Profiling The Fraudster Removing the Mask to Prevent and Detect Fraud

Preface xiii

Acknowledgments xix

PART I: OCCUPATIONAL FRAUD AND CORRUPTION

Chapter 1: Introduction to Occupational Fraud and Corruption and Recent Trends 3

Deception through Breaching Trust 4

Global Trends in Occupational Fraud 4

The Cost of Occupational Fraud and Corruption 6

Types of Occupational Fraud 8

Early Fraud 10

The Fight against Fraud 12

Profiling as a Solution 13

Chapter 2: Types of Occupational Fraud and Corruption 15

A Myriad of Fraud Schemes 16

Cybercrime 17

Chapter 3: What Is Fraud and More Specifically Occupational Fraud? 21

The Association of Certified Fraud Examiners’ Definition 22

The American Institute of Certified Public Accountants’ Definition 23

Statement of Auditing Standard No. 99 Definition 23

The Institute of Internal Auditors Definition 24

Duration of Fraud Schemes 25

Chapter 4: Corruption 27

The Geography of Corruption 28

The Fight against Corruption 31

Corruption and the Public Purse 33

Cultural and Legal Influences on Corruption 34

Chapter 5: Normative Crime Analysis and Investigative Psychology 37

Fraud Is Not a Norm 37

Investigative Psychology 40

Chapter 6: The Fraud Triangle Becomes the Fraud Diamond: A Journey through the Theory 43

The Fraud Triangle 44

Fraud Risk 45

The Theory Shaping Early Fraud Profiling 45

PART II: PROFILING THE FRAUDSTER

Chapter 7: Using Profiling in the Fight against Crime and Occupational Fraud 53

The Mind of Adolf Hitler 53

Development of the Psychology 55

Modeling 57

Modeling in Fraud Detection 59

Chapter 8: Criminal and Fraud Offender Profiling 61

The Criminal Mind-Set 61

Investigative Psychology 64

Fraud Offender Profiling 64

Profiling Challenges 67

Chapter 9: Behavioral Warning Signs or Red Flags 71

How Red Flags Help Us Discover Fraud 73

Management Red Flags 73

Changes in Employee Behavior Representing Red Flags 74

Fraudsters Living beyond Their Means Exhibit Key Red Flags 74

Red Flags in the Accounting System 76

Behavioral Characteristics as Red Flags to Fraud 78

Chapter 10: Motivation and Opportunity as Key Indicators 85

The Motivation 85

The Opportunity 92

Chapter 11: Profiling Individual Behavior and Characteristics of a Fraudster 95

Perpetrator’s Gender 97

Perpetrator’s Age 99

Perpetrator’s Tenure 101

Perpetrator’s Education Level 104

Behavioral Red Flags Based on Perpetrator’s Position 109

Behavioral Red Flags Based on Scheme Type 109

Behavioral Red Flags Based on Department 110

Chapter 12: Profiling the Fraudster’s Position and Department 113

Perpetrator’s Position 114

Perpetrator’s Department 117

Chapter 13: Profiling the Fraud Methodology or Modus Operandi 123

Collusion 124

Position of Employment Creates the Opportunity 126

Many Ways to Defraud an Organization 128

Chapter 14: Profiling the Victim Organization and Its Geography 133

Fraud Victim Organizations by Geographic Location 134

Corruption Cases by Region 136

Types of Fraud Victim Organizations 136

Size of Fraud Victim Organizations 136

Methods of Fraud in Small Businesses 138

Industry of Fraud Victim Organizations 140

Corruption Cases by Industry 142

Chapter 15: Profiling the Consequences 147

Legal Proceedings and Loss Recovery 148

Losses Recovered 149

An Often Unconsidered Consequence 151

Chapter 16: Using Case Studies for Profiling Fraudsters 153

Why Reinvent the Wheel? 154

Some High-Profile Fraud Cases 155

Chapter 17: The Use of Offender Profiling in Forensic Investigations 165

Collation of Information 165

Fraud Crime Intelligence 166

Intelligence-Led Investigating 168

The Value of Offender Profiling 168

Improved Internal Controls 170

PART III: BUILDING A FRAUD PROFILING METHODOLOGY FOR YOUR ORGANIZATION

Chapter 18: Profiling as Part of Your Sound Antifraud Program 175

Antifraud Controls at Victim Organizations 176

Antifraud Controls in Small Businesses 178

Antifraud Controls by Region 179

Effectiveness of Controls 179

Control Weaknesses That Contributed to Fraud 181

Types of Offender Profiling 186

Chapter 19: Information Sources and the Role of Data Mining 189

Forensic Profiling and the Use of Data Mining 190

Supervised and Unsupervised Learning 192

Privacy and Ethical Concerns Surrounding Data Mining 193

Contributing to the Profiling Mechanism 193

Chapter 20: Fraud Profiling Your Organization 197

Personal Particulars of the Offender 198

Obtaining Modus Operandi Information 198

Determine the Motive of the Offender 199

Opportunity 201

Red Flags 203

Lifestyle Change 203

Chapter 21: The Process of Developing a Fraud Profile 205

Development of a Fraud Risk Assessment 206

Development of the Fraud Profile 213

Development of a Fraud Detection Net 216

Chapter 22: The Role of the HR Recruitment Process in Profiling 223

Perpetrator’s Criminal History 224

Perpetrator’s Employment History 224

Controlling Human Risk 225

Effective Human Performance 226

HR Departments Closing the Door on Fraud 226

The Curriculum Vitae: Fact or Fiction? 227

Bibliography 231

About the Author 237

About the Association of Certified Fraud Examiners and the Report to the Nations on Occupational Fraud and Abuse 239

Index 243

SIMON PADGETT is an ACCA-qualified forensic accountant with over 18 years of experience in fighting fraud and corruption. He has held senior-level auditing positions in the United Kingdom, South Africa, the Caribbean, the Middle East, and Canada. Simon is the past vice president of the United Arab Emirates Association of Certified Fraud Examiners chapter.