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Public Finance for Public Administration, Northwestern University May 27th, 2014. THE PSYCHOLOGY OF FRAUD Daven Morrison MD Morrison Associates, Ltd. Asst. Clinical Professor of Psychiatry, Chicago Medical School Subject Matter Expert , Institute of Fraud Prevention.

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public finance for public administration northwestern university may 27th 2014

Public Finance for Public Administration, Northwestern UniversityMay 27th, 2014

THE PSYCHOLOGY OF FRAUD

Daven Morrison MD

Morrison Associates, Ltd.Asst. Clinical Professor of Psychiatry,

Chicago Medical SchoolSubject Matter Expert,

Institute of Fraud Prevention

slide2

What a tangled web we weave when first we practice to deceive.

Marmion

an epic poem

Walter Scott, 1808

slide3

“As a fraudster, I succeeded for almost two decades because I understood how to exploit the psychological and emotional weaknessesof my victims. This book teaches auditors and antifraud professionals about fraud psychology, the “soft underbelly of fraud” —the emotional manipulation, big and small lies, and other behavioral cues that fraudsters employ to successfully execute their crimes. I call it the art of spinning, and the authors have described it as the predator-prey dance. Without such an understanding of the behavioral dynamics of fraud, victims will always be doomed to lose (lots of money) and fraudsters will always have the upper hand.”

—Sam E. Antar

Former Crazy Eddie CFO, former CPA,

and a convicted felon

alan greenspan what went wrong
Alan Greenspan: What Went Wrong
  • I\'ve always considered myself more of a mathematician than a psychologist. It all fell apart, in the sense that not a single major forecaster of note or institution caught it.
  • The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely.
    • “What Went Wrong”
    • Alexandra Wolfe
    • WSJ, Oct 18, 2013
defining fundamentals
DEFINING FUNDAMENTALS

FRAUD

White Collar Crime

Caveat Emptor

recent cases of fraud in the news
Recent Cases of Fraud in the News
  • NY Times: Fraud in Army Recruiting Bonus Program May Cost Nearly $100 Million
  • Chicago Tribune: Republican Party wing creates 18 fake websites for Democrats
  • WSJ: Ex-SAC Trader Found Guilty
  • My inbox: Dewey-Leboef Law Firm
  • Chicago Drivers use old stubs to fake parking payments
  • Rita Crundwell
  • Jesse Jackson
  • Retailers’ Theft Interviews: Fraudulent confessions
  • LIBOR
  • Raj Rajaraptnam
questions for today
Advances are made by answering questions. Discoveries are made by questioning answers. Bernard Haisch; Director, Calphysics InstituteQuestions for Today
a b c s of behavioral forensics
A.B.C.’s of Behavioral Forensics

I: When Fraud Is Committed

  • Ch 1 Fraud Is Everywhere
  • Ch 2 The Sins of Quantification
  • Ch 3 Beyond the Fraud Triangle . . .

II: The Foundations:

  • Ch 4 . . . into the Mind
  • Ch 5 “Said the Spider to the Fly”
  • Ch 6 The Accidental Fraudster
  • Ch 7 The Bad Bushel and Beyond

III A Call to Action

  • Ch 8 The Ecology of Fraud: What You Can Do on Monday Morning
  • Ch 9 The Future of Behavioral Forensics
a b c s of fraud other resources
A.B.C.s of Fraud: Other Resources
  • Original Paper: http://theifp.org/research-grants/IFP-Whitepaper-3.pdf
  • Blog
fraud ideas from a b c text highlights of bringing freud to fraud
Fraud: Ideas from “A.B.C.” Text:Highlights of Bringing Freud to Fraud

IS

IS NOT

  • A Human Act
  • Driven by emotions
  • Natural
  • Expensive
  • Likely reflects a “change of mind”
    • A.B.C.’s of Behavioral Forensics
  • Mental Illness
  • One size fits all
  • Not a “shameless” act
  • Easily profiled
  • A “solo” act
recent cases of fraud in the news1
Recent Cases of Fraud in the News
  • NY Times: Fraud in Army Recruiting Bonus Program May Cost Nearly $100 Million
  • Chicago Tribune: Republican Party wing creates 18 fake websites for Democrats
  • WSJ: Ex-SAC Trader Found Guilty
  • My inbox: Dewey-Leboef Law Firm
  • Chicago Drivers use old stubs to fake parking payments
  • Rita Crundwell
  • Jesse Jackson
  • Retailers’ Theft Interviews: Fraudulent confessions
  • LIBOR
  • Raj Rajaraptnam
questioning answer 2 greed is the motivation
Questioning Answer #2: Greedis the motivation

What is Happening in the Mind?

the fraud triangle
THE FRAUD TRIANGLE

Opportunity: Find a hole in accounting process

FRAUD

Rationalize:

Justify theft to self

Pressure/Incentives: Knowingly commit fraud for a perceived need

the fraud triangle in motion
THE FRAUD TRIANGLE IN MOTION

Step One: Opportunity

Find a hole in accounting/oversight process

The “unofficial”legal line

FRAUD

Step Two: Pressure Knowinglycommit fraud for a perceived need

Step Three: Rationalize

Fraud is expensive over time

$$$

$$$$$

the values of the 8 motivational states
The Values of the 8 Motivational States

Serious

Achievement

Conforming

Mastery

Fitting In

Control

Individualism

Self

Collectivism

Other

Caring

Freedom

Rebellious

Sympathy

Enjoyment

Playful

Playful

how honesty reverses
How Honesty Reverses

STARTING Motivation:

Follow the rules

The “unofficial” legal line

Fraud

FINAL Motivation: Disobey the rules

?

!

Fraud Perpetration requires repetition

Question: Do I keep the money?

Answer: Yes

The Reversal

slide21

START: Rules Matter

  • Motivations to sustain fraud (rationalizations)
  • Self: They don’t care ‘bout me
  • Other: I need $ for our medical bills
  • Play: who can catch me?
  • Mastery: Now they will know who’s boss!
  • 4 More possible motivations

Sustaining Large Scale Fraud is

Sustaining the Reversal

Fraud

Over time the fraudster’s believes:

“the rules are not for me”

Reversal

$$

$$$$$

Time remains the enemy . . . because the cost grows

slide22

Motivations to recruit others (rationalizations)

  • Self: They don’t care ‘bout you!
  • Other: Youneed $ for our medical bills
  • Play: who can catch us?
  • Mastery: Now they will know we ‘re in charge!
  • 4 More possible motivations

START: Rules Matter

Fraud

Over time the fraudster’s TEAM believes:

“their rules are not for us”

Reversal

$$$$$

$$

Time/Title is the enemy . . . As the cost grows

Sustaining large frauds requires getting

others to Reverse Motivation

mark whitacre
Mark Whitacre

Video example

questioning answer 3 the answer to halting fraud is a profile
Questioning Answer #3 The answer to halting fraud is a: Profile

What is Happening in the Mind?

recent banking fraud scenario
Recent Banking Fraud Scenario

Friday Afternoon, Wire Transfer

predatory fraud is a dance
Predatory Fraud is a Dance
  • Predator
    • Nigerian Prince(ss)
    • Spider
    • Madoff
  • Prey
    • Grandma
    • Fly
    • Madoff’s friends
important topics and negative affect
IMPORTANT TOPICS AND NEGATIVE AFFECT

Trivial

Important

IMPORTANT

IMPORTANT

TOPICS: IMPORTANT

IMPORTANT

IMPORTANT

Important

Trivial

the progression examples i and ii we i need money 419
The Progression, Examples I and II: We (I) Need Money 419
  • Excitement
    • Enjoyment
    • Fear
          • The A.B.C.s p. 236
  • Shame
    • Distress
    • Excitement
innate affects from tomkins
INNATE AFFECTSFrom Tomkins

Positive1. Interest—excitement

2. Enjoyment—joy

Neutral3. Surprise—startle

Negative 4. Fear—terror

5. Distress—anguish

6. Anger—rage

7. Shame—humiliation

8. Contempt (Dissmell)

9. Disgust

affects as data and the brain the a b c s appendix b
Higher CPUs:

Blends of blends (Prefrontal Cortex)

Blends of emotion (Paralimbic)

Discrete emotions (Limbic)

Action tendencies (Diencephalon)

Affects as Data and the BrainThe A.B.C.s: Appendix B

Richard D. Lane and David A. S. Garfield,

“Becoming Aware of Feelings: Integration of Cognitive-Developmental, Neuroscientific, and Psychoanalytic Perspectives,”Neuropsychoanalysis 7, no. 1 (2005): 5–30

recent banking fraud scenario1
Recent Banking Fraud Scenario

Friday Afternoon, Wire Transfer

predator tactics
Predator Tactics
  • Masking
  • Dazzling
  • Decoying
  • Mimicking
  • Repackaging
  • Double Play
    • The A.B.C.’s p 182
the seduction of the profile
The Seduction of the Profile

Imagine how hard physics would be if particles could think.

  • Murray Gell-Man, Physics Nobel Laureate
summary
Summary

Two new ways of thinking means questioning answers:

  • Blaming “Greed” will limit your seeing the larger ecology/environment of fraud
  • Profiling Employees will make more anxiety and distance than you want and will provide a road map for those fraudsters motivated to read from the play book!
affects are the tracer bullets flying on the battlefield of fraud

Affects are the tracer bullets flying on the battlefield of fraud

What level of the human brain is your team using?

GOOD LUCK!

fraud ideas from a b c text two new models bringing freud to fraud
Fraud: Ideas from “A.B.C.” Text:Two New Models: Bringing Freud to Fraud

The Bad Apple?

Predatory vs Accidental

  • Who is (s)he?
  • What about the victim?
  • Is there a Bad Bushel or Crop?
    • ABC’s of Behavioral Forensics
  • What is in the Headlines?
  • What is most common?
  • What do you need to know about each of them?
professional competence
Professional Competence

Professor Harry Kraemer, MBA

Having the Answer vs Getting the Answer

100%

Interpersonal Knowledge

Knowledge

Percentage

Technical

Knowledge

0%

TIME on the JOB

Day One

First Year

tone at the top executive assessment

Tone at the Top:Executive Assessment

Strengths and Weaknesses in Judgment

effective judgment

Emotional Elements

Impulsive

Procrastinate

Shame

Emotional energy

Changing Conceptual Sets

Act

Predict interpersonal environment

Competitiveness

Practical problem solving

Standards

Verbal Abstractions

Boil Down To Essence

Need for nurturance

Trust

Collect All Relevant Available Data

Need for structure

High

Minimal

Relationships

Task

Tolerance of ambiguity

Low

High

Effective Judgment
executive judgment
Executive Judgment

Strengths

Vulnerabilities

  • Strong Perceptions in ambiguity
  • Strong intellect in abstractions, and practical problem solving
  • Work Ethic
  • Reality-based approach (pragmatic)
  • Narcissism
  • Poor Capacity to read Emotions and fit with Context (EQ)
  • Hyper-Competitiveness
  • Absent Self-Reflection
  • At risk of mid-life challenges
bad bushels and beyond leadership tone
Bad Bushels and Beyond: Leadership Tone
  • The Role of Psychopathy
    • The A.B.C.s Ch 5
  • The Role of Narcissism
      • The A.B.C.s Ch 7
  • The role of the Charismatic Leader
    • The A.B.C.s Ch 7
  • The Challenge of the Entrepreneur
  • The critical answer to question
clients when does your organization say no to a client
Clients: When does your organization say “no” to a client?
  • Corporate
    • What are the clients sharing?
    • What is the tone of their leadership?
    • How self-reflective are they?
    • How do they make you feel?
    • Is there Narcissism in leaders?
    • How charismatic are they?
      • Do the leaders understand and manage their executive presence?
  • Individuals
    • Are they at risk of being victim of an email scam?
      • Distress?
      • Excitement?
      • Pride? Narcissism?
    • What of the family
      • What is their tone?
      • Is there potential for fraud in the family?
employees
Employees

Avoid Accidentals

Innoculate against Predators

  • When do they get the message to “do the right thing” vs ask if it’s legal?
  • Do they have a reason to feel taken advantage of by the organization and want something in return?
  • Are they emotionally competent?
  • Can they be seduced by a predator?
  • How would a fraudster turn the culture to his advantage?
  • What are the subcultures that put the organization at risk?
vendors who interfaces with them
Vendors:Who interfaces with them?
  • Service Providers to the organization
  • Providing Service to Clients
leadership
Leadership
  • What is the tone of the leadership?
    • Do the leaders understand their presence?
  • How well do they understand emotions?
    • Are they competent?
    • Are they creating a sense of belonging or alienation?
    • Interpersonal Misfits are a breeding ground for risk/fraud?
    • How competitive are they?
  • Are there Charismatic-Leader Follower Dynamics?
  • Do they understand their impact on culture?
op risk officers
Op Risk Officers

Managing Organizational Operational Risk

Running and growing the Organization

  • Acts of Nature
  • Theft
  • Sabotage (non-IT)
  • Work Place Violence
  • Hackers: internal, external, contractors
  • Fraud
  • Navigate Regulators
  • Recruit and Retain Top Talent
  • Leverage Core Organizational Competencies
  • Asked early in the planning of new initiatives – is your perspective sought out? . .. Or avoided.
to sell the challenge of convincing leadership to address fraud
To SELL: The challenge of convincing leadership to address fraud

What you need

What they need

  • Their attention
  • Their understanding
  • Their perspective
  • Their willingness to change
  • Your understanding of the business/strategy
  • Your willingness to change
  • Your efforts in executing the strategy
required dialogue on risk
Required Dialogue on Risk

Regulators

Internal Governance

Securities Traders

Safe Zone

0% Low

High 100%

slide56

H C A G E

F A D E B

Affects are Data

fraud defined
Fraud Defined

A generic term, embracing all multifariousmeanswhich human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. . . .

Elements of a cause of action for “fraud” include false representation of a present or past fact made by defendant, action in reliance thereupon by plaintiff, and damage resulting to plaintiff from such misrepresentation.

Black’s Law Dictionary

white collar crime
White Collar Crime
  • “Those classes of nonviolent illegal activities which principally involve traditional notions of deceit, deception, concealment, manipulation, breach of trust, subterfuge or illegal circumvention.”
  • Caveat Emptor
op risk ny city
Op Risk NY City

Federal Reserve Bank of Chicago

  • Operational Risk Specialist

ABU Dhabi Investments Authority

  • Deputy Director

Intact Financial Corporation

  • Vice President

Freddie Mac

  • VP Internal Controls

International Monetary Fund

  • Accountant

US Securities and Exchange Commission

  • Staff Accountant

National Bank of Canada

  • Vice-President, Operational & Reputation Risks

ABU Dhabi Investment Authority

  • Senior Manager

Santander Director of Technology & Operations

Banque Pictet & Cie SA

Banco Bradesco SA - Controller

Brazilian Development Bank – BNDES

  • Operational Risk Manager

Banco de Mexico Deputy - Manager

IMF Accountant (2)

UniCredit Bank AG - Managing Director

Banco Bradesco S/A- Compliance Analyst Sr.

Zions Bancorporation

  • Risk Management Administrator

Banco de la Republica - Deputy Manager

a psychiatrist s perspective
A Psychiatrist’s Perspective

Getting into the Mind of the Fraudster

An Exploration of your Challenges

Actions to Consider: Convincing Leadership to take it Seriously

background focus on private industry
Background: Focus on Private Industry
  • Morrison Associates, Ltd.
    • Arthur Andersen
    • Continental Bank
    • Conseco Insurance
    • Food Lion
  • Daven Morrison
    • Psychiatric Resident and Chief Resident (1996)
    • Morrison Associates since 1996
    • Consultation to Leadership Teams
    • Anti-Fraud Efforts
      • Institute of Fraud Prevention
      • Tomkins Institute of Emotion and Cognition
      • Senior Editor and Author: The A.B.C.s of Behavioral Forensics
dixon illinois
Dixon Illinois

The Best Reason Ever to have Professional Management

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