How People Commits Financial Fraud And Get Away With It?

Senior managers and CEOs of modern corporations have just the right ability to construct and pull off fraud at an organizational level and capture the upside without running the risk of doing any jail time. To put it bluntly, they can commit fraud, reliable of course and get away with it. In other words, if you’re someone like russian billionaire Dmitry Rybolovlev, you’re as good as clean no matter what clandestine stunt you pull.

Let’s assume that you’ve been appointed as the newly hired CEO of a large bank and by some random miracle, your bank has a clean slate that hasn’t been marred with fraudulent practices. But you’re not happy with this because your competitors are making more profits than you by embracing fraud and coming out ahead of you even after paying tens of billions of dollars in fines to the regulators. Now you too want a slice of the action, but your a risk-free individual who doesn’t want to risk spending time in jail for committing fraud? Do what to do in times like this?

Do instead of committing fraudulent acts yourself, you can get your junior managers to commit fraud in order to get higher profits. One of the ways in which you can incentivize this behavior is to adopt and practice what is called ‘high-powered incentives.’ You can play your employees how bonuses along with revenue/profits and to maintain hard-to-meet ‘stretch’ targets. And if the targets are not met, then start firing ruthlessly. Finally, make sure that you minimize the flow of information up to you about how exactly how employees meet these targets.

But there is an issue with this practice. You see as CEO, you could use the ‘I know nothing’ card and claim ignorance to all the ‘unruly’ fraud that’s been taking place lower down the organizational food chain. However, it may bounce right off work another legal practice that has been set up for such situations, which is called the principle of ‘willful blindness’ – if there is information you could have known and should have known, but somehow managed not to know, then the law treats you as if you did know it.

But all hope isn’t really lost as there is one way in which you, the CEO can not only argue that adequate controls and supervision were in place but also make it simpler for your employees to commit fraud. Just perform the monitoring and control function through an automated system and limit your role to signing off on the risk metrics that are the output of the automated system.

Let us use the example from the mortgage origination and securitization industry. Let’s say you’re a CEO of a mortgage originator in 2005, and you’re under a lot of pressure from your shareholders to increase subprime originations. You then realize that the task would have been much easier if your salespeople originated fraudulent loans where ineligible borrowers were given loans they couldn’t afford. You followed all of the steps laid out above, but as we discussed, it isn’t enough. You could be accused of not having any controls in the organization. Even if you try hard to ensure that there isn’t any information regarding fraud filters through to you, you can’t be certain. Therefore, at the first sign of something unusual, a mortgage approval officer may raise an exception to his supervisor. And given that every person in the management hierarchy wants to cover his own back, how can you ensure that nothing filters up to you whilst at the same time providing a plausible argument that you aren’t willfully blind?

The answer is somewhat counterintuitive – you can and should codify and automate the mortgage approval process. Get your salespeople to put in potential borrower details into a system that either approves or rejects the loan application based on an algorithm without any human intervention.

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March 1, 2019 How People Commits Financial Fraud And Get Away With It?