11th Annual Fraud Summit 2010
Understanding the drivers of fraud and the motivations of offenders
Dr Russell G Smith Principal Criminologist
Outline
Scoping the fraud environment in Australia
What drives financial crime? The effects of the global financial crisis Trends in detected fraud
Profiling fraudsters
Individual characteristics Personality types and white collar offending Motivations Rationalisations
Reducing fraud risks
Individual-based psychological approaches Using offender profiles as a risk assessment and crime reduction tool
Scoping the fraud environment in Australia
Fraud is where the money is (Willie Sutton)
Public sector new benefits, new taxes, new e-payment systems, new programs (e.g. emissions trading, home insulation, school building) Private sector new financial products, new payment systems, new financial pressures
Misusing new technologies
Technologies of forgery and counterfeiting Technologies of information databases of personal information Electronic payment systems to transfer funds illegally New hardware and software mobile devices, wireless networks
Corruption risks
Corruption of insiders to gain access to secure systems Collusion between criminals and others (20% of fraud KPMG 2009)
The effects of the global financial crisis
Fraud driver
Availability of opportunities and suitable targets The presence of suitably motivated individuals
Increased risk
Availability of government payments / professionals willing to create secrecy vehicles and / or falsify documentation Perceived need to maintain failing businesses Perceived need to maintain lifestyle
Reduced risk
Potential fraudsters who lose jobs Reduced income / assets in business Reduced capacity to lend Acceptability of business failure and / or reduced lifestyle in times of recession Increased learning from other countries experiences Increased internal controls on lending and transactions Increased awareness of risk, surveillance and early intervention by regulators Source: Michael Levi (forthcoming)
The absence of Pre-existing frauds detected following reduced inflow of capable sustaining funds (e.g. Ponzis) guardians Perceptions that law enforcement and regulators are over-stretched
Profiling fraudsters
Biological determinism
Giambattiste della Porta (1535-1615) thieves have small ears, small noses, slender fingers, bushy eyebrows, and mobile eyes Lombroso L'Uomo Delinquente (Criminal Man 1876) Criminaloids (drawn into crime by chance); Habitual criminals (lifes circumstances)
Demographic and workplace characteristics
Age, sex, education, ethnic background, personality Criminal background (recidivism) Type of job, level, length of employment
Motivations and rationalisations
Cupidity Maintenance of lifestyle Gambling and addictions
Serious fraud offender profile (AIC/PwC)
Source: AIC / PricewaterhouseCoopers Serious Fraud Study (2003)
Personality types and white collar offending
Prior research in the United States
Desire for control positively related to intention to engage in corporate offending (Piquero et al. 2005) Social conscientiousness is negatively related to white collar offending offenders are more unreliable, irresponsible, opportunistic, manipulative, suspicious and judgmental (Collins & Schmidt 1993) Competetiveness in men is positively related to intentions to engage in insider trading (Terpstra 1993) Negative emotions (lack of discipline, insensitivity to others) is positively related to white collar offending (Collins & Bagozzi 1999) Positive extroverts, disagreeable, neurotic types have a tendency towards white collar offending (Alalehto 2003) Low self-control is less predictive of corporate offending than organisational theories would predict (Simpson & Piquero 2002)
Personality types and long-term recidivism
Sample and procedures
Study of 64 federal, white collar offenders in Indiana penitentiaries Data from official records, interviews and personality tests
Personality measures
Jesness Personality Inventory scales collapsed into 4 groups: aggressive (manipulative, hostile, anti-social values) neurotic (anxious, defensive, insecure) dependent (followers with no anti-social values) situational (pro-social, conforming, naive)
Recidivism measures
Re-arrested between 1986 and 1998 (over 12 years)
Controls
Marital status, dependents, education, employment, race, SES
Source: Listwan, Piquero & Van Voorhis (2010) ANZJCriminology 156
Probability of re-arrest by personality type by year
Source: Listwan et al. ANZJC (2010:166)
Personality types and long-term recidivism
High desire-for-control individuals (aggressive type)
Tend to be over-confident in their own abilities Have unrealistic goals and expectations Are assertive in manipulating events to their advantage Pass their failures off onto others
High negative-affectivity individuals (neurotic type)
Avoid challenging situations Have a lower threshold for experiencing negative events Have difficulty meeting their own goals
Both types of individuals
Proficient in making excuses and being negative Proficient in finding alternative ways of reaching the high standards they have set for themselves even if these are dishonest
Source: Listwan et al. ANZJC (2010: 168)
The motivations of fraudsters (AIC/PwC 2003)
Source: AIC / PricewaterhouseCoopers Serious Fraud Study (2003: 44) N = 208
The motivations of fraudsters (KPMG 2009)
Source: KPMG Fraud Survey (2009: 18) N = 420
The techniques of neutralisation
Denial of authorship
Shifting blame onto others, or claiming to have been coerced into offending
Sharing responsibility
They can afford it; fraud is rife and 'everyones doing it
External influences
Global financial crisis created pressures that led to the fraud
Denial of injury
Intended to repay the money so that no-one would have lost out
Denial of illegality
Conduct was technically not wrong, or they didnt know it was illegal
Denial of culpability
Offenders were sick or affected by circumstances beyond their control
Appeal to higher loyalties
Laws can be ignored due to higher loyalties owed to friends and family
Based on Sykes & Matza (1957)
Individual-based psychological approaches to fraud reduction Reducing the provocations that encourage offending
Dispute avoidance personnel management, recruitment screening Arousal reduction dealing with problem gambling, lifestyle pressures Temptation reduction employing good internal business controls
Removing excuses used to justify offending
Publicity of rules making laws known and understandable Appeals to conscience explaining the benefits of compliance Aiding regulatory compliance making it easier to act honestly
Making effective use of offender profiles
Understanding the profiles that apply to your business environment Using offender profiles as a risk assessment and crime reduction tool Evaluating the effectiveness of using profiles for risk reduction
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