Global profiles of the fraudster
February 2015 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
Having conducted numerous fraud investigations we are amazed at how often we hear “John? John did that? He was the last person I would have suspected.” Regrettably that is quite often the point. Fraud investigation specialists have long debated whether it is possible to develop a profile of a fraudster that is accurate enough to enable organisations to predict and catch people committing fraud or identifying them prior to them committing a fraudulent act. The prediction of a crime before it occurs is, at least for now, the subject of science fiction films. Nevertheless, analysis of the constantly changing nature of the types of fraud, the jurisdictions in which they occur, and the traits common to a ‘typical fraudster’ can help organisations better prepare and implement stronger internal controls to limit the negative impact of fraud. In short, an ounce of prevention is worth a pound of cure.
Profiling the fraudster
A recently conducted KPMG study, ‘Global Profiles of the Fraudster’, resulted in the analysis of 596 cases involving fraudsters across the globe. While some characteristics identified were similar to those reported on two years earlier, the methods employed by fraudsters continue to evolve. One of the major changes is the growing use of technology by fraudsters from a new generation with access to much more information than their predecessors.
When we gauge the most recent characteristics of the fraudster against the cases that have occurred across the globe they appear to be somewhat consistent. Currently two of the largest markets targeted for expansion by companies are Greater China and Central and South America. Despite the distinct differences in geography, laws, culture and business generally, there were a number of unique and often similar factors encountered when dealing with fraud in those regions. Ultimately the study seems to reinforce the adage that while circumstances may differ, people are generally similar in their behaviour when gauged against the factors that can lead to fraudulent behaviour.
Asia and Greater China
Asia and Greater China have cultural norms, values and societal expectations that go back thousands of years. The key principles that westerners rely on – rule of law, ethical standards and morality – exist but are applied differently to business relationships and transactions. One distinction is the degree to which others are likely to be involved or complicit and that most fraudsters are not very concerned with getting caught, particularly for corporate misconduct. There are three reasons for this: (i) the rule of law as ‘we know it’ is still evolving in China, where it has only existed for around 25-30 years; (ii) relationships extend well beyond any given employer, often going back to university or even grade school; and (iii) fraud schemes are commonly passed from colleagues and business associates rather than being developed independently.
One of the key societal factors that can influence fraudsters in the Asia and Greater China region is how conduct is determined to be morally correct. For example, in China, gift-giving, entertainment and providing hospitality have historically been a means to an end and the flow of benefits between individuals is a sign of respect and continued cooperation for mutual benefit. Relationships are the primary driver of commerce in China – without them nothing gets done. Of course, this practice is at odds with both western customs and western laws, and can result in the interpretation that one must ‘do more work’ to create the paperwork needed in order to get reimbursed because of silly western laws. This can mean altering or producing false documentation and being prepared to lie about the expenses if questioned. Another societal factor worth discussing is the concept of ‘face’. Face loosely equates to respect in the West, but is much more valued in Eastern societies. Causing someone to lose face, especially publicly, is a significant sign of disrespect and lack of loyalty, and indicates the person causing the loss of face has no honour and is not trustworthy themselves. Therefore, even if someone is trying to do the ‘right thing’, they may be persecuted and forced out of an organisation for doing so.
Latin American countries are increasingly significant participants in global trade. According to a June 2013 World Bank report, the Latin American countries collectively have made significant progress in the past 15 years in reducing poverty, building a middle class and levelling the playing field in reducing social inequality. Initiatives launched by a number of Latin American countries have included investing in public infrastructure and implementing broad economic incentives to make their market attractive to foreign investors. As a result, capital has flowed to the region.
Those initiatives have also contributed to new opportunities for fraudsters, where fraud and corruption were already endemic problems in the region. Some of the deep-rooted causes which have served as the ‘motivation’ element for fraud in Latin America can be historically related to social inequality, an overall ineffective regulatory environment, economic instability in some countries and the added factor of organised crime related to the drug and narcotics trade. Greed, financial gain and financial difficulty scored high in ‘Global Profiles of the Fraudster’ as primary motivations, and this is also the case for Latin America. Most cases observed in the region related to opportunities being available for perpetrators to obtain financial gains.
One contributing factor observed during the course of the investigation, which increases the difficulty in detecting fraud in some countries in Latin America, is the dictatorial behaviour often present in senior members of management involved in fraudulent acts. In some countries in Latin America, you are culturally taught since childhood to show respect for your elders and superiors. This translates into the business world with employees turning a blind eye to unethical acts committed by their supervisors. You just don’t challenge decisions of people in positions of authority. Motivation to look the other way can be due to fear of losing the job, and thus economic livelihood.
Clearly, the behavioural sciences field does not currently allow for one to accurately predict the possibility that an individual will resort to perpetrating fraud in or against an organisation. Having said that, past history and profiles of individuals that have been involved in fraudulent activity does paint a picture, albeit blurry. Using this knowledge, we begin asking questions that can better support fraud risk management capabilities. What measures does my organisation have to identify the red flags of the perfect storm for fraudulent behaviour based on the fraud triangle – motivation, opportunity and ability to rationalise the act of fraud? What controls does my organisation have in place to prevent unlimited authority to go unchecked and provide the opportunity for fraud and misconduct? Is intolerance of fraud part of our corporate culture? Are allegations regarding members of management treated differently than line employees? Are our fraud risk management programs and controls tailored to our region’s corporate and social cultural norms to encourage and support intolerance of fraud and misconduct and improve our efforts to deter and detect crimes? With the failure to initially respond to red flags and lapses in internal controls being major contributors to enabling fraud, how will I enhance my organisation’s awareness with respect to fraud prevention and detection efforts?
While new technology has created novel types of fraudulent behaviour, and fraud risks cannot be fully mitigated, addressing the global profiles of the fraudster across different regions will help you to remain vigilant and remember that the typical fraudster may remain the tenured, trusted employee – the last one you may have suspected.
Ivan E. Velez is a director, Guido van Drunen is a principal and Brian Wilson is a managing director at KPMG LLP. Mr Velez can be contacted on +1 (305) 913 2742 or by email: firstname.lastname@example.org. Mr van Drunen can be contacted on +1 (206) 579 8107 or by email: email@example.com. Mr Wilson can be contacted on +1(317) 616 2567 or by email: firstname.lastname@example.org.
© Financier Worldwide
Ivan E. Velez, Guido van Drunen and Brian Wilson