Business, Financial and Investment Fraud - Detection and Resolution
Crisis Containment
Consultation - Examination - Crisis Management
Definition: Fraud is the abuse of trust or the subversion of normalcy for secret gain. Someone is abusing the trust you place in them to cheat you.
To commit an act of deceit or fraud, a person must have the motivation.
To act on that motivation there are three more components one must have:
Credibility, Access and Opportunity.
Someone with no motivation to cheat would not cheat even if they had the other components.
Types of Fraud
Abuse of company funds: This is a frequent story in the news. Abuse of company funds is using the company’s own money for uses that benefit an individual but do not benefit the company. These funds are used for the personal benefit of the person who authorized the use of those funds.
Example When company money is used to buy a car when that car will not be used for the company’s benefit or as unrecorded compensation for the person getting the car. The Adelphia Story is a great example of abuse of company funds.
Arson: Setting a fire can be a form of fraud when the setting of that fire can help someone make money when they would not normally be able to earn it.
Example Burning down a building for the insurance money is a good example.
Bribe: See Payoffs
Conflict of interest: This kind of fraud has been popular in the news with securities analysts being accused of issuing bad reports about some stocks to their management but, issuing public reports praising that same stock. The conflict arises when that stock is being promoted by the firm that pays those analysts’ salaries.
Example When you ask for objective advice between two products from a salesman selling one of the products. That salesman earns a salary from selling one of those products and nothing for telling you to buy the other product. You’re asking that salesman to risk taking food out of their mouth by telling you to buy the other product. Would you take food out of your mouth? Why would they?
Cooking the books: This old accounting phrase refers to the manipulation of financial statements and records to conceal the reality. Note: After discovery it is relatively easy to unravel their work. They leave a clear trail.
Example Enron cooked the books.
Corruption: One who abuses the responsibility and trust placed in them for secret personal gain.
Example One who takes a bribe is said to be corrupt.
Deceit: Deliberately misleading someone for personal gain though no actual crime has been committed.
Embezzlement: This is the illegal use of funds placed in someone’s control.
Larceny is another name.
Example The bookkeeper takes company money for their own use.
Falsified financial statements: This is similar to cooking the books; the lawyers prefer this term.
False/fraudulent claims: Insurance claims overvaluing a loss or creating a loss for secret gain.
Influence peddling: When one attempts to control the actions of another by offering a personal gain outside the normal course of business. This is accused of happening frequently with politicians. It can also be called “swinging one’s weight around” as well as coercion or scratching one another's back.
Insider trading: Gaining from or reducing a loss from a publicly traded security by selling it or buying it on important news learned before it is released is called insider trading. From whom this news is learned is the difference between being legal or illegal. Overhearing a conversation in a restaurant is not illegal; hearing it from the company’s president is illegal. The media likes to report this kind of fraud.
Example Martha Stewart’s accusation was thrown out by the judge. She was convicted of obstructing an investigation into a crime of which she was not guilty. You might want to read that one twice.
Internal theft: This refers generally to the pilferage of company assets by employees. Companies dealing in products have the most problems in this area.
Example Retail stores suffer from inventory shrinkage where goods are taken without being paid for.
Larceny: See Embezzlement
Misappropriation of company funds for personal gain: This is using the company’s cash as one’s own piggy bank. When this happens in a privately owned company, it is rarely a crime. In a publicly owned company, it can be considered abuse of investor funds and may be a crime.
Overcharging for services: This practice is most common in the services sector which includes plumbers as well as lawyers. While difficult to prove, these charges can still be disputed and should always be questioned.
Payoff/kickback: These activities refer to bribes. A bribe is a direct payment in order to gain where one would not likely gain in normal circumstances. The recipient of a bribe can be referred to as being corrupt. Bribes are frequently paid to buyers or influence peddlers to gain orders for a company that it may otherwise not get. A payoff is paid before the sale is made, a kickback is paid after the sale is made. A payoff is like saying “please”; a kickback is like saying “thank you”. Bribery is rarely reported or litigated.
Example Halliburton has admitted that two of its employees had accepted bribes. The UN’s Iraq oil for food program seems filled with bribery accusations.
Phony or bad investments: Ponzi / Madoff schemes, phony real estate deals, false stock information and impossible returns, business buy-outs etc. make up most types of this fraud. This group includes legal but misunderstood investments and also illegal offerings. “They found land on my property in Florida”, is a common cry among its victims. Many of these victims would not be victims except for their own naive or unrealistic expectations and lack of due diligence before investing.
Power-Plays: Office politics are major creators of power-play opportunities. This activity is used by one against others to gain favor with their superiors for their own gain. A common tactic in this activity is to diminish another employee to make oneself look better. A common term for this is “back stabbing”.
Another common tactic is when a superior or supervisor abuses their credibility and position to damage someone they don’t particularly like in the hopes of getting rid of them.
Extreme attention and being overly helpful towards one’s senior or supervisor in hopes of special gain is frequently seen as “brown nosing”, “apple polishing” and other unflattering terms.
At no time do power plays benefit the company’s operations as a whole.
Royalty and license fraud: This is attempting to avoid paying fees for the use of another’s intellectual property (patent, trademark or copyright) or using another’s intellectual property without permission. Large companies with many copyrights, trademarks or patents maintain significant legal representation (lawyers) to very aggressively sue anyone they think is engaged in such activity or even possibly contemplating such activity.
Skimming: Taking money directly from the receipts and not recording the revenue on the books. In larger scale, I call it “income diversion”.
Spying: Selling of secrets, industrial or national, for secret gain.
Terrorism: Political or economic terrorism subverts normal day-to-day living in order to create chaos, pain, fear and disruption to provide gain for the terrorist, their organization or movement.
