We hang the petty thieves and appoint the great ones to public office.
Answering a Question
Northwestern University has a Masters in Public Policy and Administration program and this program has a comprehensive course on the finance. Over the past year I have been a guest lecturer on fraud. As the year reached completion, the elections were of interest to Bob Kiely a co-leader of the course and City Manager of Lake Forest Illinois. The most recent course, in fact, had the fraud lecture following the national and local elections by exactly one week. Professor Kiely wondered: “How did the promises made by elected officials compare and contrast with those of fraud? “
In our text, The A.B.C.s of Behavioral Forensics, regarding the question of breaking the law, we use a continuum around psychopathy we discuss a novel observation: “subclinical psychopathy”. Subclinical denotes the person can have some shared behaviors of a psychopath while not completely crossing over into what is described by the layman as a “monster”.
Subclinical psychopathy might explain what happens when people deceive or are caught outright telling lies in politics. I used two fictional characters: Mr. Smith who never tells a lie and “straightens up” politics through the force of his will and good intentions. On the other end, I used Mephistopheles, one of many classical iterations of the devil, or the “king of lies” who promised Faust what every he wanted in exchange for his soul. Using the standard definition of fraud: one who, embracing all multifarious means which human ingenuity can devise, (takes) advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. . . .. (adapted from Black’s Law Dictionary) we stepped into what became a pretty easy case to make that political promises are pretty close to, if not flat out, fraudulent.
A politician is a fellow who will lay down your life for his country.
This led to a discussion around the promises of politicians. There were many that were concerning, and recent:
- The Quincome tax: a tax by Illinois Governor Quinn that was promised to be temporary, but given the revenue shortfall in Illinois, it was obvious to most observers that it must become permanent – thus breaking the promise.
- The teachers’ Union highly risky speculation of their pension in auction rate debt. From the Chicago Tribune, as the Mayor scolded the Union for taking too much risk with borrowing, noted their report (November 7, 2014) found that CPS’ 2003-07 issuance of $1 billion in risky auction-rate debt paired with interest-rate swaps will likely cost the district $100 million more than traditional fixed-rate bonds would have.
- The challenger to Mitch McConnell who claimed as a Democrat she had not and would not vote with the President who was also a Democrat.
Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.
Lies, Damn Lies, and Political Ads
Then, we reviewed with the class recent negative advertisements in which small disclaimers are made at the end of highly provocative ads, or groups with known biases are supporting candidates but do so in clandestine, untraceable ways. In addition, how is the American Public served when the accounting for something as expensive as the Global War on Terror is not placed formally into the budget? In terms of tactics, our fraud blog team (Bigelow) suggested the classic tactic of what he called “pivoting” in which politicians refuse to answer a pointed question and instead ask a favorable question about a non-issue. In the class we used: You may be curious about my history as a sexual predator, but the American people are really curious to know is why is congress not doing anything to help the middle class – I promise to shake up the congress and bring about real change.
Politicians are the same all over. They promise to build a bridge even where there is no river.
As a class, we revisited classic accounting techniques that are known to be used to cover up fraudulent transactions:
Masking: Failing to record or disclose an expense or a liability.
Dazzling: Disclosing information in the footnotes to the statements rather than in showing it in the body of the text.
Decoying: Emphasizing legal issues (blind alleys) that after a close examination turn out to be immaterial or handled appropriately.
Repackaging: Changing the descriptions or labels that characterize economic entities or reframing issues to maliciously justify the use of favorable accounting procedures.
Mimicking: Creating ﬁctitious transactions or transactions without substance.
Double play: Improperly applying general accepted accounting principles to an item that is not individually material.
These known tactics that serve to camouflage fraud do have ties to electioneering:
- How does Quinn’s promise to have a short-term temporary tax that became a permanent tax fit with these tactics?
- How does the “off the books” financing of the wars in Afghanistan and Iraq fit with these tactics: is this “Masking”, “Dazzling” or something else?
- What of the vague or later proven false negative advertisements? Is this “Dazzling”?
- What of the false accusations or inferences (“Soft on crime”, “sending jobs overseas”, etc), are they “Mimicking?”
- What of organizations that extend beyond US borders are influenced by local politics including corrupt officials?
Political electioneering is an ugly side of democracy that has been a concern since the birth of the Union. Washington in fact was famously critical of the idea of political parties and urged them to not be created. It undermines trust of government and harms the overall confidence in a democratic process.
Municipal organizations do not exist in a Milton Friedman market-place as do privately owned organizations. This is important to emphasize because they have no back up. If they fail, there are not other “competitors” that can fill in for their role: they create an environment for which it is safe to have markets in the first place. In terms of finance in particular, governments are different than private industry – they must be more conservative in terms of investing their financial resources.
Municipal Organizations, too, are composed of human beings who can be defrauded. In fact, subsequent to the course, Downers Grove, a generally well-run community outside of Chicago, was a victim of a significant fraud scheme. According to the Tribune: Downers Grove recently announced that $587,000 of its money is being withheld by the Illinois Metropolitan Investment Fund as a fraud investigation continues. The story goes on to note that this suburb financial troubles are part of a larger fraud scheme orchestrated by Nikesh A. Patel. Using an intermediary, Nikesh created fake documentation that ultimately were used or adapted in a total of $150M of bad loans. The predatory fraudster discussed in our class had come to life in the real world. Trust but verify, a central tenant of accounting had been ignored.
In the end, the administrators, the often ridiculed “government bureaucrats”, are essential to our government, and thus our market places staying as well functioning as possible.
Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D. These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud. Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.