“The only thing you got in this world is what you can sell.”

— Arthur Miller, “Death of a Salesman”

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But he was such a good guy!

I can’t believe he stole 4.8million!

Individuals like Melissa Caddick, Melinda Scott and Bernie Madoff, when first exposed, initially elicit expressions of shocked disbelief; quickly replaced by outrage, over-reaction and their categorisation as outliers.

But fraud is surprisingly common and most fraudsters are friendly, seemingly generous and quite approachable.

“The AFR Weekend made contact with 11 of Scott’s 163 recorded victims. All spoke of their shock and disbelief at discovering she had stolen from them. Many expressed concern for the welfare of [her] children.

Sid, a 70-year-old retired panel beater from the eastern suburbs of Sydney, “couldn’t believe it” when one day he saw the balance of his superannuation account, which was supposed to be more than $90,000, was down to just $4000.”

— Sally Rose, “How Melinda Scott befriended clients and stole from them”, AFR

How often, when fraud is exposed, do you hear stories like this?

Despite the evidence, people are often surprised to learn one of their employees, or one of their colleagues, had misappropriated funds to re-coup a trading position, fund a gambling addiction, pay for living expenses, purchase luxuries they couldn’t otherwise afford or, commonly, just because they could.

Financial advice is a credence good and advisers, providing their clients with care and consideration, are explicitly trusted by those that rely on, and are vulnerable to, their adviser’s ethics and good judgment. Trustworthiness is assumed, and trust easily granted, but, like most professions, there are some that abuse that trust.

• $1,106,463 from 10 clients on 125 occasions Anthony Vivian Dick jailed for stealing client’s funds | Commonwealth Director of Public Prosecutions (cdpp.gov.au)
• $1.865 million from 10 clients Man who misappropriated retirement savings lost his moral compass | Commonwealth Director of Public Prosecutions (cdpp.gov.au)
• $5.9 million from 6 couples ‘Before we had plans, now we worry about survival’ – Financial adviser found guilty of fraud | Commonwealth Director of Public Prosecutions (cdpp.gov.au)
• $4.8 million from 30 victims Former Adelaide financial advisor sentenced to 10 years imprisonment after stealing client funds | Commonwealth Director of Public Prosecutions (cdpp.gov.au)

These are just a small number of cases the Commonwealth Director of Public Prosecutions (CDPP) has successfully run in the last year. It’s tempting to dismiss them as rare exceptions but

A review of CDPP prosecution statistics and referrals from partner agencies which included ASIC and the ACCC, show a disturbing and not surprising upward trend in fraud.

In the 2019-2020  CDPP’s Annual Report, under the Commercial, Financial and Corruption portfolio, reported 106 referrals, with 282 matters on hand, with the top referring agencies including ASIC, AFP, ATO and the ACCC, with ASIC being the largest source of referrals.

As other commentators have observed, “it is a truth, universally acknowledged, that a crisis increases one’s propensity for fraud.

In a previous article, we posited that in a crisis like COVID-19, incidents of fraud could increase by as much as 22%. The data supports our thesis and undermines the practical value of unmonitored and unenforceable standards because the fraud is usually driven by need rather than greed; by necessity not opportunity.

Business owners are often surprised that employees can, and do, commit fraud despite oversight and controls. Often it’s the person they would least expect (or can least afford to lose). 

What is interesting, is that the characteristics of the fraud perpetrators are often the exact characteristics you looked for when hiring them. Doesn’t every employer want staff that are outgoing, influential, clever and conscientious?

As a licensee the actions of these type of employees, will cast both a shadow and spotlight on you, your risk framework and our monitoring and supervision capability. One persons’ dishonesty can quickly compromise your licence and ability to continue providing financial services, honesty, fairly and efficiently. Let alone the reputational damage one employees actions can have on your business. 

Why do nice guys go bad?

“Articles, articles, articles
Rather you remain unremarkable
Got a lotta interviews, interviews, interviews
When they say your name, I just act confused”

— Billie Eilish, “Therefore I am”

In a research paper published by the Australian Institute of Criminology, Grace Duffield and Peter Grabosky in The Psychology of Fraud, argue that fraud, like many other crimes, can best be explained by three factors:

1. a supply of motivated offenders;
2. the availability of suitable targets and
3. the absence of capable guardians. 

If you’re a licensee, wondering about the likelihood of adviser misconduct, don’t underestimate your contribution to the misconduct you might eventually uncover.

As a Licensee, you are a guardian and your advisers, and their clients, rely on your capability. In monitoring and supervising these individuals you are ensuring your clients are protected from the dishonesty of these supposed ‘good guys’. 

So, the question to ask yourself, before ASIC or the Courts do, is whether your compliance function is capable, competent and adequately resourced?

While you ponder that (uncomfortable) question, take the time to read Duffield and Grabosky’s article which outlines some common motivating elements fraud including:

• Explanations of financial strain;
• A desire to possess what one cannot afford – ‘trying to keep up with the Jones’s’;
• Ego in which there is a comparison with others who are better off and a desire to match that standard in terms of lifestyle;
• A threat of loss of something currently owned;
• Lifestyle choices, the most prominent of which is gambling; and
• Ego and power over people as well as power over situations.

They conclude that the risk of fraud is both a product of personality and environment or situational variable.

Reflecting on personality in the first instance, the research acknowledges that financial strain features in almost every type of fraudulent activity and suggests that financial strain is a very subjective thing, with even the most affluent feeling economically deprived in comparison to what they perceive to be their relevant standard.

Fraud is sometimes a short-term solution to overcome a temporary loss, be it through trading, business stress. However, other types of fraud may relate to ego/power, for example power over people as well as power over situations but others are motivated by a desire to manipulate and make fools of their victims as well as gratification from mastery over a situation.

From the previous cases run by the CDPP, some of the activities the convicted fraudsters were engaging in included:

• Advising clients to establish SMSFs, opened cash management accounts on their behalf and assume near complete control of their financial affairs;

• Encouraging clients to invest in a scheme operated by the advisers company;
• Operating a Ponzi Scheme under the guise of their business; misappropriating client funds for personal use, or to transfer to other clients; and purporting they were returns on amounts they had misappropriated earlier;
• Targeting victims who were financially unsophisticated and/or trusting clients;
• Stealing money to pay personal and business expenses, and paying for the family’s living expenses; and
• Forging signatures of their victims or convinced victims to pre-sign withdrawal forms.

The Psychology of Fraud

Practical wisdom

Although many frauds never make it to court, many judges have offered compelling assessments of fraudsters’ motivation, characteristics, behaviour, investment choices and morality: 

• You had known most of your victims for many years and they trusted you completely. A number of them relied on your advice without question, and all the while you were systematically stealing their life savings from them,’
• ‘You have caused great suffering to many people. Yours is despicable offending and offending which only came to an end when you were caught. You did not voluntarily desist.’
• Calculated and callous scheme of dishonesty’.
• ‘Involved a high level of planning, sophistication and persistence, investors had been robbed of their retirement and Mr Jayaweera had committed a gross breach of trust’
• You did not use the defrauded money to fund a lavish lifestyle, but said this made the offending no less dishonest; Mr Jayaweera knew what was happening at all times, and when his victims began to suspect something was wrong, reassured them their money was safe’.
• Actions were a cruel and deceitful betrayal leading to financial disaster for the victims involved’.
• The case highlighted the serious dangers of self-managed super funds’
• Lost his moral compass”.
• ‘I have seen this too often: after the first one, it becomes easier. It was sophisticated to the point that you diverted money into accounts other than your own, and I come to the conclusion that it was not just for need but there was some greed, because you bought a big boat and a car. I accept there was also need, but I cannot say it was all about that’

Lessons for Licensees

Leaving aside their historic distaste for compliance, the vast majority of advisers, in our experience, are honest, principled and ethical; unfortunately, not every adviser is.

While it’s dangerous to generalise from specifics, it’s equally dangerous to dismiss exceptions or the possibility of misconduct. We’ve frequently written about individual preferences and construal elements and while we remain convinced that individual preferences have less weight than environment and context, as a licensee, you need to consider both the individual and the environment in which the individual operates. 

• Have you created the culture and controls that resolve, or mitigate, the opportunities for successful fraud?
• Does your business and the way you manage risk and monitor and supervise your representatives, give them the opportunity to commit fraud?
• Have you created a work environment with unrealistic performance goals that may motivate people to cut corners?
• Are you aware of personal factors that may be creating a pressure cooker environment, inducing them commit a crime?

In a journal published by the Australian Institute of Criminology, entitled: ‘Strain, coping and sustained fraud offending’ people convicted of serious fraud offences that were committed in the course of their employment or professional work were interviewed. Fraud offending among the people interviewed, took place over extended periods, often fluctuating in intensity. 

In addition to identifying that employee fraud often continues over an extended period and fluctuates in intensity, the authors introduce the fraud triangle, which underpins strategies for workplace fraud prevention and detection strategies.

Unlike Duffield and Grabosky’s thesis, the fraud triangle suggests that fraud is the result of the confluence of three conditions:

• Opportunity (e.g., weaknesses in, or ability to override, internal controls);
• Motivating incentive or pressure (e.g., personal financial problems or unrealistic performance goals); and
• A capacity to rationalise (e.g., from personal attributes or pressures).

In this study, serious fraud offenders reported feeling a range of positive and negative emotions during their offending. While all of them expressed feelings of satisfaction and thrill, all referred to strains in relation to their offending, i.e., regret, guilt, shame, anxiety, and fear of being caught.

However, the ‘strains in relation to their offending – regret, guilt, shame, anxiety and fear – did not prevent their misconduct.

In fact, Sean Graham argues that, from a practical perspective, the fraud triangle (and the escalating, embedded and patient nature of employee fraud) suggests that ethics exams and enhanced ‘reference checking’ are unlikely to prevent fraud. Instead, he suggests that Licensees should:

• Review their compliance arrangements/risk framework with a specific focus on exceptions and individual discretion;
• Review their Balanced Scorecard/Incentive scheme both to identify systemic weaknesses and the (actual) strategies used by their high performers; and
• Focus attention on their advisers’ contraventions of internal policies and their real (rather than rhetoric) commitment to ‘compliance’. (Acts, not words). Even without a conscious intention to commit fraud, small contraventions and compromises create the conditions for rationalising and justifying larger contraventions.

So, what should you do, if you suspect (or identify) fraud?

CPA Australia has published  useful guide to reducing the risk of employee fraud and what to do after a fraud has been detected.

CPA Guide on Employee Fraud

While we’d recommend that you read the Guide in its entirety, they outline the following steps:

1. Stop the fraud from continuing. Reduce access to electronic and other information or resources including blocking remote access. You may need to engage someone to undertake forensic IT on computer assets to recover anything that has been deleted from the hard disk. Identify other computers/equipment the employee may have used.
2. Collect the facts. Before you approach the employee, collect as many facts as possible before you approach the employee. Speak to their colleagues and ensure they can safely discuss what they know.
3. Discuss the issue with the employee: you should be careful and approach these conversations with a clear head. You may wish to seek legal advice before having the conversation or have your lawyer present.
4. Report the fraud to the police (and ASIC): this step is after the fraud is detected or reasonably suspected.

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