2009 IS THE YEAR OF THE FRAUDSTER

The Psychological Profile of a White-Collar Criminal
By Financial Detective Steve Lee


Los Angeles, California, December 15th, 2009—I’ve been asked to comment frequently on the news this year about a lot of fraudulent business activities in 2009. You’ve seen the headlines every single day, the most well-known among them Bernie Madoff’s Ponzi scheme, continuing with the secret UBS Swiss bank accounts of U.S. tax evaders, and most recently with the Galleon Group’s insider trading debacle.

While fraud certainly persists during periods of economic growth, it conflagrates in economic downturns. Tanking financial market values, depressed real estate, smaller paychecks, reductions in employee headcount, erosion of internal controls, desperation for unrealistic returns, stockholder pressure on corporate officers, scope limitations on audit functions, as well as diminished morale, are the factors that fan the flames of fraud in a down market.

Inside the mind of a white-collar fraudster

What does the archetypal white-collar fraudster look like? Much has been written about fraudster demographics. As a group, fraudsters whether executives or employees are dominated by middle-aged white males, the most notorious among them profiled in magazine cover stories. But, what are they thinking when they commit these crimes? Based on my experience in the field, executive white-collar criminals share the following key attributes:

• Calculating and Justifying. Fraudsters typically calculate potential gains and losses before they decide to commit fraud. They know they are far less likely to go to jail for a $50 million swindle than an armed robber who heists $500 from a bank teller. This knowledge emboldens them. The fraudster justifies his actions with a simple credo: the end justifies the means. In fact, for these individuals, anything can be justified. And that’s where they become dangerous.


• Entitlement. This is a corollary to justification. Many times fraudsters defend their acts by pointing to what they believe they are entitled to. They will frequently explain their behaviors with statements like: “I would have received that money anyway” and “I’ve made a lot of money for this company and this is no more than fair compensation.” It is also typically apparent in their lifestyles. Privately, they almost invariably indulge in various forms of excess that can be astonishing; it may be the 35,000 square foot homes, multiple corporate jets, jewel encrusted Breguet or Chopard watches and/or Bugatti, Ferrari and Lamborghini exotic cars.

• Unrestrained by Ethics. Modern systems of ethics center on behavior that either is consistent with moral principles or creates what ethicists refer to as “the greater good”. While fraudsters frequently talk about ethics and engage in moralizing, their actions are almost always inconsistent with either the greater good or an acceptable set of moral rules. They frequently talk a good game around business ethics, honesty and integrity. Their public actions stand up to a cursory review. Their business activities are often suspicious on a day-to-day basis. They usually spin a cocoon of financial opacity around these activities. It is part of the permission they give themselves to act outside moral principals and the greater good. News making examples include Jeffrey Skilling at Enron, Bernie Ebbers at WorldCom, Bernard Madoff and the allegations surrounding Raj Rajaratnam and his Galleon Fund operations.

• Intuitive Behaviorists. The executive fraudster’s ongoing shenanigans rely on a keen understanding of human behavior. They use bluster, force of personality and charm to deflect skepticism and to prevent insiders from turning on them. They also use incentives, fear of reprisals and a sense of being trapped as a co-conspirator to keep insiders in line. Fraudsters count on the laziness of their victims. They gamble that a suspicious client, employee, board member or colleague is averse to “rocking the boat.” Frauds do not usually survive illumination. Victim and co-worker passivity enables executive fraud.

• Loyalty & Trust. Executive fraudsters inspire loyalty and trust not only among their employees, but also among their clients and business colleagues. As cynical as this may sound, loyalty and trust can be the pavers on the road to fraud. For example, an employer might not question a trusted employee walking out of the warehouse with a box because they assume he is conducting the firm’s business. Similarly, investors may have assumed that Madoff offered no sophisticated web-based account access because he did things the “old fashioned” way or because his methods were so proprietary that such information could give away the Madoff “competitive advantage”. We now know that the real reason was because the securities were not really there, just like the trusted employee might be walking away with the firm’s inventory to his pick-up truck. The executive fraudster bets – usually correctly –that his prey will think, “Whatever you say, you’re the boss/expert/smartest-guy-in-the-room.”

• Smart. There is a popular notion that criminals are stupid. Whereas this may be the case in the realm of violent crime, narcotics, and burglary, it is not true of executive-level fraudsters. In fact, they are among the cleverest people we encounter.

• Overconfidence. This is often where fraudsters get caught. Despite their smarts, high-level fraudsters are superstitious learners. Fraud detectives know that fraudsters sometimes observe a single data point and extrapolate it as though it were a rule. For example, if they get away with one fraudulent move, they become addicted and plan their next move with a falsely bloated sense of security. Among those whose frauds are eventually uncovered, there tends to be a belief that “if they haven’t caught me up to now, they won’t catch me in the future.” It’s just not so.
Frauds tend to expand as they age. The velocity of the fraud and the volume of funds required to support it generally grows geometrically or exponentially while the available resources to support the fraud usually grow linearly. The overconfident fraudster may indulge in believing that what he has concealed now can be remedied or rendered opaque in the future. He contends that when a more ideal environment arises, he can resolve the financial discrepancies created by his fraud. He also tends to underestimate the doggedness of lawyers, auditors, bankers, regulators and others who may investigate the transactions that the fraudster has buried.