Embezzlement. Financial statement fraud. Ponzi schemes. Online dating scams. Elder fraud. The varieties of grift are only limited by the human imagination. But what every fraud has in common is the con artist’s talent for making lies seem true.
The very best conmen do it by exploiting our vulnerabilities. Romance scammers exploit people’s isolation. Ponzi schemers like Bernie Madoff exploit investors’ greed. Keith Raniere, leader of the Nxivm cult (made famous in a recent HBO series), exploited women’s ambitions and insecurities. And grifters of all kinds exploit the innate human desire to believe.
“A world immune to Ponzi schemes is a world utterly devoid of trust, and no one wants to live in a world like that,” writes Madoff biographer Diana B. Henriques in The Wizard of Lies: Bernie Madoff and the Death of Trust. “No healthy economic system can function in a world like that.”
Famous fraudsters like Madoff, Raniere, and Charles Ponzi are showmen, operating on a grand scale. Some are most likely sociopaths. But even small-time embezzlers share traits with the greats — chiefly, the ability to rationalize their actions. “The first big lie a Ponzi schemer has to tell is to himself, that he will get away with it it somehow,” said Henriques in an interview with PursuitMag. “That ability to simply shut the door on inconvenient and uncomfortable truth is essential to being a con artist.”
But personality alone isn’t enough to induce someone to commit fraud; they must also have reason and opportunity.
The Fraud Triangle, created by Donald R. Cressey and Edwin Sutherland, illustrates this in a simple geometry — the combination of psychology, external motivation, and situation that can lead someone to break the law. We’re sure you know this image very well by now:
The Fraud Triangle is an excellent tool for helping fraud investigators envision the whys and hows of fraud. What’s tougher is accepting that none of us — even streetwise, skeptical investigators — are entirely immune to being conned. Humans are not nearly as good at detecting deception as we think we are. Research shows that education, experience, and high intelligence do not necessarily make people less likely to fall prey to scammers. (If this Harvard Law professor can be taken in, anyone can.) And often, the worst of it isn’t the stolen money; it’s the loss of trust, the lives shattered by betrayal, and the terrible shame of being played.
But as Madoff biographer Diana Henriques pointed out in an interview with us, there are strategies for protecting yourself, your clients, and your business from fraudsters. First, do your due diligence — the more facts you know about a subject, the more likely you’ll be to sort truth from lies. “Do not encounter a liar unprepared,” says Henriques.
A dose of humility can also be of use; understanding your own vulnerabilities might help you sense when someone is probing a weak point. And once you detect those red flags, you’re better positioned to turn the tables — and launch your own investigative probe.
This month we’ll explore occupational fraud and the ways scammers are exploiting the Covid-19 pandemic. Look for articles this month by David P. Weber, an attorney, CFE, and forensic accounting professor who’ll also be our November webinar guest. And you can pitch your own case studies of fraud and fraud investigations by emailing managing editor Kim Green.
In the meantime, enjoy our archive of fraud and deception articles by our excellent trove of contributors. Scroll down for a deep-dive study.
Intellectual Property Case 1: Trapping an eBay Counterfeiter
“At our investigative agency, we participated in a nationwide sting on an eBay counterfeiter who was boldly re-selling a major pharmaceutical company’s products. We say ‘boldly’ because this individual was openly advertising the products on a website as well as on eBay. In a coordinated sting operation, different PIs in selected locales around the U.S. made undercover purchases of the counterfeited products over a short period. Afterward, each of us forwarded documentation of the purchases and any written documentation, including notarized affidavits of the same, to the law firm representing the pharmaceutical company. Although we haven’t followed the outcome of the legal hearings, we don’t see this individual hawking these counterfeit products anymore!” —Colleen Collins, North Denver Investigations