of fraud. The three basic risks that drive fraud are the following:

  1. Trust
  2. Lack of control mechanisms that provide opportunity
  3. Lack of deterrence or understanding about consequences

Trust is the foundation for building personal and professional relationships. Trust is also a fraudster’s best friend. Trust facilitates opportunity because it enables a fraudster to circumvent control mechanisms. Misplaced trust buys time for a fraudster to keep the window of opportunity open and to perpetuate their deception. Differentiating between meaningful relationships and fraud requires understanding and situational awareness. Understanding the motivation and rationalization used by fraudsters to justify their actions can be a critical component in recognizing the risk of fraudulent behavior.

Situational awareness is being aware of your physical surroundings. It requires being vigilant in identifying potential threats and dangerous situations. According to Stratfor, a leading geopolitical intelligence service, being situationally aware of your physical surroundings is more of a mindset than a skill. It is the recognition that threats exist and taking responsibility for your personal security. One of the key best practices is to trust your gut or intuition. If a person or activity is out of place or unusual, trust your instincts and be attentive for potential danger.

The same concept about situational awareness can be applied to fraud. It requires being vigilant in identifying and mitigating potential fraud risks and schemes. Being situationally aware of fraud is more of a mindset than a skill. It is the recognition that you are constantly vulnerable to fraud. You have to accept responsibility for your fraud vulnerability. The key best practice is to maintain your objectivity about trust, reasonableness and temptation. You must be objective about establishing trust relationships and not allowing such relationships to circumvent control mechanisms, such as separation of duties. You must consistently assess the reasonableness about situations and scenarios with which you are presented. You must remain objective about being lured into the temptation of financial enrichment or a false sense of security to scenarios that sound “too good to be true.”

Strong control mechanisms and monitoring limit the opportunity to commit fraud and lead to fraud deterrence. A perception of detection is more likely to cause a potential fraudster to consider the consequences of their actions. If an individual thinks that internal controls are in place that will detect fraud, they will be less inclined to “cross the line of integrity” and commit fraud.

Understanding the Mindset of a Fraudster

I have investigated fraud for 45 years and I have been teaching fraud awareness since 1981. In my experience, a fraudster’s mindset is driven by five factors. Those factors or elements are as follows:

  1. Integrity
  2. Opportunity
  3. Incentive or pressure
  4. Rationalization or attitude
  5. Capability

The five factors or elements build upon each other. An individual’s integrity is the starting point. If a person possesses a great deal of integrity and has limited opportunity, they will be less likely to cross what I refer to as “the line of integrity” and commit fraud. Conversely, if a person possesses limited integrity and is afforded a great deal of opportunity, they will more likely cross “the line of integrity” and commit fraud. In many instances, the integrity and opportunity continuum falls between the two extremes and will be driven by a combination of the other three factors: incentive, rationalization and capability.

Opportunity, incentive and rationalization are referred to as the fraud triangle. They were introduced in 1953 by criminologist Donald R. Cressey. The fraud triangle became widely recognized in the mid-1970s. The combination of the three factors was believed to be the drivers that led individuals to commit fraud. Opportunity represents the chance to commit fraud. Incentive or pressure represents the motivation and is usually caused by financial demands. Rationalization or attitude is the self-justification making the fraudulent act acceptable.

Subsequently, in 2004, David T. Wolfe, a certified public accountant and forensic accountant, and Dr. Dana R. Hermanson, a college accounting professor, published a paper, which added capability to the fraud triangle, creating the fraud diamond. They believed that unless an individual possessed the right capabilities, they would not succeed in committing fraud. Capabilities are the personal traits and skillsets necessary to exploit opportunity, incentive and rationalization.

Opportunity is the most important factor because it influences integrity and capability. If there are strong control mechanisms and a perception of detection, there is limited opportunity. Limited opportunity would then be more likely to deter an individual from crossing “the line of integrity.” Likewise, regardless of the proficiency of skillsets, the prospect of detection would likely serve as a deterrent.

When an individual succumbs to the temptation of committing fraud and crosses “the line of integrity,” what do they think about? They think about executing their fraud scheme without being detected. They think about establishing and maintaining their illicit funding stream. They think about protecting their illicit funding stream and personally benefiting from it.

Fraudsters who think about the potential consequences of their illicit activity, particularly the ones who believe that consequences do not apply to them, will likely have an exit strategy. They recognize that their fraud scheme will have a useful life that will expire. These fraudsters tend to be more arrogant and lack empathy. For the most part, they are focused on identifying the warning signs that their fraud is about to collapse. If they are not overcome by greed—which happens in many cases and causes them to lose focus and get caught—they will attempt to execute their exit strategy, escape and protect their illicit proceeds.

Understanding the Attributes of a Fraudster

Looking back at the mindset of a fraudster, their attributes will be shaped, in part, by the combination of the fraud diamond and the specific fraud in which they engage. Once they exploit the opportunity, plan their illicit activity and cross “the line of integrity,” their actions will be driven by the level of incentive required, in most instances, a financial incentive. As the opportunity and incentive come into focus, they will rationalize and justify their behavior. They will typically ensure they possess or acquire the necessary skillsets (capabilities) to achieve their illicit objective.

With the five fraud elements in place (integrity, opportunity, incentive, rationalization and capabilities), the attributes required to succeed manifest themselves. The fraudster must be motivated. They will be driven, manipulative and endeavor to develop and exploit trust relationships. They will need to be an effective communicator and effective self-promoter. They will usually start out focused; however, their focus could become blurred by a sense of greed and arrogance. Greed and arrogance can be a fraudster’s ally or biggest adversary by evolving into a critical vulnerability.

In many situations, fraudsters will lack empathy toward their victims. This lack of empathy is one reason why fraudsters may be inclined not to consider the consequences of their actions. Fraudsters will endeavor to avoid detection and maintain focus. Maintaining focus will enable them to execute their exit strategy. However, their greed and arrogance can also cause them to lose focus and not recognize the warning signs of their demise. The lack of empathy and focus caused by greed and arrogance will frequently be the lynchpins to a fraudster’s undoing.

Understanding the Fraud Crime Problem

Fraudsters understand how to use financial institutions to facilitate their illicit activity

Fraud is deception. Fraud knows no boundaries. Fraud schemes range from simple to complex. Fraudsters are adept at exploiting systemic vulnerabilities, such as the anonymity afforded by the internet. Troublingly, fraudsters understand how to use financial institutions to facilitate their illicit activity. There has been an upward trend in civil litigation cases where victims and/or groups of victims of fraud schemes have sued financial institutions for their role in facilitating the fraud. In almost all such situations, financial institutions have been unwitting facilitators. Nonetheless, they find themselves subject to lawsuits.

Since there is an expansive range of fraud schemes, fraud should be assessed, understood and addressed from two perspectives or levels: generic and specific. The ability to be deceptive and avoid detection is a fraudster’s primary key to success. When potential victims and investigators understand how fraudsters take advantage of generic and specific fraud schemes, they position themselves to more favorably deal with the situation.

From a generic or simplistic perspective, fraud is deception. Over time, the weight of the deception will cause the fraud to collapse. How long does it take before a fraud collapses and is detected? It could be right at the start. It could be a matter of days, weeks, months or years. The useful life of a fraud is contingent on numerous considerations. The more situationally aware you are regarding the risk of fraud, the more likely that a fraud can be prevented or detected sooner rather than later.

There are a variety of specific fraud schemes that range from investment fraud to corporate fraud, embezzlement, check fraud, elder fraud and so many more sham activities. Regardless of the scenario, it should be viewed as deception and then from the type of specific fraud scheme it is. You need to consider which specific fraud schemes you are more susceptible to from both a personal and business perspective. Common themes to assess will originate with the potential abuse of trust and circumvention of control mechanisms. Regardless of whether it is an investment fraud, business fraud, embezzlement, elderly fraud or a check fraud, the abuse of trust and circumvention of controls will likely be a factor.

Disruptive and Preventive Measures Leading to the Deconstruction of a Fraudster

Deconstructing a fraudster requires proactive and reactive measures. Preventive steps will be more proactive and detection mechanisms will be more reactive. Deconstructing a fraudster begins with fraud prevention. The best form of prevention is deterring a potential fraudster from crossing “the line of integrity.” To do so, build a perception of detection by minimizing opportunity and reinforcing the fact that a fraudster will face serious consequences for their illicit activity.

Best practices to limit opportunity include having strong internal controls, consistent monitoring and a fraud risk assessment, assessing and testing the trust environment, and overall vigilance and situational awareness. In a business setting, promote a no tolerance for fraud policy. This begins with the tone at the top of the organization. Business leaders must endorse strong ethical standards and embrace a no nonsense, no tolerance policy.

If you are reacting to a fraud that has been detected, deconstructing the fraudster starts with planning. You must assess the situation and prepare a written plan to address the fraud. Depending on the circumstances, you should determine how to exploit the vulnerabilities of the fraudster and how to develop evidence regarding the fraud. This requires understanding. The greed and arrogance of a fraudster cannot only cause them to lose focus, but it could cause them to more openly talk about their scheme and add additional layers of spin and deceit. The added spin and deceit adds additional weight to the fraud leading to its ultimate collapse. In addition, many fraudsters want you to know they are the smartest guy or girl in the room and they will not shy from talking about it. Be a good listener and let them talk and implicate themselves.

Other steps you need to consider in furtherance of deconstructing a fraudster includes not allowing the fraudster to gain the upper hand. Planning and preparation can assure that you maintain the upper hand. You must gather your facts objectively, be persistent and be analytical in evaluating the information you gather and assess the reasonableness of the situation. Another element to consider when planning is to develop contingencies to deal with potential exit strategies the fraudster might contemplate. Depending on the circumstances and the specific mindset of the fraudster you are dealing with, you can be confronted with a variety of potential exit strategies. Understanding and planning are the keys to deconstructing a fraudster.

Understand the Consequences of Fraud

It is important to recognize and understand the multiple consequences of fraud. All actions or inactions regarding fraud have consequences for victims, financial institutions and other third parties, as well as to the fraudsters themselves. Victims of fraud face financial loss, potential devastation and emotional distress. Financial institutions and other third parties could find themselves in the contrasting situation of serving as a facilitation tool or being a detection mechanism. Regardless of whether they find themselves as a facilitation tool or detection mechanism, they could face the consequences of financial, reputational and/or litigation risk. Invariably a fraud will collapse. Fraudsters face the consequence of prosecution and incarceration, restitution, seizure and asset forfeiture. In addition, fraudsters face the loss of family and loved ones as a result of their fraudulent behavior. The more that can be done to publicize and visualize the negative consequences fraudsters face, the greater the possibility of deterring potential fraudsters from crossing “the line of integrity.”

Conclusion

What part of committing fraud is a good idea? If fraudsters were truly aware of the inevitable negative consequences of their illicit actions, they would more likely be deterred from fraudulent behavior.

Trust is the foundation for meaningful relationships. Trust is also a fraudster’s best friend. Develop situational awareness for fraud with a focus on trust. Do not allow trust to negate control mechanisms. Limit the opportunity of fraud from occurring. Perception of detection is significant fraud deterrence. Strong internal controls will limit the opportunity for fraud. In promoting a perception of detection, reinforce the negative consequences of committing fraud. If a potential fraudster considered the inevitable negative consequences of fraud, they would likely be less inclined to cross “the line of integrity” and not commit fraud.

Once a fraud is occurring or has taken place, deconstructing a fraudster comes down to understanding and planning. You must understand the fraud risk, the mindset of a fraudster, the attributes of a fraudster, the fraud crime problem and the consequences of fraud. Understanding all of these should lead to better preparation and planning, which will subsequently lead to disruption and prevention. 

Dennis M. Lormel, CAMS, internationally recognized CTF expert, president & CEO, DML Associates LLC, Lansdowne, VA, USA, dlormel@dmlassocllc.com

One comment

  1. Great Read… also if I may add, Fraudsters main motive to commit fraud should be something to think aboutt. The saying, “what’s in it you me” goes hand in hand I believe in committing fraud.

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