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THE PSYCHOLOGY OF A FRAUDSTER A PRESENTATION OF CORPORATE AUDIT AND INTERNAL CONTROL THURSDAY LECTURE SERIES

AT THE END OF THIS LECTURE WE SHOULD BE ABLE TO:DEFINE FRAUD


EXAMPLES OF FRAUD WHY DO PEOPLE COMMIT FRAUD THE FRAUD DIAMOND

DEFINITION Fraud can be defined as the act of using deceptive means to obtain unmerited benefits. It is an intentional act by one or more individuals among management, employees, or third parties, which results in a misrepresentation of financial statement. Fraudsters engage in fraud because they do not want to go the hard way to work for the benefit they are after or it could be that the benefit is altogether difficult for them to obtain legitimately in the foreseeable future. EXAMPLES OF FRAUD There are various types of frauds in the Banking Industry. The following are some of them: 1. Cheque frauds Examples are: a. Cloning b. Falsification c. Suppression d. Conversion e. Kiting f. Substitution

2. Cash Frauds Examples are: a. Teeming and laden 1

b. Deposit suppression c. Pilfering 3. Manipulation of records

4. Dummy postings 5. Systems FraudsExamples are: a. Password sniffing b. Salami Technique (slicing of credits belonging to customers to the fraudster s account) c. Manipulation of system files and tables to falsify account balances or delete audit trails. 6. Purchases Related Frauds - Examples are: a. Over-invoicing b. Purchase of inferior items c. Multiple payments on the same purchase / recycling of vouchers 7. 8. 9. 10. 11. 12. 13. 14. Teeming and leading / cap flying Misappropriation of customer s security deposit Inflation of contract amount Theft of store materials Illegal sale of scrap False age declaration Abuse of tendering procedure Inclusion of dummy name on payroll

WHY DO PEOPLE COMMIT FRAUD? We often wonder why people commit fraud, why they steal things that do not belong to them and what goes through their minds when they do such awful things This is the big question! Employees commit fraud, customers commit fraud, even non-customers too. 2

According to some research, 20% of employees in an organisation have committed or will commit fraud; 20% would never commit fraud; while 60% would commit fraud when under pressure. If these statistics are true for employees, they will also be true for other people. The problem is: No one knows where each person belongs to. This is why we want to ex-ray some psychological factors that make people commit fraud. Dr. Ronald Cressey (1953) studied 200 individuals convicted of embezzlement. He formulated the Fraud Triangle as a basis to understand the Psychology of fraudsters. The triangle consists of 3 factors i.e incentive, rationalization and opportunity But a fourth factor was added to in 2004 by David Wolfe and Dana Hermanson in what they called the Fraud Diamond. We shall therefore be using The Fraud Diamond in this discussion to answer the question why do people commit fraud THE FRAUD DIAMOND

INCENTIVE RATIONALIZATION OPPORTUNITY CAPABILITY


RED FLAG FRAUD DETECTION AND PREVENTION TIPS RECOMMENDATION CONCLUSION

INCENTIVE / MOTIVATION In this element, Cressey says that a person always feels pressure or feels a need to commit fraud. It might be a financial need such as high medical bills or debts or it can be a desire for material goods that makes a person want to commit fraud. Sometimes, there may even be a need for good results at work or gambling and even drugs. So, it does not necessarily have to be a financial need or pressure that makes one commit fraud. In this process, the fraudster conceives a lofty incentive or motivation which provides the push to engage in the fraudulent activity. The more the incentive, the more the urge to do it. 3

What motivates a person to want to get into fraudulent behaviour? There are several factors: 1. Greed life. This is excessive desire for something that one cannot afford at that point or stage in

2. Peers Pressure When a person belongs to a peer group, he will want to have what other members of the group have. 3. Flamboyant Lifestyle by all means. In most cases, a person with flamboyant lifestyle will want to maintain it

4. Financial Pressure - Financial pressure often makes people (the 60%) who would otherwise not commit fraud to do so. Financial pressures may be self-inflicted or circumstantial. 5. Belief System Some people don t even believe that certain types of frauds can be classified as frauds. For instance, some people don t even believe that embezzlement is fraud because of the way politicians and the society have idolized embezzlers rather than punish them. 6. Predilections - Some people have strong tendencies or habits that induce fraud. For instance, kleptomaniacs will always want to steal even if they have plenty money whereas oniomaniacs will always look for money anyhow to continue their shopping spree.

RATIONALIZATION Fraudsters always rationalize their behavior by convincing themselves that committing fraud is okay. For instance," I deserve it. I only want my share", "After this, I'm done", "They'll blow their money anyway" etc. Fraudsters will also rationalize their behavior by convincing themselves that they are just "borrowing" money and will pay it back one day. Some fraudsters may say that the company has enough money and it won't affect them in a big way. In this process, the fraudster tries to find justification for engaging in the abominable act. If he is able to justify the bad act as good, he gets ready to execute. y Just like in any other process of making decisions, fraudsters also try to convince themselves of the justification for committing fraud. Whether this process of finding justifiable reasons for committing fraud is carried out objectively is another question.

However, these are some of the reasons they cite for committing fraud. y y The Devil How often we hear it is the Devil ! Poor Pay survive . Fraudsters often cite poor pay as a justification, and then they say man must

Everyone does it with it?

Just look around they say to themselves, everyone does it, so what s wrong

Poor Reward for Hard work When hard work is not recognized and rewarded, that 60% of the people usually try to find justification in it. Inadequate Punishment for Offenders When offenders are not adequately punished, people feel they can get away with fraud. That breeds a fertile ground for frauds. I am smart, I will do it and not get caught

What we should however bear in mind is that no one will ever be able to advance reasons that can turn frauds into good deeds nor will a fraudster be able to provide sufficient reasons that can discharge and acquit him once he has crossed the red line.

OPPORTUNITY When there is a need, the fraudster usually looks for opportunities to commit fraud. And the workplace is always a good target. Employees may have certain access to records, valuable documents or other information that would allow them to commit fraud. They may also have heard stories from other employees, who may have cheated the employer before, and may have gotten away with it. Therefore, internal access as well as knowledge about what goes on in the company may make it easier for them to commit fraud. Once the fraudster has made up his mind to commit fraud, the next thing he does is to study the system and wait for opportunity to strike. This opportunity is given to him by you and me. To prevent fraud, we must never allow the opportunity to exist for the fraudster to act. y y No fraudster will ever be able to strike successfully if the opportunity does not exist. The opportunity the fraudster is looking for usually comes his way once we stop being watchful or refuse to act in a prescribed manner. Weak internal control system, abuse of position, carelessness and deliberately circumventing established controls are some of the factors that create opportunities for the fraudster.

CAPABILITY y y Even if opportunities exist, an individual must have the capability to see and exploit them. This consideration made Wolfe and Hermanson to formulate the Fraud Diamond theory Journal December 1, 2004. 5 CPA

y y y y y y y

According to them, the capable individual should have the following qualities: Position/Function Brains Confidence Coercion skills / social engineering skills Effective lying Immunity to stress (without conscience)

RED FLAGS In the work or even home environment, there is need to trust people. But the extent of trust must be balanced. There are some red flags that can help you suspect that a fraud has or is about to occur. Living beyond means Financial difficulties Wheeler-dealer attitude control issues unwillingness to share duties Divorce/family problems Unusually close association with customers/vendors Refusal to take vacations complaining about lack of authority Irritability, suspiciousness, or defensiveness Addiction/cultism Past legal problems Past employment-related problems Complaining about inadequate pay Over ambitious/inquisitiveness Instability in life circumstances 6

Refusal to take vacation

FRAUD PREVENTION AND DETECTION TIPS Understand the bank s policy and procedures clearly and ask questions when in doubt Don t be in a hurry to pay an instrument unless you are sure. Don t give another person your password. It could be the opportunity the fraudster has been waiting for. You will be responsible for whatever is done with it. Change your password regularly and do not use simple passwords (e.g. 123456) If your function involves cash (Teller, Cash Officer, TSD Head), know that once cash leaves you, it is difficult to get it back. Always watch over your cash, it is the asset mostly at risk. Ensure you monitor your Bulk Tellers and customers while counting are going on. Do not allow staffs carry bags or wear dresses with large pockets in the cash area. Sign off the Vault Cash Register daily but make sure you are sure of the physical cash. If you are a Teller or Bulk Teller, always analyze your cash receipts or payments. Cash exchange tickets must be signed off once you are exchanging cash. Do not trust and also verify. NEVER sign on for someone (even your supervisor) to use your ID to post. Blow the whistle at the appropriate time; do not wait until things happened. Do not process any transaction because you were asked to do it KYC is very fundamental; do not introduce a customer you do not know NEVER complete the visitation forms on your desk while you did not visit the address If you are too familiar with a customer, you are likely to drop your guard Report any suspicious activity (staff or customer) Don t help customer source for referees Authorizers should not be on auto while authorizing. Make sure you appreciate and understand each transaction fully before pressing the button.

Account officers must know their customers very well. This includes doing a proper visitation (never complete a customer s KYC form from your table without visiting the location), assessing the volume the customer can reasonably do. Also, understand the dynamics of the customer s business. For confirmation purposes, call the customer yourself with the number he supplied even if he has given letter confirmation. Don t keep customers documents in your procession Book secured credits and collect all credits booked Don t delegate you core responsibility; compromise may arise from there Tellers must not pay amounts beyond their limit without recourse to supervisors Be sure of what you are signing (CSU officers SV instructions without checking) Pass cheques through the UV light before parting with cash. Periodic staff rotation Adequate number of staff and separation of duties Moving in company of good friends Staff to be screened before employment Strict disciplinary action to deter staff Sequential numbering of documents Leave within your means

RECOMMENDATIONS y y y y y Report suspected cases to the Ethics Committee. Train your staff and communicate expected behaviour clearly Take strong action against employees or even customers or non-customers who commit fraud. Conduct your own activities on a high ethical level. Take your vacations and let your associates do so too.

Provide detection tools at your branches and make sure they work machines, currency detectors, CCTV, etc.

e.g. time stamping

CONCLUSION y Everyone performs certain controls functions whether you are in Business Development, HR, Operations, Corporate Audit, IT, Legal, etc. The day you stop doing your controls, the day you stop watching your controls, and the day you become carefree, that s the day the fraudster strikes. Sometimes innocent people go down with frauds because they failed to watch and act. Don t be one!

y y

FRAUD IS SELF- DECEITFUL AND DESTRUCTIVE BECAUSE YOU LL EVENTAULLY SUFFERS THE CONSEQUENCIES. NEVER GET INVOLVED Fraud prevention is a collective responsibility which everybody must play his/her own part For everything you do; do not only know HOW but you must know WHY , that is the only way you will be convinced about it. Fraud is not worth the stress; you will get caught and disgraced. So don t even think about it.

It is difficult to cover a lot in a 45 minute lecture. There are many more points that can be discussed but we do hope that what we have shared will assist us to guard against falling victims to fraudsters.

Let s work together to make this Bank difficult for fraudsters to get through. This is one more way to increase the bottom line. THANK YOU