I am a fraud and economic crime educator and training consultant.
By the very nature of my profession I deal with fraud and white collar crime and the people who are involved in this crime (albeit vicariously!) on a daily basis.
Not only that I am an ex fraudster myself having perpetrated one of the largest white collar crimes in the history of South Africa.
In addition I spent many, many hours in jail talking with other fraudsters to try and understand the nature of their crimes, their mindset, what drove them to crime and how and why the targeted specific companies or industries.
I also spend many hours engaged in research to stay on top of trends in fraud and white collar crime on a local and international basis.
I am an expert in my field and I understand fraud and economic crime and why people commit fraud.
The question is why do we have an absolute deluge of fraud and economic crime?
We are all aware of the dangers that fraud and economic crime represent to our businesses, ourselves and the economy of the country.
Why does this scourge continue to proliferate?
This is an easy answer.
We all lie, cheat and steal.
That is how our previous Auditor General, Mr Shauket Fakie, defines fraud.
“Lying, cheating and stealing”
The official South African definition of fraud is:
“Fraud is the unlawful and intentional making of a misrepresentation which causes actual and or potential prejudice to another”.
The first problem is that we don’t understand what fraud is and what the consequences could be.
Here is a recent example to illustrate the point.
I read a story on Moneyweb's Realestateweb about the undervaluing of houses by estate agents to get quicker sales.
Is this only business?
Nope it is definitely fraud.
Look at the definition, fits the bill doesn’t it?
When that estate agent deliberately misrepresented the value of the house to the seller he caused him potential prejudice and it is therefore fraud.
If the potential prejudice is more than R500 000.00 that qualifies the estate agent for a 15 year minimum sentence jail term.
Did that agent think about that when he made that misrepresentation?
Did he even know that he was committing fraud?
Can he deal with spending the next 12 years in jail?
People don’t realise that fraud is about potential not actual loss, the victim does not have to suffer any actual loss for you to be found guilty of fraud.
The other problem is that we are all motivated by self interest; the only important thing is what is good for us.
We lie to our spouses, children, bosses, business partners, the Minister and God Himself without thinking of consequence.
We steal the all the time even if it is only a pencil from work, our employer’s time, our expense accounts or someone else’s chocolate bar from the cupboard.
We cheat at games, on our spouses, our employers.
And we find no problem with this, I mean, EVERYONE does it.
We are all (or at least 80% of us according to research) morally confused. We will do anything if the motive and opportunity are right.
If this is the case, and it is, why would fraud be a stretch?
We are all already corrupt, we have strong criminal tendencies, and we only have to convert these tendencies into action.
Yes I know YOU have never done anything like that, you are one of the morally impeccable 10%!
The other 10% are outright crooks and NONE of us fall into that category!
The point is that there is a definite line between moral and immoral behaviour and most of us crossed that line a long time ago.
Most of us just idle along as petty criminals until the right opportunity and motive come along, and then we become real crooks.
Once you have crossed the line you have crossed the line, very difficult to get back.
Do you really think that the high profile crooks that we read about started life with the ambition of becoming a crook?
Of course not, things just got out of control; the downward spiral swept them away.
This happens very easily and quickly and you rationalise and justify it all the time telling yourself that it is only business and that you are doing nothing wrong.
Deep down you may know the truth but you only admit it when you are caught, and you WILL be caught.
So the answer is that we are ignorant, we don’t know that what we are doing is fraud and we are morally confused.
The solution is very easy; don’t EVER lie, cheat or steal and be morally impeccable.
Develop, build, maintain and promote a cast iron impeccable personal moral code.
And stick to it no matter what happens.
In a word be trustworthy.
Showing posts with label Fraud. Show all posts
Showing posts with label Fraud. Show all posts
Thursday, December 11, 2008
Wednesday, December 10, 2008
Trust, Fraud and Business in South Africa
I was recently doing some research and came across some startling facts from KPMG contained in The 2007 KPMG Fraud Report for Europe, Middle East and Africa.
I thought that only crooks committed fraud.
I was in the “business”, I committed major fraud myself and I met a large number of fraudsters who operated in a number of different ways while in prison.
But I always thought that we (the fraudsters) were the exception, the scrapings at the bottom of the barrel of society if you will, those whose moral confusion and adaptable personal integrity allowed them to commit fraud.
But I was wrong.
Facts from the report establish that in 86% of the cases investigated the fraud was perpetrated by management. Of this figure 11% were board members, 49% were senior management and 26% were management.
If you relate this to the general figures that estimate that 85% of South African companies will fall victim to fraud, losing up to 6% of turnover a horrific picture of corporate integrity starts to emerge.
Relate this further to the fact that fully one third of bankruptcies are as a direct result of fraud and theft.
And it is estimated that only 48% of fraud is discovered (or reported) and of that 48% only 40% of the perpetrators are sentenced.
The report also highlighted the fact that trust was always the major risk factor in fraud.
Those in a position of trust were committing fraud almost at will, having the ability to cover it up.
What do these figures say about business in South Africa?
Remember these figures are from 2007 when times were good, who knows what they are now that times are tough.
We are good at explaining these things away, of making excuses.
The report highlights rationalisation as the major factor in fraud.
This is borne out by one of my experiences in jail with a fellow sentenced for fraud. He was horrified with the label of fraudster and maintained that he was only a businessman who operated in “the gray area of business”.
You try and figure that rationalisation out, I never could.
His attitude is, I would imagine, quite common in business in South Africa.
Anyone in business who studies this report can no longer say that “they” are committing fraud.
It is us; it seems that we are rotten to the core.
On a personal note at least I feel better after reading the report.
I have no reason to feel isolated. I was one of the majority, one of the “boys”, those prepared to abuse the norms of business, society and own integrity.
I am not alone.
The people committing fraud in South Africa are just like you and me; in fact they are you and me.
We should never forget that our major businesses and organisations are made up of people just like you and me no matter what their elevated positions may be.
The executives, shareholders and other stakeholders of businesses are subject to the same temptations, opportunities, threats and pressures as the rest of us.
And a business reflects the approach and attitudes of its people.
So the attitude of business must change to reflect a more moral and ethical approach. Our businesses should be above reproach.
Why is corporate fraud such a problem?
I believe that it is not only the general moral confusion that most of us suffer from (80% of people will commit fraud if the motive and opportunity is right) it is also the demands placed upon people in business by the markets, shareholder expectations or the demands of superiors to meet targets.
This is further exacerbated by our natural greed, maybe not for money per se but for recognition, promotion or bonuses.
Remember that 86% of the corporate fraud in South Africa is committed by management and board members.
What could explain this? Are they just bad people, crooks?
No I don’t believe so.
I quote from Managing the Businesses Risk of Fraud: A Practical Guide, sponsored by the Institute of Internal Auditors, The American Institute of Certified Public Accountants and the Association of Certified Fraud Examiners.
“A 2007 Oversight Systems study5 discovered that the primary reasons why fraud occurs are “pressures to do ‘whatever it takes’ to meet goals” (81 percent of respondents) and “to seek personal gain” (72 percent). Additionally, many respondents indicated that “they do not consider their actions fraudulent” (40 percent) as a reason for wrongful behavior.”
Are the pressures exerted on boards and executives by market conditions, shareholder expectations or performance pressures from superiors forcing people into fraud and unethical behaviour?
Or are they just greedy crooks?
They cannot be, not 86% of them.
Our corporate society in South Africa needs to take a careful, brutally honest look at corporate governance issues, the expectations they create in the markets and the performance pressures that flow from those expectations and the pressures they place on their people.
They need to manage expectations so that people don’t feel obliged to “do whatever it takes”.
Above all they must have an acceptable moral and ethical code in the organisation and a professional Fraud Management Program in place that applies from the top of the company right to the bottom.
They must have regular training and education for all management and staff on fraud awareness, prevention and management.
And they must communicate their Fraud Management Program to the investing public, other stakeholders and staff.
The commitment to effective and rigorous Fraud Management starts from the top of the organisation and filters down.
A more stringent code of conduct reflecting the fact that those at the top will be held to a higher standard and stricter code of conduct than normal staff must be composed and must be communicated to all.
Set the example from the top.
The board and senior management must be morally impeccable if they expect to eradicate fraud in the company.
The situation is not beyond our grasp but we must act now, structure a Fraud Management Program, invest in staff education and communicate your commitment to the eradication of fraud in your organisation.
Apart from all the other benefits just think what you could do with 6% of TURNOVER on your bottom line.
That may relieve some of the pressure and silence your critics.
Act today, tomorrow may be too late.
I thought that only crooks committed fraud.
I was in the “business”, I committed major fraud myself and I met a large number of fraudsters who operated in a number of different ways while in prison.
But I always thought that we (the fraudsters) were the exception, the scrapings at the bottom of the barrel of society if you will, those whose moral confusion and adaptable personal integrity allowed them to commit fraud.
But I was wrong.
Facts from the report establish that in 86% of the cases investigated the fraud was perpetrated by management. Of this figure 11% were board members, 49% were senior management and 26% were management.
If you relate this to the general figures that estimate that 85% of South African companies will fall victim to fraud, losing up to 6% of turnover a horrific picture of corporate integrity starts to emerge.
Relate this further to the fact that fully one third of bankruptcies are as a direct result of fraud and theft.
And it is estimated that only 48% of fraud is discovered (or reported) and of that 48% only 40% of the perpetrators are sentenced.
The report also highlighted the fact that trust was always the major risk factor in fraud.
Those in a position of trust were committing fraud almost at will, having the ability to cover it up.
What do these figures say about business in South Africa?
Remember these figures are from 2007 when times were good, who knows what they are now that times are tough.
We are good at explaining these things away, of making excuses.
The report highlights rationalisation as the major factor in fraud.
This is borne out by one of my experiences in jail with a fellow sentenced for fraud. He was horrified with the label of fraudster and maintained that he was only a businessman who operated in “the gray area of business”.
You try and figure that rationalisation out, I never could.
His attitude is, I would imagine, quite common in business in South Africa.
Anyone in business who studies this report can no longer say that “they” are committing fraud.
It is us; it seems that we are rotten to the core.
On a personal note at least I feel better after reading the report.
I have no reason to feel isolated. I was one of the majority, one of the “boys”, those prepared to abuse the norms of business, society and own integrity.
I am not alone.
The people committing fraud in South Africa are just like you and me; in fact they are you and me.
We should never forget that our major businesses and organisations are made up of people just like you and me no matter what their elevated positions may be.
The executives, shareholders and other stakeholders of businesses are subject to the same temptations, opportunities, threats and pressures as the rest of us.
And a business reflects the approach and attitudes of its people.
So the attitude of business must change to reflect a more moral and ethical approach. Our businesses should be above reproach.
Why is corporate fraud such a problem?
I believe that it is not only the general moral confusion that most of us suffer from (80% of people will commit fraud if the motive and opportunity is right) it is also the demands placed upon people in business by the markets, shareholder expectations or the demands of superiors to meet targets.
This is further exacerbated by our natural greed, maybe not for money per se but for recognition, promotion or bonuses.
Remember that 86% of the corporate fraud in South Africa is committed by management and board members.
What could explain this? Are they just bad people, crooks?
No I don’t believe so.
I quote from Managing the Businesses Risk of Fraud: A Practical Guide, sponsored by the Institute of Internal Auditors, The American Institute of Certified Public Accountants and the Association of Certified Fraud Examiners.
“A 2007 Oversight Systems study5 discovered that the primary reasons why fraud occurs are “pressures to do ‘whatever it takes’ to meet goals” (81 percent of respondents) and “to seek personal gain” (72 percent). Additionally, many respondents indicated that “they do not consider their actions fraudulent” (40 percent) as a reason for wrongful behavior.”
Are the pressures exerted on boards and executives by market conditions, shareholder expectations or performance pressures from superiors forcing people into fraud and unethical behaviour?
Or are they just greedy crooks?
They cannot be, not 86% of them.
Our corporate society in South Africa needs to take a careful, brutally honest look at corporate governance issues, the expectations they create in the markets and the performance pressures that flow from those expectations and the pressures they place on their people.
They need to manage expectations so that people don’t feel obliged to “do whatever it takes”.
Above all they must have an acceptable moral and ethical code in the organisation and a professional Fraud Management Program in place that applies from the top of the company right to the bottom.
They must have regular training and education for all management and staff on fraud awareness, prevention and management.
And they must communicate their Fraud Management Program to the investing public, other stakeholders and staff.
The commitment to effective and rigorous Fraud Management starts from the top of the organisation and filters down.
A more stringent code of conduct reflecting the fact that those at the top will be held to a higher standard and stricter code of conduct than normal staff must be composed and must be communicated to all.
Set the example from the top.
The board and senior management must be morally impeccable if they expect to eradicate fraud in the company.
The situation is not beyond our grasp but we must act now, structure a Fraud Management Program, invest in staff education and communicate your commitment to the eradication of fraud in your organisation.
Apart from all the other benefits just think what you could do with 6% of TURNOVER on your bottom line.
That may relieve some of the pressure and silence your critics.
Act today, tomorrow may be too late.
Monday, December 8, 2008
When is it a scam?
How do you tell the difference between a genuine business opportunity and a dodgy or completely bogus scheme?
A huge challenge today is that with modern digital technology the ability to produce truly top class forged documents is in everybody’s hands.
This applies to both paper based and electronic documents. You can no longer rely on what you see either in person or electronically.
Anything is too easy to copy or forge from scratch and the results are nearly perfect, every time.
And of course you will be provided with names, numbers, web site and e mail addresses to be used to verify the veracity of the documents and information.
Perhaps a business card or two will be put in your hand by the representative you meet.
And electronic sleight of hand can make you believe you are seeing what you are not and talking to who you aren’t.
The illusion is crafted to perfection. It is very simple with today’s technology to craft a nearly perfect illusion.
Human senses are dominated by the visual to a huge extent so we tend to believe what we see.
If everything looks good – it is significant that we always say that something “looks” good – we will tend to be taken in by the scam.
We will phone the numbers we are given check the figures, visit the right web site and so on while we “verify” that everything is above board.
We are excited; this is it, the big one (greed and lack of judgement kicking in!) and we go for it boots and all!
We trust what we see and this is our downfall.
This aided and abetted by the common misconception that we will all someday come across that magic, secret deal that will make our fortune.
The deal that has only been made available to us because we are special, selected investors who will understand the proposition.
Don’t tell anyone, it’s secret.
That’s the giveaway.
It’s a scam.
That’s also their protection; don’t tell anyone its secret.
By all means check out what we have told you, where we steer you to; but don’t tell anyone its secret.
Above all don’t tell your professional advisors.
If it looks too good to be true, it is.
Please don’t be misled into believing that this only happens in grubby, back street deals, it happens everywhere.
So what do you do?
When presented with any opportunity you must go back to basics.
Good old fashioned leg work, face to face interviews with vetted people and research and verification.
Check all facts by making direct, independent contact with the company concerned.
Don’t call the number on the business card you were given, don’t take the number from the documents or the web site, do it the old fashioned way, look the number up yourself in the telephone directory.
Make an appointment to see the man at his office and go through the documents.
Be sceptical, demand detailed verifiable answers and independently verifiable paperwork.
And take you auditor or financial advisor with you; tell him to be obstructive, sceptical, judgemental, argumentative and confrontational.
Whatever the deal entails take an appropriate subject specialist with you to the meeting.
And tell him to be skeptical.
Generate a bit of heat; get a debate going; make the person PROVE all factual contentions.
If everything checks out, the documents, facts and contentions made prove to be true, by all means invest your life savings.
Maybe there is a tooth fairy and Santa lives at the North Pole.
But make sure you verify everything personally AND independently with knowledgeable experts.
I am prepared to bet that only 1 in 100,000 of these opportunities will actually check out.
In most cases you will never see or hear from the promoters of these schemes again.
Anatomy of a fraud scheme
The following characteristics will be present:
• The returns are above normal, guaranteed with no risk
• The deal is secret, confidential, special
• It relies on special “insider” knowledge or contacts
• Key facts cannot be independently verified due to the secret nature of the deal
• It is border line unethical, a bit murky but not illegal but it must be kept strictly confidential
• It will have at least one key, larger than life personality involved who will cement the whole deal by sheer force of personality
• It will give you up front incentives at the slightest display of interest
• It will seem too good to be true
• You must act NOW the market is up, the market is down, the commodity price is –whatever- the point is to stampede you into a quick decision
Of course all of these things play into our human nature desire to want to be involved in secret, slightly dodgy, very lucrative business.
Business that for a short while makes us feel like one of the chosen few, special people with insider knowledge.
My advice to you is that if even ONE of these factors is present, run a mile, immediately.
To paraphrase Mark Twain “better to miss the opportunity and be thought to be a fool than to invest and remove all doubt”
Healthy scepticism, common sense and attention to detail will save you a lot of heartache.
Control your emotions, your ego and your greed and you will be able to avoid the worst pitfalls of clever schemes.
And remember the saying that a penny’s prevention is worth more than a pound of cure.
A huge challenge today is that with modern digital technology the ability to produce truly top class forged documents is in everybody’s hands.
This applies to both paper based and electronic documents. You can no longer rely on what you see either in person or electronically.
Anything is too easy to copy or forge from scratch and the results are nearly perfect, every time.
And of course you will be provided with names, numbers, web site and e mail addresses to be used to verify the veracity of the documents and information.
Perhaps a business card or two will be put in your hand by the representative you meet.
And electronic sleight of hand can make you believe you are seeing what you are not and talking to who you aren’t.
The illusion is crafted to perfection. It is very simple with today’s technology to craft a nearly perfect illusion.
Human senses are dominated by the visual to a huge extent so we tend to believe what we see.
If everything looks good – it is significant that we always say that something “looks” good – we will tend to be taken in by the scam.
We will phone the numbers we are given check the figures, visit the right web site and so on while we “verify” that everything is above board.
We are excited; this is it, the big one (greed and lack of judgement kicking in!) and we go for it boots and all!
We trust what we see and this is our downfall.
This aided and abetted by the common misconception that we will all someday come across that magic, secret deal that will make our fortune.
The deal that has only been made available to us because we are special, selected investors who will understand the proposition.
Don’t tell anyone, it’s secret.
That’s the giveaway.
It’s a scam.
That’s also their protection; don’t tell anyone its secret.
By all means check out what we have told you, where we steer you to; but don’t tell anyone its secret.
Above all don’t tell your professional advisors.
If it looks too good to be true, it is.
Please don’t be misled into believing that this only happens in grubby, back street deals, it happens everywhere.
So what do you do?
When presented with any opportunity you must go back to basics.
Good old fashioned leg work, face to face interviews with vetted people and research and verification.
Check all facts by making direct, independent contact with the company concerned.
Don’t call the number on the business card you were given, don’t take the number from the documents or the web site, do it the old fashioned way, look the number up yourself in the telephone directory.
Make an appointment to see the man at his office and go through the documents.
Be sceptical, demand detailed verifiable answers and independently verifiable paperwork.
And take you auditor or financial advisor with you; tell him to be obstructive, sceptical, judgemental, argumentative and confrontational.
Whatever the deal entails take an appropriate subject specialist with you to the meeting.
And tell him to be skeptical.
Generate a bit of heat; get a debate going; make the person PROVE all factual contentions.
If everything checks out, the documents, facts and contentions made prove to be true, by all means invest your life savings.
Maybe there is a tooth fairy and Santa lives at the North Pole.
But make sure you verify everything personally AND independently with knowledgeable experts.
I am prepared to bet that only 1 in 100,000 of these opportunities will actually check out.
In most cases you will never see or hear from the promoters of these schemes again.
Anatomy of a fraud scheme
The following characteristics will be present:
• The returns are above normal, guaranteed with no risk
• The deal is secret, confidential, special
• It relies on special “insider” knowledge or contacts
• Key facts cannot be independently verified due to the secret nature of the deal
• It is border line unethical, a bit murky but not illegal but it must be kept strictly confidential
• It will have at least one key, larger than life personality involved who will cement the whole deal by sheer force of personality
• It will give you up front incentives at the slightest display of interest
• It will seem too good to be true
• You must act NOW the market is up, the market is down, the commodity price is –whatever- the point is to stampede you into a quick decision
Of course all of these things play into our human nature desire to want to be involved in secret, slightly dodgy, very lucrative business.
Business that for a short while makes us feel like one of the chosen few, special people with insider knowledge.
My advice to you is that if even ONE of these factors is present, run a mile, immediately.
To paraphrase Mark Twain “better to miss the opportunity and be thought to be a fool than to invest and remove all doubt”
Healthy scepticism, common sense and attention to detail will save you a lot of heartache.
Control your emotions, your ego and your greed and you will be able to avoid the worst pitfalls of clever schemes.
And remember the saying that a penny’s prevention is worth more than a pound of cure.
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