FRAUD – THE ULTIMATE DECEPTION Why do people become fraudsters?

WORDS: Mathew Fleming - Korda Mentha PHOTOGRAPHY Supplied

Fraud is the use of deception to create or obtain a dishonest advantage or benefit. In my years investigating fraudulent schemes and behaviour it is apparent that frauds are opportunistic or planned, in fact criminally masterminded. The perpetrators (criminals/fraudsters) of fraud are varied in age, appearance, socio-economic status, and culture. Fraudsters are most likely to be readers of this magazine, not the stereotypical criminals that we conjure in our imagination. The Association of Certified Fraud Examiners (Global Fraud Survey (acfe.com) conducts global surveys; the 2023 Global Fraud Survey will gather meaningful information on how fraud is committed, how it is detected, who commits it and how organisations respond after they have been victimised. The Global Survey states that the likely fraud perpetrator is statistically male, between 33-48 years of age with a tertiary qualification and in a position of trust. Sounds like someone we all know.

So why do seemingly normal, educated, trusted people commit fraud? Over time the theory has been established that fraud is committed when three factors are present and operate in unison. These factors when presented and acted upon together are the recipe for all fraudulent behaviour and without them, it wouldn’t exist. So, knowing this can be useful in our own fight against fraud, to put up resistance, educate others and to spot red flags and thus stop fraud before it occurs.

For a fraudster to commit fraud there must be the following three factors.

Incentive or pressure – There needs to be some type of incentive or pressure, which may be as simple as greed and wanting more, or the pressure of meeting financial obligations.

Opportunity – The actual chance to commit an act, for example, a bank manager who has the keys to the vault will therefore have an opportunity to use the keys for wrongdoing.

Rationalisation – The criminal mindset, which is to say that one rationalises their behaviour to be able to do the wrong thing, such as “I work hard, I’m entitled to more, and no one will know or miss this, it’s a victimless crime etc”.

In my years of investigating matters around the globe, these three factors have been present in each of the fraud matters I have investigated, sometimes with shocking, stark reality. I had investigated a series of frauds that culminated in the suspect making very frank admissions to each of the fraud schemes that he perpetrated upon a large global manufacturer. His reasoning for committing the fraud was that he had to keep up his “playboy” type lifestyle and keep his mistress in the lifestyle she was accustomed to, which included fast cars, jewellery and plastic surgery. Of the $2m+ in fraudulent takings, it seems he squandered 90% of it on trying to preserve his lascivious affair with a woman 15 years his junior, the whole time while his wife and two children lived in a modest council house and were behind in their school fees. I will never forget what he said to me when I asked him why? He said “There is no way she would have stayed with me for my looks, so I got her addicted to my cash”, and I replied, “Actually it wasn’t your cash was it?” to which he quickly replied, “I’ve worked hard for this company, it’s a multibillion-dollar enterprise why shouldn’t I get something for my troubles”. Here he has the incentive to maintain his affair, was in a position of trust to undertake the fraudulent actions and rationalised it all by saying “I work hard etc”.

In another matter, an opportunity presented itself to a mid-tier mining company commercial geologist who was researching mining lease sites in Australia and had access to the intellectual property of the mine owners, and potential global investors, as well as the information on the protected government lease tenements. He saw an opportunity that most of the investors would contact him directly without copying in any other company people, asking for prospectus information and early initial investment opportunities, when he promptly set up a similar named business with bank account details. Within three weeks of correspondence, he had received 12 investor initial deposits which accumulated to $ 42 million into his bogus account which was then sent to accounts in Singapore.  He also funnelled some legitimate investors and their deposits to legitimate company accounts. He then took a cruise around the Whitsunday islands for a week to catch a flight to Singapore and cash out. When he returned home from his island cruise there were more emails from investors wanting into the investment opportunity; he couldn’t resist and went in again, this time raking in another $14m for himself. This of course prolonged his exit strategy by a few weeks, and within this time a German investor who by chance was in Australia popped into the head office with his correspondence wanting to discuss his investment, thus unravelling our fraudster’s malfeasance. When I interviewed him he said, “$ 42 million was plenty, I could have retired in Asia or South America, I just got greedy.”

Both are examples of greed, but of course, in these times of immense economic pressure I see many examples of desperation driving the incentive to commit fraud, usually tied to another vice such as gambling or drugs, but sometimes it seems the reason is pure desperation. A single mum who was the bookkeeper for a nonprofit charity for over 12 years was living close to the edge and barely making ends meet when by chance she had a bundle of cash from a charity night in her possession and was to take it to the bank the next day. On this day she attended a brunch with a group of friends, which ended in the gaming room of her local pub; she won $500 on the pokies that day and was hooked. She returned later without her friends and began to fritter away the $8,000 cash that was to be deposited. To cover herself she “cooked the books” and the charity was none the wiser. She continued to take money from the charity covering her newly formed gambling addiction. It got to a point that she was behind in her rent, cutting down on her groceries and stealing more and more from the charity to keep the vicious cycle spinning.  Of course, the merry-go-round always stops, and by the time she was discovered she had squandered over $380,000 in 13 months. When I interviewed her with a colleague, she described her life and reasoning, and was in tears of guilt and contrition always saying that “I was going to pay it back, I just needed to win more.” At one point during the interview, my inexperienced colleague was also in tears, with a soothing patting hand on her shoulders almost excusing her of her sins. At this point, I said, “Let’s all have a little coffee break and compose.”

Whether it is hard luck, greed or a combination of need and greed, we can all understand that fraud will only take place if the three factors of incentive/pressure, opportunity and rationalisation are present.  Understanding this we are therefore armed to identify the red flags that may present when these factors are acted upon. Red flags are logical indicators, such as single control of processes in a position of trust, multiple excuses and cover-ups for financial anomalies and human behaviour, whether a lavish lifestyle or strange habits or issues that present themselves. We all know someone who is always declining calls from banks, borrowing cash or looking for the next sure thing at the races. 

Trust your instincts and probe into your gut feelings and examine the leads, because a fraudster’s worst enemy is a keen investigator… and we can all be keen investigators. 

About the Author: Matthew Fleming is a respected investigator for the highest courts and governments around the world. He has more than 30 years’ experience in law enforcement, forensic consulting, and advisory, including over 23 years of this in leading high-profile corporate and government investigations across the Asia Pacific. Now, as a forensic investigator with KordaMentha, Matthew handles sensitive, challenging engagements, including factual investigations, large-scale global fraud, and corruption matters, as well as complex financial crime, anti-money laundering, and workplace investigations. He has delivered outcomes for his clients in multi-level, multi- jurisdictional, and deeply complex assignments.