Fraud Triangle

People like David, in the previous example, may not set out to engage in fraudulent behavior but unforeseen circumstances can impact behavior. Educators identify a “Fraud Triangle” that, theoretically, create a perfect storm for fraud. The three corners of the triangle include:

• Opportunity: A person like David Smith had to be in the position that would allow him to create the scheme. If he were not in a managerial position, he would not have been able to initiate the scam.
• Pressure: David Smith’s supervisors may have considered him a competent, trustworthy employee. They may not have known pressures he felt in his personal life.
• Rationalization: A person like David Smith may think that the company is so big and profitable that no one would even notice the missing funds.

Although hindsight is 20/20, we can always learn from real case studies:

• What if Quest Diagnostics invested more resources in its compliance systems?
• What if the training systems included lessons on the high costs of corporate fraud, both for the business and for the people that knowingly engage in white-collar crime?

David Smith may have been in a position to commit the fraud, he may have felt pressure, and he may have been able to rationalize his crime. The question remains: would better training have convinced him to act with more integrity?

WorldCom and Internal Fraud:

Further consider the example of Walt Pavlo, a person who writes a popular column for Forbes online. In January 2001, a federal judge sentenced Walt Pavlo to 41 months in federal prison. The sentence followed Pavlo’s conviction for white-collar crimes that included money laundering, wire fraud, and obstruction of justice.

Walt had worked hard to earn an engineering degree and an MBA. Those credentials led to a leadership position at MCI WorldCom, one of the world’s most valuable companies at the turn of the century. In his role as a finance manager, Walt described pressure he felt to report higher revenues than the company earned. The supervisors that oversaw his department wanted to boost WorldCom’s financial performance, likely with pressure from the top. When Walt saw that other leaders entered fraudulent transactions, he felt justified to create his own fraud to enrich himself.

Ordinary people may not expect a multi-billion-dollar, global corporation like WorldCom to engage in fraud. Neither would they expect a family man with a professional education to exploit the fraud he discovered—then create his own scam.

Members of our team have met and interacted with thousands of people that served time for white-collar crimes. Despite leading or working with companies that had compliance-training manuals, they did not get the message.

Human Stories of Noncompliance and Fraud:

To make compliance a part of any corporate culture, leaders should include regular training that includes real-life stories. Those stories will help all team members appreciate the magnitude of problems that come with a government investigation. When leaders and team members grasp the severity of consequences, fewer people will participate in the type of behavior that can increase risk levels for businesses and organizations.

As an added bonus, by investing in compliance training that works, businesses and individuals may qualify for leniency or mitigation in the event that investigators begin asking questions.

It’s impossible to predict who might commit fraud within an organization. The vast majority of people that engage in white-collar crime do not have criminal histories. Yet as the theory of the fraud triangle suggests:

• those people may be in a position to commit fraud;
• they may feel pressure that induces them to participate in fraud;
• they may rationalize their behavior for any number of reasons.

Good training may lower risk levels for businesses and for individuals. Consider statements that our team at Compliance Mitigation found during research for the creation of our course materials:

• According to Carnegie Mellon University’s report on Insider Fraud in Financial Services, employees working in accounting, operations, sales, upper management, customer service, purchasing, and finance commit 75% of all corporate fraud.
• Employers frequently assume that people always act with integrity, even after being hired. Since businesses incentivize managers to focus on meeting targets and goals rather than detecting fraud, commitment to ongoing compliance training frequently suffers.
• In a report that Intel published, Grand Theft Data, inside sources cause 42% of all company security breaches. Those security breaches can lead to government investigations and litigation, exposing businesses and individuals to enormous levels of stress.
• Corporate fraud represents one of the government’s highest criminal priorities. The FBI estimates that white-collar crime costs Americans more than $300 billion annually. Those crimes run the gamut, from accounting schemes designed to deceive management, investors, auditors, and analysts about the true financial condition of a company, to cases involving fraud on the government and insurers, vendors, and clients.  Government agencies scrutinize telemarketers, brokers, crypto currency businesses, cannabis, financial services, and the healthcare field.
• The FBI partners with numerous agencies to capitalize on their experience in specific areas such as securities, taxes, pensions, energy, and commodities. The Bureau has placed greater emphasis on investigating allegations of these frauds, and FBI agents frequently broaden their reach by partnering with other agencies, such as the:
  • Securities and Exchange Commission
  • Commodity Futures Trading Commission
  • Federal Trade Commission
  • Internal Revenue Service
  • Department of Labor
  • Federal Energy Regulatory Commission,
  • US Postal Service
  • Secret Service.
• The Department of Homeland Security has its own independent mandate to criminally pursue fraud, financial crimes involving blackmail, contract fraud, grant fraud, money laundering, bribery, immigration fraud and program theft. 
• Government investigations are likely to increase as a result of COVID-19. The CARES Act, subjects companies to additional scrutiny by establishing three new oversight bodies:
  1. the Office of the Special Inspector General for Pandemic Recovery within the Treasury Department;
  2. the Pandemic Response Accountability Committee, consisting of the IGs for Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor and the Treasury, among others; and
  3. the Congressional Oversight Commission.  In fact, dozens of cases have already been brought in connection with abuse of the Payroll Protection Program (PPP).