Magazine article Risk Management

The New Breed of Fraudsters

Magazine article Risk Management

The New Breed of Fraudsters

Article excerpt

The term "white collar crime" was coined by sociologist Edwin Sutherland in 1939. It was meant to describe a crime committed by a person of respectability, high social status and in the course of one's occupation. In recent years, as major scandals have unfolded - Enron, Worldcom, Tyco, subprime mortgage fraud -white collar crime has become elevated in the public's conscious. Then, federal investigators uncovered one diabolical con to trump them all.

The massive Ponzi scheme orchestrated by disgraced stockbroker Bernie Madoff outraged the nation and forever changed how the world thinks about white collar crime. But researchers, too, have begun to find a darker side to modern fraudsters. Until recently, the research conducted into occupational fraud has maintained a prevailing view that, at the end of the day, these culprits need to rationalize their negative behaviors in order to actually commit their acts. That may no longer be the case. As more thieves like Madoff are discovered, it seems we are seeing a new, harsher, more deviant brand of white collar criminal.

Donald R. Cressey is one of the most renowned theorists on occupational fraud. He started out as a doctoral student of the legendary sociologist Edwin Sutherland, who literally re-wrote the book on criminology when his aptly named work, Criminology, was published in 1924. Like his mentor, Cressey moved on to study white collar criminals during the 1940s and developed a hypothesis that would influence everyone who has researched workplace fraud since. Cressey's study of embezzlement matured into what became referred to as "the fraud triangle," which describes three factors that must be in place for workplace fraud to occur: pressure, opportunity and rationalization.

In terms of pressure, fraudsters would violate the trust of their employers when faced with personal problems that led them to misappropriate their company's assets as a solution. In more common terms, one would describe this as the motive behind the crime.

This pressure could be created by other desires as well - revenge against the employer being a common example. In such situations, the offender psychologically displaces blame for his actions onto the employer - or perhaps a coworker - and the company, in their mind, becomes the cause of their behavior.

The opportunity aspect is simple enough: a fraudster must be able to capitalize upon a chance to engage in theft. Such opportunities generally happen when there is a loss or breakdown with an organization's internal controls.

The third and final factor that must be present in Creesey's fraud triangle model is the act of rationalization. This occurs before the theft, wherein the employee looks upon themselves as being a good person and not as a criminal. In essence, before committing fraud, an offender must overcome the psychological hurdle that the negative act in and of itself presents for them. They do this by justifying it first within their own minds, where the act becomes more of a way out of a problem or a justifiable act of retribution than a crime.

Although it has long been studied and held up as an accurate description of white collar crime, Joseph Wells of the Association of Certified Fraud Examiners believes the fraud triangle model no longer reflects current times. Researchers such as Cressey have led us to believe that occupational fraud offenders are people who possess a sense of morals, and therefore need to rationalize their criminal acts before committing them. But Wells says that society has changed over the decades. Looking at many of the fraud cases we have seen in recent years, it is hard to disagree.

With criminals like Bernie Madoff being thrust into the public eye, a new view of fraud is emerging. It is one in which occupational offenders operate without any moral compass in life. They feel no need for self-rationalization in their actions.

Instead, they act with self-perceived impunity in the face of all regulations or laws in place to deter such activity. …

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