INTERVIEWER: Hello and welcome to the latest in IBAC’s ongoing podcast series. IBAC is Victoria’s anti-corruption agency and our role is to expose, investigate and prevent public sector corruption and police misconduct. We’re very fortunate to be joined by Dr Russell Smith, Principal Criminologist from the Australian Institute of Criminology and today we’re posing the question ‘is there a typical fraudster’. Thanks for joining us Dr Smith.
DR RUSSELL SMITH: Thank you, pleasure to be here.
INTERVIEWER: So to talk about fraud and the people who commit fraud, we first need to understand exactly what it is, so can you outline the different forms fraud can take?
DR RUSSELL SMITH: Yes, fraud’s essentially looking at the problem of dishonesty where people try and obtain some benefit or avoid a loss by using deceitful means. And it’s probably easiest to think about the range of different types of fraud by looking at the people involved. So from the victim’s point of view we can have government departments, businesses or you and I, just individuals who suffer loss through maybe a consumer scam. We can also look at it from the offender’s point of view and again you can divide them up into people who are working in businesses, insiders as they’re called, or people externally and that’s often people in the public who might try and get some benefit from the government or from an organisation illegally. We can also think about the targets so what fraudsters are trying to get out of their enterprise so they might be looking at getting access to equipment improperly such as using business laptops for personal use, trying to get some entitlements for free, such as travel benefits or payments, sometimes misuse of information, intellectual property infringements is a real problem and particularly in large organisations where people might use trademarks, logos or other forms of IP without authorisation. And finally there is a range of benefits – misuse of credit cards as an obvious one and simple theft of cash, petty cash from businesses and government departments.
INTERVIEWER: You’ve said fraud usually comes with some form of personal benefit, be it money or something else, apart from greed what else can motivate someone to commit fraud?
DR RUSSELL SMITH: It’s usually some form of financial strain, either in your personal life or your business life – people who are trying to live a lifestyle that their legitimate income really can’t support. Sometimes they’ll get into debt and then they’ll need to steal money to satisfy those debts for other occasions. As you said, it’s really greed and people just trying to maintain a lifestyle that they just can’t afford. Occasionally there will be personal factors involved that will motivate someone to act dishonestly and I suppose the best example of that is problem gambling where people run up debts through gambling and need to steal money to get out of those problems. And occasionally a few sort of what might be called pathological motivations where people commit fraud through acts of revenge in the workplace, they want to take reprisals against their managers who they see as being improper or not rewarding them properly. Occasionally there will be people with mental health issues, you know who have a pathological problem that might lead them to act dishonestly. And there have even been cases of where people stealing money where their spouse or a close relative has got a terminal illness and they need to pay for medical treatment and that might seem to be justifiable to the person involved.
INTERVIEWER: You’ve spoken in the past and you’ve presented at many IBAC events as well about whether there is a typical fraudster. Is it a simple answer?
DR RUSSELL SMITH: In some senses it is. Occupational fraudsters – so these are people working in organisations or for government departments – tend to fit into a pretty usual mould. They tend to be predominantly male, aged about 30s to mid-40s, they’re educated, they usually have tertiary qualifications and they’re often long-term employees so people who have been in an organisation for five to 10 years, they’ve established a degree of trust in their position and they usually have access to some of the information that you need to have to carry out a fraud. They tend to act by themselves, although there’s organised crime out there. A lot of occupational fraud is really carried out by individuals who just want to make some money and they tend to be first time offenders. Most people commit a particularly serious fraud only once and once they’re found out they seem not to reoffend. So that’s the occupational people, people who are acting dishonestly in the workplace.
INTERVIEWER: IBAC investigations often uncover extremely complex arrangements and relationships that people build in order to avoid being found out, can we assume that people who commit fraud are intelligent and organised?
DR RUSSELL SMITH: Particularly the people who are stealing the larger sums of money, you know multi-million dollar frauds usually have people who are in medium management or senior manages and they tend to be well educated and intelligent I think is a good description of them. But there are also members of the public who commit fraud and sometimes they might be people of not great higher degrees of education or intelligence, welfare recipients, people who defraud the tax office and people who steal money from their workplace.
INTERVIEWER: Now obviously the more power a person holds in their job the higher the financial delegation and the more damage fraud can cause, how prevalent is fraud at that executive level?
DR RUSSELL SMITH: Amongst the largest value frauds, they tend to be committed by senior managers, they’re often the people who’ve got the opportunities, they know how systems work and they know how to compromise the systems. So it’s not unheard of for CEOs, sometimes Chief Financial Officers and other senior managers to be involved in large-scale frauds like that. The higher the level manager, the higher the losses that usually occur as a result of a fraud. And similarly the longer fraud takes place the more money obviously is involved, so it’s a great benefit for organisations to detect fraud quickly and put a stop to it.
INTERVIEWER: Looking at organisational fraud, there may be a perception that fraud can only occur in organisations with lack systems and processes. Is this the case? Or can it happen anywhere?
DR RUSSELL SMITH: It can happen and does happen everywhere and even in the largest organisations. You know large corporates that have very sophisticated anti-fraud measures in place, they are often targeted by fraudsters. And if there’s some absence of due diligence by the managers or some opportunities that open up that haven’t been thought through carefully then fraud can take place and that’s not something that you can often prevent. There’s just a degree of opportunity that is made use of by fraudsters. Some of the smaller organisations can also have fraud and occasionally there will be very large-scale frauds committed by one or two individuals.
INTERVIEWER: Are there lessons here, particularly for the public sector?
DR RUSSELL SMITH: The public sector is the location where the largest amounts of money are and you can think of the health care system, the welfare benefit system, the tax office and customs all who deal in enormous amounts of money, so the opportunities for fraudsters to make a very large profit out of large government departments are really prevalent. As a result those very large organisations have incredibly sophisticated systems to prevent and also so detect fraud throughout the organisation and they’ll have large departments that its sole responsibility is really to deal with fraud risk management.
INTERVIEWER: What can an organisation do to protect itself from fraud?
DR RUSSELL SMITH: Yeah, protecting yourself there’s a whole range of different strategies, having good policies in place so you know what is happening in your organisation, being aware of the risks that are in an organisation, knowing where money is being transferred, the controls that are placed on financial transactions and particularly electronic transactions, all of those areas if you don’t have a clear understanding of what’s happening in your organisation then fraudsters can sometimes make use of the opportunities and commit an offence.
INTERVIEWER: And is this how fraud is often detected? Or are there other avenues?
DR RUSSELL SMITH: Detection most often takes place through work colleagues, seeing some anomaly and what’s happening in the workplace and then investigating it a bit further and then reporting it. Often there are tip offs in particularly in the area of revenue fraud, tax fraud, members of the public will find something unusual about someone’s lifestyle perhaps and then report it to the tax office and then they can take the initiative and investigate it further. Occasionally frauds detected serendipitously just by accident, someone will go on holidays and a replacement person will come into the workplace and then they’ll discover that the bookkeeping really isn’t quite up to scratch, in fact there is a fraud there to be detected, so that’s really an accidental method of detection.
INTERVIEWER: So when the fraud is detected, what kind of reaction do you think the fraudster would have?
DR RUSSELL SMITH: Often fraudsters simply plead guilty, they acknowledge the fact that they have been acting dishonestly, agree with what the police or investigators put before them and are really quite pleased to stop what they have been doing. And that’s often the case with people who have been acting dishonestly for a long period of time, you know sometimes it might have gone on for five or six years and if there’s a problem, gambling issue or some other thing like that then they get into a situation where they really want to stop what they’re doing and change their life. So I think some people acknowledge it, some fraudsters obviously deny it and that might fall into the category of pathological liars and people who are really intent on just keeping on going with their dishonest behaviour. Some fraudsters often deny what’s happened and they tend to use a range of rationalisations of what they have been engaged in. Sometimes they will say that no one is really hurt by the act of fraud, you know, it’s just often government money and no one’s really suffering a personal loss. And finally there is a category which is called higher loyalties and this is where people commit fraud where they’re usually trying to assist a close family member and that might be through purchasing medical treatment or helping someone, a close member of the family and their argument is that they are a duty of loyalty to their family member that is greater than their duty of honesty to the community. But we can use all of those ideas to reduce fraud and in fact if you can challenge those arguments that gives you a very good way of neutralising what the person is arguing so when they say that no one is going to be hurt by it or everybody does it, if you explain it in fact the community does suffer a detriment by what’s happening and in fact there are individuals who are hurt by fraud then maybe they will be less likely to act dishonestly. So it gives you a different perspective on how to try and address some of the motivations.
INTERVIEWER: So knowing all we know now about fraud, what techniques can we use to prevent it from happening?
DR RUSSELL SMITH: There’s a range of business controls that are in place, just ordinary principals of risk management, assessing risks in organisations, having good internal controls so that particular duties are separated so that two people are involved in decision making rather than one and monitoring staff so you that you can see if there are any problems that are arising. In recent years there has been a lot of attention paid to assessing people when they’re recruited for positions so giving them proper tests, sometimes psychological tests to try and assess whether they’re likely to behave dishonestly in the future and although that’s superficially a good idea a predicative validity of those sort of things are not really great. Often people are going to be driven into fraud by factors other than their own personal phycology, it’s more the external circumstances in which they find themselves that are going to most important. But certainly verifying a person’s credentials and making sure they are not submitting false academic records or test armours when they are applying for a job is worth carrying out. Having effective security measures on information and communication systems is critical because most fraud in the 21st century is really carried out using computers in some way or another so having good password credentials, making sure that data flows are monitored carefully and using anti malware, pretty simple standard things that we all should do.
INTERVIEWER: Dr Smith, your insights are fascinating and it makes us think about corruption prevention on a whole other way. Thanks so much for talking with us today.
DR RUSSELL SMITH: It’s a pleasure, thanks.
INTERVIEWER: That was Dr Russell Smith, Principal Criminologist from the Australian Institute of Criminology, answering the question ‘Is there a typical fraudster’. Of course if you want more information about fraud and prevention please go to www.ibac.vic.gov.au