Overview of Major Fraud Cases and Theories: Lessons from 2009

1. Fraud Report 2009

2. Recent cases • Madoff - $54bn (£38bn) • Allen Stanford - $8bn (£5.6bn) • Kazutsugi Nami, Japanese Ponzi scheme $2.5bn (£1.76bn) • US Ponzi schemes • Nadel $300m • Schrenker • “Chicago suburban businessman ... Tens of millions of dollars” • Satyam $1bn • Langbar £365m

4. Closer to home – BBC News Feb 2009 • “Charity manager jailed for fraud” - £500,000 • “Arrests over £3m mortgage fraud” • “Fraud police arrest city trader” – investment fraud running into millions of pounds • “Man steals from firm to buy toys” - £780,000

5. White collar crime theories • Interactionist theory • Sutherland’s theory of Differential Association • Self control theory • Gottfredson and Hirschi's (1990) • Rational choice theory • Origins of Motivation • Culture of competition • Coleman (1987) • American dream theory • Choo and Tan (2007)

6. Opportunity • Cressey’s Fraud Triangle helps explain the human process for committing fraud Fraud Triangle Motivation Rationalisation

7. Fraud Triangle – Motivation/Pressure • Compulsive behaviours • Gambling, alcohol, illegal drug use • Financial debts • Credit cards, loans • Family problems • Divorce, problems with children • Work pressures • High targets • Greed

8. Fraud Triangle - Opportunity • Opportunity is the perception by someone believing they can commit a fraud without getting caught. • Management controls and influences “opportunity” more than any other factor in the Fraud Triangle. • Management tools are employment checks, internal controls, internal audits.

9. Fraud Triangle - Rationalisation • Justification for fraud: • “They owe me” or “I earned it” • “I need it more than they do” • “It’s only fair” • “I am only borrowing it” • Rationalisation is a form of denial. The person is not accepting reality. • Rationalisation is the hardest area for management to influence or control.

10. International Survey precedents • KPMG (2007) • 70% of fraudsters were between ages of 36 and 55 • 85% were male • 67% acted within 1 to 5 years • 68% acted alone • Detected by: • Whistle blowing 25% • Management review/internal control 31% KPMG (2007) Profile of a Fraudster Survey 2007

11. International Survey precedents • Bussman and Werle (2006) • 41% were aged between 31 and 40 • 87% were male • Detected by: • Tip off 29% • Internal audit 25% Bussman, K.D. And Werle, M.M. (2006) Addressing Crime in Companies, British Journal of Criminology, 46, 1128-1144.

13. Background • There were 69 respondent organisations • Survey focused on assessing the level of employee fraud, and • Evaluating the basic control procedures in place to reduce the risk of fraud occurring • Almost one-third of respondents had discovered a fraud in the last 2 years

14. Sample profile • 57% were service companies and most were private limited companies

15. 40 per cent had no fraud prevention measures

16. Two thirds of organisations perceive fraud as a risk to their industry

17. 31 per cent only regard prevention as “slightly important”

18. 43 percent internal controls and audit • 29% tip-offs

19. Costs of fraud • BDO Stoy Hayward Fraud Track team noted that in 2008 reported fraud in the UK was up 14 per cent on the previous year • Actual fraud in the UK much higher, the Home Office estimate for cost in 2003/04 was £16bn • Survey fraud cases showed a wide range of fraud types from cash skimming to financial statement fraud and asset misappropriation • Average value £74k range £500 to £1m • Average total cost was £435k with a high of £4m

20. Costs of fraud • Other studies show that up to 50 percent of a business’ sales can be taken in the worst cases • Less than 20 per cent of defrauded sums is recovered • In this study only 36% of the cases were reported to the police • Concern over organisational reputation given as the main reason

21. Average age of 37 with less than 5 years service

22. 86 percent male

24. Risk Management Measures • 60 per cent have a standard risk management policy in place • 66 per cent have pre-employment screening • 62 per cent conduct regular risk and threat assessments • Only 30 per cent have implemented a fraud awareness programme • 34 per cent have any educational programme on fraud

25. Risk Management Measures • The ACFE study in the USA found: • In companies with specific fraud training, median levels of fraud were reduced by 52 per cent • Companies who had instituted an anti fraud policy showed a 49 per cent reduction

29. Survey key findings • Two thirds of businesses perceive fraud to be a risk in their industry • Less than one third have a fraud awareness programme or any educational programme relating to the threat of fraud • Nearly 70 per cent believe fraud will increase in the near term mainly as a result of the economic downturn • 40 per cent do not have fraud prevention measures in place

30. Survey key findings • Almost one third of organisations had discovered a fraud in the last two years • Discovery mainly through internal audit and tip-offs

33. Contact details • Richard Trafford • 023 92 84 4121 • richard.trafford@port.ac.uk

34. Questions ?