PROFILING THE FRAUDSTER

Transcription

1 For so long fraud examination has focused on weaknesses in controls and the investigation of transactions that occurred outside of that control environment. Fraud is perpetrated, however, by human beings who make conscious decisions to be dishonest and steal from others. Profiling the characteristics of these fraudsters, their methodologies, and their environments provides another tool in the fight against fraud and corruption. This session will take you through the theory of profiling methodology, use case studies and short videos to demonstrate how it works, and provide you with fraud profiling methodology. SIMON PADGETT Director Forensic Services Simon Padgett is a British-qualified accountant with an MBA from Oxford. He is previously Head of Forensic Services for PwC in Vancouver, Canada, and Head/Director of Forensic Services at Protiviti in the United Arab Emirates. He has also held positions of Head of Internal Audit, Risk Management, and Forensic Services for large public companies and has worked for the Big 4 accountancy firms including six years at Ernst & Young in South Africa and KPMG in the Caribbean region. His experience crosses the spectrum of forensic accounting, auditing, risk management, corporate governance and more. His career for the last 20 years has had a focus on forensic accounting and fraud and corruption investigations. Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, republished, modified, reproduced, distributed, copied, or sold without the prior consent of the author. 2016

2 The typical organization loses 5 percent of its annual revenue to fraud. Applied to the estimated 2013 gross world product, this figure translates to a potential total fraud loss of more than US$3.7 trillion worldwide, according to the 2014 Association of Certified Fraud Examiners Report to the Nations. So, put in context, Fraud is material. Profiling is a part of everyday life for all of us, and we use previous experiences to determine how we get through the days activities. Indeed, when we approach the winter months we know that we need to wear warmer clothing. Why? Because last winter told us so. When we drive on a roundabout or the stoplight turns red we know exactly what to do or how to react to the event because we have done it so many times before. More to the point, we can identify the cold of winter and the challenges we face whilst driving because we have seen the patterns on numerous occasions before and our brains have analyzed the information at that time, stored the patterns of data, and have drawn on the stored memory to deal with the current event. Then consider your favorite sport and trying to work out who will win. In the same way that we recall previous events, we also recall the previous histories of sports teams and players. Footballers of a certain age might be in their peak, rugby players from a certain continent may win more games, and marathon runners from certain African countries are always likely to run the fastest times. This is everyday profiling of individuals based on previous experiences. If this process works in dealing with the characteristics of day to day activities and people we come into contact with, then why is this process of profiling not more prevalent in the fight against fraud? It can be seen that many forensic investigations do not have a formal process for either

3 drawing from or contributing to fraud type and fraudster profiling. Fraud profiling has the potential to serve as an aid to fraud investigations. Valuable data and information on offenders and fraud situations and scenarios are not used as much as they should or could be by investigators in the identification of workplace fraud. Occupational fraud or white collar crime reflects a high rate of incidence and a relatively low rate of detection, rendering it one of the significant crime challenges of the 21st century. Fraud risk can be effectively managed by integration and the use of previous knowledge concerning the individual, the situational environment, and motivations driving fraud offenders. Examination of empirical research on frauds and fraud offenders yields common characteristics, such as the fact that the average fraudster is male, married with a degree, and has a professional relationship, usually by means of employment with the victim organization. The fraudster is most likely to work in accounting, finance, or procurement departments, being the gatekeeper element of the business process and not within the internal audit department. Currently, they are more likely to work for financial services organizations, according to the ACFE s Report to the Nations on Occupational Fraud and Abuse. Research has revealed many types of fraud offenders and the circumstances in which fraud is committed. Much of this research tells us that the fraudster is the opportunistic offender with no criminal record who, out of greed, abuses a position of financial trust to commit a fraud alone or with few accomplices. An interesting finding is the fact that most fraud offenders use complex methodologies to carry out and hide their crimes. This has implications for prevention

4 strategies as the traditional barriers to fraud, such as internal accounting controls and employment screening, are no longer sufficient on their own. So if profiling techniques are to be added to the fraud investigator s toolbox, we must first ask, and more importantly, answer some questions. How does profiling assist and add value to investigations? What key aspects of an offender profile should be included in the profiling and are such details as marital status, age, and race really necessary, as well as fraudster background, skill, and professional qualifications? Would it be beneficial to include in such profiling the characteristics of the fraud scheme or scenario itself and the situation that lends itself to the fraud? Furthermore, should the type of victim organization be analyzed and should this be further drilled down into as to which departments and divisions are most likely to be prone to fraud attack? Many surveys tell us that 80 to 85 percent of frauds are committed by insiders. Surely if we knew from which departments the fraudsters came or, possibly more importantly, which vulnerable departments they try to be recruited from, this could be a focal area for both proactive fraud risk management and reactive investigation. We all too often focus on the control environment and, quite often, human beings are fundamental to that control environment or at least key elements of it. Human beings are the weakest link. How strong is the control in a segregation of duties control if the employees in the process are or exhibit characteristics that place their honesty and integrity in doubt? Surely, if the human element of the control environment is not considered then such controls are weak or even nonexistent. Profiling of these employees is fundamental to an effective control environment. There is no doubt, however, that a full

5 understanding of what fraud is and which measures are best suited to combatting the fraud disease is absolutely necessary before we can start to profile the fraudster or his actions. We have to face the fact that fraud cannot be prevented. Internal controls and security systems reduce the risk but there are no guarantees, and the track record of prevention and detection is, actually, not great. Human beings can be ingenious and their behavior unpredictable. Some are desperate, many are risk-takers. Most are both. Some employees might have a more devious entrepreneurial spirit than we might have imagined. If fraud is committed by trusted employees who know the system then it is quite likely that they also know how to bypass these controls and therefore something more is required in the preventative and detective fight. Fraud profiling is the process of identifying the characteristics that the fraudster and their fraud would present or be visualized if it were to happen in your organization. If you know what it looks like, you can identify or recognize it and catch it when it happens. If you catch it when it happens it will make the next person think twice about committing fraud and will leave investigators with key indicators of the behavioral or situational patterns or footprints for the future. Interestingly, as is the case at the time of writing, periods of economic slowdown or recession increase the likelihood of employee fraud. Apart from the increase in financial need there is also increased psychological pressure on employees. Employees are not only under great personal financial stress, but they might also be feeling great insecurity about the futures of their organizations. When close colleagues are laid off, fear and insecurity prevail. This brings about a further

6 dimension to the profiling scenario, the fact that the economic environment should be included as a constituent part of profiling fraudsters. Put simply, human beings in a deprived part of a city in a country going through economic slowdown might be more likely to commit fraud than those earning good, tax-free salaries in a country that is booming or bypassing recession. The economic environment, therefore, also needs to be included in any profiling methodology. In summary, fraud happens. It happens in any organization that has money or assets irrespective of profitability. Quite often it is a cause of an organization that is not profitable. The fraudster is internal. Remember, 80 to 85 percent of frauds are committed by persons inside the organization, committed by our colleagues. More often than not it occurs at the senior level and it is done by someone to whom we report and rely upon to safeguard our organization s assets. We have to adopt the attitude that the fraudster is within our organization, and it is only prudent that we alter the paradigm, expect that fraud will happen and adopt a preventative strategy. To be ahead of the curve, that strategy has to include the relatively new dimension of profiling. To identify anything, you've got to know what it looks like. If you don't know what it looks like you might walk right past it without recognizing it. There are an infinite number of characteristics of fraud offenders and fraud types or scenarios and there are an infinite variety of industries, business structures, departments, accounting systems, etc. Like attempts to prevent fraud, there is no guarantee that a detection strategy will work all the time and identify every fraud. However, research indicates that most occupational fraud is not sophisticated and,

7 generally, not well concealed. All that is required is to identify what it would look like and it will more than likely be found. Profiling is not intended to provide an absolute guarantee of fraud detection but an incremental improvement in the odds against your business becoming a victim of fraud. So if we can profile the following footprints attributable to the act of fraud, then we have pretty good coverage of all the likely characteristics that give us the greatest chance of recognizing the fraudster and the fraudulent act, including: The fraudster s behavioral indicators The environment in which the fraud occurs, to include: Victim organization type and sector Victim department Fraudster s position in the department Geographical location Economic situation Fraud type characteristics Fraud methodology or modus operandi Fraud motivators Characteristics of the consequences or the impact of fraud. The process of profiling has to be simple and understandable yet it should be rigorous and comprehensive. Its objective is the development of a set of detection controls that will identify the characteristics of a fraudster or the patterns a fraud would present if it were to occur in your business