profiling the fraudster · © 2012 protiviti member firm (middle east) consultancy confidential:...

© 2012 Protiviti Member Firm (Middle East) Consultancy

CONFIDENTIAL: This document is for your company's internal use only and may not be copied nor distributed to any third party.

Profiling The Fraudster

Simon PadgettDirectorForensic Services

[email protected]

Hong Kong. November, 2012



Elements of Fraud

Misrepresentation

Intention

Prejudice or potential

prejudice

Legality



What is One + One ??

1 1 1

1 1 1

Total 2 1 0

=SUM(B1:B2) =SUM(C1:C2) =SUM(D1:D2)

Format “1” to

Text

Format “-1” without brackets



All is NOT what it seems


CONFIDENTIAL: This document is for your company's internal use only and may not be copied nor distributed to any third party.Ac

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…who’s next?



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"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”



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ENRON EXECS prepare

to testify before a

house panel



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ROARING’ GOOD TIME:

Director Rebecca Mark arrives at

an Enron party in Harley style,

belying her corporate image.



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THE HOUSTON STRIP CLUB

Treasures, where Enron executives would

ring up thousands of dollars on private

dances and expensive champagne.



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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



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www.theinformationcenter.com

Mobile Card Reader....

For Sale ....$49.00 +

($13.00 S&H)... Runs on

a 9 volt battery!..Holds up

to 700 card swipes in its

own memory! Palm size!

Software included!



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THE FORGER’S TOOLS

SCALPEL

HYPODERMIC NEEDLE

PRESTIK

RAZOR/ CRAFT KNIFE

PERFORATION CUTTER

ACID /SOLVENT

HAIR SPRAY

PUTTY

BRAKE FLUID AND LEMON JUICE

SAND

JIK

‘CORECTOR BILLE’

CORRECTABLE RIBBONS

TRANSFERABLE LETTERS (‘LETRASET’)

COLOURED PENCILS

SELLOTAPE

INK ERASER (RUBBER)

MAGNIFYING GLASS OR MICROSCOPE

COLOUR PHOTOCOPIER

COMPUTER, SCANNER, IMAGE PROCESSING

SOFTWARE AND COLOUR PRINTER

CORRECTOR PAPER AND BURNISHER

DRY ICE

SUNTAN LOTION



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CHEQUE FRAUD – SYNDICATE STYLE



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Forgery...Calligraphy ??



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Beverage Division $ 65 114 000

Gaming Division $ 19 038 000

Entertainment Division $ 8 125 000

Insurance & IR $ 13 210 000

$ 105 487 000

“There are lots of people in Chicago that have me pegged as one of these bloodthirsty

Monsters – the kind that puts out his victims eyes with a red-hot poker, and grins while

he’s doing it. I’m not the worst person in the world. I’m a businessman”.

Why is this man

smiling?



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E&Y Fraud Survey – Key Findings

In the last year :

2 in 3 had been defrauded

1 in 10 had more than 50 frauds

82% were committed by employees

Half of the employees had over 5 years service

A quarter had more than 10 years service

A third of the frauds were by management


CONFIDENTIAL: This document is for your company's internal use only and may not be copied nor distributed to any third party.23

The first face is one of systems or controls

The other face is the human element

The Two faces of fraud



COSO identifies 5 components, which when integrated and

operating in all business units, will help establish an effective

internal control framework:

1. Control Environment

2. Risk Assessment

3. Control activities

4. Information and Communication

5. Monitoring

COSO



Organizations first identify risks and prioritize them by assessing

the impact and likelihood of an inherent risk.

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.

So, why do people commit fraud?

Fraud Risk Assessment



One of the best theories on why people commit fraud was

given by Donald Cressey in his book “Other People’s Money”

Cressey stated that Fraud occurs when an individual :

• Has a non sharable financial problem.

• Perceives an opportunity to resolve the situation.

• Has the ability to rationalize his misdeeds even before

committing them.

Other People’s Money



An individual may be under pressure from a financial

problem which the individual perceives cannot be

solved through other means. These problems often

manifest themselves into behavioral patterns or red

flags, which if spotted in time, could prevent a fraud

from happening.

The ACFE 2012 Report to the Nations, states that

81% of fraudsters exhibit such indicators prior to

defrauding. The most commonly cited behavioral red

flags were perpetrators living beyond their apparent

means or experiencing financial difficulties.

Pressure



8

Even if an individual has the motive, he cannot

perpetrate the fraud unless presented with an

opportunity. Opportunities present themselves as

weaknesses or gaps in internal controls..

Opportunity



Rationalisation

Rationalisation of the act is the last element in

understanding why people commit fraud. Most people

believe themselves as good and need to convince

themselves that their actions were justified.

Some of these justifications are:

• I was going to pay it back

• Everybody does it

• I am not hurting anyone

• I was helping my family

• This is nothing compared to what xyz did.



To sum up, when this individual under pressure 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

The Fraud Triangle



To be able to effectively analyse 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.

Traditional Risk Assessment Criteria

Fraud Risk Assessment Criteria IMPACT OPPORTUNITY SITUATIONAL

PRESSURE ATTITUDE OR

PERSONAL

INTEGRITY

FRAUD RISK PRIORITY

IMPACT LIKELIHOOD INHERENT RISK

RATING

The Human Elements

Fraud Risk Assessment Process

Likelihood

http://www.google.com/imgres?imgurl=http://static2.hbr.org/hbr/hbr-now/flatmm/HeatMapSlide2a.jpg&imgrefurl=http://blogs.hbr.org/hbr/hbr-now/2009/06/exposing-rare-but-dangerous-fr.html&usg=__oz0v8vk_7kqW4JwU3e_FVl85C2M=&h=337&w=450&sz=135&hl=en&start=31&zoom=1&tbnid=vulEsdpYLDgNOM:&tbnh=95&tbnw=127&ei=wSqMUImhBYfOhAfojIHYBw&prev=/search?q=fraud+risk+assessment&start=20&um=1&hl=en&safe=off&sa=N&tbo=d&rlz=1T4GGHP_enAE473AE474&tbm=isch&um=1&itbs=1



For example in an organization where an individual

performs a number of key controls – if this

individual’s personal integrity and values are high,

the chances of fraud happening is significantly

lower than when the individual’s personal integrity

is low. Understanding the people who manage key

internal controls in an organization, their values

and attitude could go a long way in minimizing the

incidence of fraud and help build effective anti-

fraud deterrents within an organization.

Key Controls and Personal Integrity



It is important for organizations to consider the human element while

managing fraud risks. An Anti-Fraud Program that considers the human

element may include the following fundamental controls:

•Establish a Code of Ethics.

•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 whistle blower hotline.

Anti-Fraud Program



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 favourable

or unfavourable to the violation of the law. Criminal

behaviour results when one is exposed to an excess of

definitions favourable to the violation of the law over

unfavourable definitions.



2. Harvey Cardwell

Wrote a book in 1960 on the logic and language of auditing for fraud.

Found there are primarily 3 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 & 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 & self-confidence



3. Gottfredson & 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.

Central to this decision is low self-control.



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 & controls may hurt, not deter.



5. Donald R. Cressey, 1953

Other Peoples Money

A criminologist who studied embezzlers

Why people become “trust violators”

Developed the Fraud Triangle

Cressey’s three learning principles

1) Non-shareable financial problem.

2) Perception that occupational situation can resolve the

problem.

3) Ability to Rationalize the act(s).



THE FRAUD TRIANGLE

Pressure/Frustration(Heat)

Opportunity(Fuel)

Rationalisation(Oxygen)

Opportunity is what a company has the most power to control in order to limit fraud

Opportunity

Pressure

Rationalization

(heat)

(oxygen)(fuel)

The Fraud Triangle



Fraud Risk Model

Attitude/

rationalization

Opportunity

Incentive/

pressure

High Risk

Medium

Risk

“…the auditor cannot assume that the absence one or two of these conditions means there is no risk…

“ The investigator should not assume that all 3 conditions must be evident before concluding that fraud risk is evident.



6. The triangle extended: the fraud diamond - Wolfe &

Hermanson - 2004Pressure

capability

opportunity

rationalisation

Position/function

The Human brain

Confidence/ego

Cultural issues

Coercion skills

Effective lying

Immunity to stress



The three parts of perceived

opportunity……

1. To commit fraud

2. To conceal fraud

3. To avoid punishment

Constant focus on

all three is,

psychologically,

very hard work.



3

pressure/rationalisation

capability

identify opportunity act

upon it;

will I be

caught?No

commit

fraud

Yes

don’t

do it

maybe

caught not

punisheddo it



Iceberg Theory of Dishonesty

Overt Aspects

- Hierarchy

- Financial resources

- Goals of the organisation

- Skills and abilities of

personnel

- Technological state

- Performances stds

- Efficiency measurements

Covert Aspects

- Attitudes

- Feelings (fear, anger, etc)

- Values

- Norms

- Interaction

- Supportiveness

- Satisfaction

Structural

Considerations

Behaviourial

Considerations

Waterline



Characteristics of a Fraudster

College educated, white Male. ¾ of frauds are committed by

men. Higher median loss (US$85,000 for men, US$ 48,000 for

women).

Intelligent. The challenge of “secure systems” overcomes

boredom.

Egotistical. Feel worth more than their position.

Inquisitive. Curious as to computer vulnerability.

Risk takers. Not afraid to fail. Fails to consider consequences.

Rule breakers. Likes shortcuts. Justifies infractions of laws.



Characteristics of a Fraudster, continued

Hard Workers. 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.



Characteristics of a Fraudster, continued

Sudden large purchases

Close relationships with suppliers/customers.

Don’t like people reviewing work

Unable to relax

Often display drastic behavioral changes

Need turns to greed.

Nick Brignola – Louisiana State University.

“Fraud Perpetrator Profile”



HOW DID KUBLAI KHAN AND HIS MONGOLS BREAK THROUGH THE IMPENETRABLE GREAT WALL OF CHINA?

HE BRIBED THE GATEKEEPER!



Changes in Behaviour

Sudden large purchases. House, Car, Jewellery

Brags about purchases

Carry large amounts of cash

Fending off creditors

Borrows money from co-workers

Moody, Irritable

Defensive attitude to questioning

Territorial over responsibilities



Changes in Behaviour, continued

Workaholic

Mentions financial/family problems

Exhibits signs of addiction. Absenteeism, looks ill

Decrease in productivity

Spending excessive time with vendors/suppliers

Nervous

“Minor” infringements



Characteristics of a Victim Organisation

Most costly abuses in organizations of less than 100 employees.

Where fraud is not perceived a risk

Management ignore irregularities

Morale is low

High employee turnover

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



ACFE Report to the Nations on

Occupational Fraud and Abuse -

2012

The latest report was compiled from 1,388 cases and covered

cases from almost 100 countries on 6 continents.

ACFE Report to the Nations on

Occupational Fraud and Abuse -

Asia Pacific Edition - 2010



Victims of Occupational FraudThe Asia-Pacific Report provides some information on the types of

businesses that were victims of occupational frauds. The highs and

lows are as follows:

% of

cases

Median

loss

High Banking

and

finance

20.2% US$

200,000

Low Religious,

Charitable

0.6% Education US$

513,000



Profiling by Fraudster Position in Organisation This is explained on the basis that more senior people in management

levels and executive positions have a greater opportunity to commit and

hide larger frauds. This is a common theme throughout the remainder of

the profiles.

The study also found that lower level employees committed more frauds in

number than executives - probably because there are many more lower

level employees that executives.

Employee Management Owner/Executive

33.8% 49.8% 16.4%

$200,000 $242,000 $1,000,000



Profiling by Job Description in Organisation

% of cases Median loss

HighsSales

Accounting

20%

17.1%

US$143,000

US$190,000

Lows Internal Audit 0.3% $14,000

The greatest number of cases are committed by people within

sales and the accounting areas of the business, as these

employees will have the knowledge of how to commit and hide

the fraud and access to the records to do so.



Profiling by Fraudster Gender

The % of males committing fraud is much higher in the Asia

Pacific region than worldwide. Perhaps more males in the

workplace ?

Male Female

Percentage 84.3% 15.7%

Median Loss US$300,000 US$215,000



Profiling by Fraudster Age

Under

2626 to 30 31 to 40 41 to 50 51 to 60 over 60

% 5.0% 11.7% 39.4% 32.5% 10.7% 0.7%

Median losses increase with the age of employees.



Profiling by Educational Standard

High SchoolSome College

EducationCollege Education Post Graduate

Percentage 18.9%% 10.6%% 50.0% 20.5%

Median Loss $250,000 $145,000 $234,000 $333,000

Smarter people - smarter frauds?



Past Criminal History in Asia Pacific Region

About 85% of people caught and convicted of

occupational fraud had not previously been

charged or convicted of a crime, and over 83%

have never been terminated from a job. This

means that background checks may be of limited

value when trying to find people who might commit

fraud.



The Invisible Fraudster

The Internet ………….Cybercrime

The Anonymous fraudster



“With Banc 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! “

Bank of Africa - Disclaimer



Note site name

Note email address



Note email warning

Note address

Who are you dealing with?????



Genuine Passport??



FRAUD AND AML…

profiling the fraudster · © 2012 protiviti member firm (middle east) consultancy confidential:...

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