Course Introduction
Course Content

What Happens When Responsibility is Delegated?

Although we can control our own behavior, we don’t always have an ability to know how others will behave. When business leaders delegate responsibilities, they simultaneously raise their level of risk. Business leaders may not know what a team member is saying to a customer or how that team member may be acting in fulfilling job responsibilities. When that happens, the team member may expose the entire company to interference from regulators, or losses from internal fraud.

For example, consider Justin, a co-founder of one of our companies.

Justin graduated from USC and went on to become a stockbroker. While employed as a stockbroker at UBS, he executed market trades on behalf of people that managed private hedge funds. In that role, Justin had insight into account balances for the clients he served; he could also review balances in each of the client accounts at the hedge-fund. UBS trusted Justin took to look after the interests of his clients, and also after the interests of the firm.

When Justin walked into a meeting with one of his clients, he also met with people who had invested in the hedge fund. Those investors showed Justin an account statement that they had received from the hedge-fund manager. When Justin saw the statement, he knew at once that the document had been fraudulently inflated. His client had manipulated the statement to show balances that the client wanted to see, rather than what the account held.

Justin had been earning enormous commissions from the account. Despite seeing first-hand evidence of the fraud, he chose to remain quiet so as not to disturb the income stream from commissions. Rather than reporting the fraud, Justin allowed his client to continue deceiving investors. As a result, Justin immersed himself into an internal fraud that cost his employer millions of dollars. When authorities discovered the fraud, Justin lost his job.

Justin had deceived himself into believing that since he wasn’t the person manipulating the financial statements, he wasn’t responsible. Yet by continuing to claim commissions for trades that he knew had been predicated on fraud, he became complicitous. Fraud charges may stem from direct participation, or even from the observation of others that participate in fraud. As a result of his complicity, prosecutors brought criminal charges against him. While in prison, he said that while he was in the midst of the crime, he didn’t realize the extent of his wrongdoing.

Business leaders and team members can learn from such examples. Many people do not set out to participate in fraudulent schemes. They fall into situations on the job or go through complications in life. Those situations can lead to a dilemma; doing the right thing can have bad consequences:

  • A person can lose an income stream,
  • A person can be ostracized on the job, and
  • A person may have to serve as a witness against someone he or she cares about.

We’d like to believe that people of good character always act appropriately. Yet with the growing number of guilty pleas for white-collar crimes like fraud, bribery, or other types of self-dealing acts, people’s characters are constantly tested.

Our team at Compliance Mitigation believes that business leaders would, therefore, be wise to invest more time and resources in training. Despite good intentions, opportunities or bad actors can tempt people. And people can delude themselves with all types of lies to excuse their behavior. When they do, they put their liberty on the line, and they expose the company to enormous costs.

Business leaders that invest time to train may lower a company’s risk profile and a company’s vulnerability to internal fraud. In earlier modules, we’ve noted three components that may increase possibilities for fraud:

  1. Financial Pressure: significant personal debt, credit problems, or some kind of emergency.
  2. Opportunity: the ability and capability to take advantage of an opening in either your security system or system of checks and balances. 
  3. Rationalization – justifications for illicit actions.

Since most people don’t seek employment with an intention to commit fraud, it’s difficult to predict a person’s character during the hiring process. The thought of committing fraud usually occurs over time as circumstances and/or disillusionment sinks in. For this reason, compliance programs should task a specific individual with the responsibility of conducting spot checks, or audits, with an expressed goal of looking for signs of internal fraud.