(Blog Curator’s Note: With this posting, we end a lengthy hiatus in postings on this blog, for reasons cited in the previous posting. It is appropriate to return to some basic thinking about fraud as we resume. Dr. Sridhar Ramamoorti is founder of this blog, and the posting below is based on his definition of fraud in the SAGE Encyclopedia of Criminal Psychology.)
(By Sridhar Ramamoorti) Fraud is a violation of trust, a human act to deceive another so that the victim suffers a loss and the perpetrator makes an unlawful gain. Black’s Law Dictionary is somewhat more profuse in its definition: “All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning, or dissembling, and any unfair way in which another is cheated.” (In both definitions above, the word, “human” is stressed for reasons described below.)
Fraud is a form of theft, but not by force. The victim, in most instances, willingly gives away money or something else of value because of lies and misrepresentation and betrayal of trust.
Fraud is also a form of deception. Deception is inherent in nature. Many living creatures survive through deception (an example: the viceroy butterfly looks like the bitter and mildly poisonous monarch butterfly). Within the human world, deception may be benevolent (think of potentially life-saving camouflage used by infantry troops). And it can also be malevolent, where deception is used for gaining money, power, prestige, or some other “advantage” (to use Black’s language) without compensating in some way those whose loss becomes the fraudster’s gain.
Both definitions of fraud include some common elements:
• It is committed by human beings.
• It is a betrayal of the trust that humans grant each other.
• It involves either false representations or suppression of true representations between humans.
• The person committing fraud gains an advantage over the victim in pursuit of self-interest.
Those committing fraud has been conjectured in the literature being of two types:
• Accidental or situational fraudsters, who find themselves with opportunity to commit fraud and then act on that opportunity.
• Predators that seek opportunity to commit fraud and then act on that intent.
In all fraud case, as we point out in our book, A.B.C.’s of Behavioral Forensics (Wiley, 2013), three conditions are at play:
The opportunity for trust violation, the motivation to commit the fraudulent act, and rationalization within the fraudster’s mind justifying the fraudulent behavior as appropriate to the situation. (This blog centers on the latter two factors as keys to the prevention and investigation of fraud incidents.)
Thus far, we’ve looked at fraud as white collar crime that is committed by an individual. But cases abound where fraud extends well beyond the actions of one person. Our book proposes a taxonomy (way of organizing a body of knowledge) of fraud in multiple levels:
• The Bad Apple (one individual);
• The Bad Bushel (when a group of people collude in the fraud);
• The Bad Crop (when a whole organization perpetrates and perpetuates fraud).
• And one of our bringingfreudtofraud bloggers, Victor E. Hartman, has proposed an even larger compilation of people committing fraud, which we may describe as a Rigged Market! This is where multiple organizations and regulators fail to protect the public and functionally contribute to the betrayal of public trust, such as was the case with the Wall Street financial crisis of 2007-2009.
Most fraud prevention and investigation efforts to date have centered on how fraud occurs. This blog and its sponsoring group, The Behavioral Forensics GroupTMLLC, is targeting the why people commit fraud. These motivations are deeper than the usual surface assumption of greed. A highly salient ingredient of the definitions of fraud with which we started (and stressed with italics and bold print) is the mention of people. Fraud is not fraud unless a person is committing it. The more we understand why people commit fraud, the more effective we can be in preventing fraud and in investigating fraud cases. We cannot be content in asking the “how” question regarding the instruments of fraud; we need to be asking the “why” question—what were the motivations causing otherwise good people to do bad things?
Fraud is also a crime where often the victim unwittingly colludes with the fraudster. Fraudsters have their psychology; so do victims, giving themselves permission to enter into a fraudulent transaction with their own sets of justifications.
The psychology of fraud is a new and emerging field of study and investigation, ripe with long-term potential for helping to mitigate the incidence of fraud through a better understanding of why it is committed. Actions based on this new knowledge targeted to motivations and rationalizations can be coupled with actions to reduce the opportunity to commit fraud in a broad spectrum approach to the control of fraud.
BEHAVIORAL FORENSICS GROUPTM LLC
The Behavioral Forensics GroupTM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives. The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics GroupTM LLC. Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4GTM is a premier, pioneering practice in this field.