Upload
ramona-golden
View
17
Download
2
Tags:
Embed Size (px)
DESCRIPTION
Public Finance for Public Administration, Northwestern University May 27th, 2014. THE PSYCHOLOGY OF FRAUD Daven Morrison MD Morrison Associates, Ltd. Asst. Clinical Professor of Psychiatry, Chicago Medical School Subject Matter Expert , Institute of Fraud Prevention. - PowerPoint PPT Presentation
Citation preview
+
Public Finance for Public Administration, Northwestern UniversityMay 27th, 2014
THE PSYCHOLOGY OF FRAUD
Daven Morrison MDMorrison Associates, Ltd.Asst. Clinical Professor of Psychiatry,Chicago Medical SchoolSubject Matter Expert,Institute of Fraud Prevention
What a tangled web we weave when first we practice to deceive.
Marmion an epic poem
Walter Scott, 1808
“As a fraudster, I succeeded for almost two decades because I understood how to exploit the psychological and emotional weaknesses of my victims. This book teaches auditors and antifraud professionals about fraud psychology, the “soft underbelly of fraud” —the emotional manipulation, big and small lies, and other behavioral cues that fraudsters employ to successfully execute their crimes. I call it the art of spinning, and the authors have described it as the predator-prey dance. Without such an understanding of the behavioral dynamics of fraud, victims will always be doomed to lose (lots of money) and fraudsters will always have the upper hand.”
—Sam E. AntarFormer Crazy Eddie CFO, former CPA,
and a convicted felon
+Alan Greenspan: What Went Wrong I've always considered myself more of a mathematician than a psychologist. It all fell apart, in the sense that not a single major forecaster of note or institution caught it.
The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely.
“What Went Wrong” Alexandra Wolfe WSJ, Oct 18, 2013
+Recent Cases of Fraud in the News NY Times: Fraud in
Army Recruiting Bonus Program May Cost Nearly $100 Million
Chicago Tribune: Republican Party wing creates 18 fake websites for Democrats
WSJ: Ex-SAC Trader Found Guilty
My inbox: Dewey-Leboef Law Firm
Chicago Drivers use old stubs to fake parking payments
Rita Crundwell
Jesse Jackson
Retailers’ Theft Interviews: Fraudulent confessions
LIBOR
Raj Rajaraptnam
+Questions for Today
Advances are made by answering questions. Discoveries are made by questioning answers. Bernard Haisch; Director, Calphysics Institute
+A.B.C.’s of Behavioral Forensics
I: When Fraud Is Committed Ch 1 Fraud Is Everywhere Ch 2 The Sins of Quantification Ch 3 Beyond the Fraud Triangle . . .
II: The Foundations: Ch 4 . . . into the Mind Ch 5 “Said the Spider to the Fly” Ch 6 The Accidental Fraudster Ch 7 The Bad Bushel and Beyond
III A Call to Action Ch 8 The Ecology of Fraud:
What You Can Do on Monday Morning
Ch 9 The Future of Behavioral Forensics
+A.B.C.s of Fraud: Other Resources
• Original Paper: http://theifp.org/research-grants/IFP-
Whitepaper-3.pdf
• Blog
+Fraud: Ideas from “A.B.C.” Text:
Highlights of Bringing Freud to Fraud
A Human Act Driven by emotions Natural Expensive Likely reflects a “change
of mind” A.B.C.’s of Behavioral Forensics
Mental Illness One size fits all Not a “shameless” act Easily profiled A “solo” act
IS IS NOT
+Recent Cases of Fraud in the News NY Times: Fraud in
Army Recruiting Bonus Program May Cost Nearly $100 Million
Chicago Tribune: Republican Party wing creates 18 fake websites for Democrats
WSJ: Ex-SAC Trader Found Guilty
My inbox: Dewey-Leboef Law Firm
Chicago Drivers use old stubs to fake parking payments
Rita Crundwell
Jesse Jackson
Retailers’ Theft Interviews: Fraudulent confessions
LIBOR
Raj Rajaraptnam
+
FRAUD
THE FRAUD TRIANGLE
Rationalize: Justify theft to self
Opportunity: Find a hole in accounting process
Pressure/Incentives: Knowingly commit fraud for a perceived need
+
FRAUD
THE FRAUD TRIANGLE IN MOTION
Step Three: Rationalize
Step One: Opportunity Find a hole in accounting/oversight process
Step Two: Pressure Knowingly commit fraud for a perceived need
The “unofficial”legal line
Fraud is expensive over time
$$$ $$$$$
+The Values of the 8 Motivational States
19
Serious
Rebellious
Other
Playful
ConformingMastery
Sympathy
ControlFitting In
Individualism
Caring
Achievement
Enjoyment
Collectivism
Freedom
Playful
Self
+
Fraud
How Honesty Reverses
Answer: YesQuestion: Do I keep the money?
STARTING Motivation:
Follow the rules
FINAL Motivation:
Disobey the rules
The “unofficial” legal line
? !
The Reversal
Fraud Perpetration requires repetition
+
Fraud
Reversal
START: Rules Matter
Sustaining Large Scale Fraud is
Sustaining the Reversal Motivations to sustain fraud
(rationalizations)•Self: They don’t care ‘bout me
•Other: I need $ for our medical bills
•Play: who can catch me?
•Mastery: Now they will know who’s boss!
•4 More possible motivations
$$$$$$$
Time remains the enemy . . . because the cost grows
Over time the fraudster’s believes: “the rules are not for me”
Fraud
Reversal
START: Rules Matter
Sustaining large frauds requires getting
others to Reverse Motivation Motivations to recruit others
(rationalizations)•Self: They don’t care ‘bout you!
•Other: You need $ for our medical bills
•Play: who can catch us?
•Mastery: Now they will know we ‘re in charge!
•4 More possible motivations
$$$$$$$
Time/Title is the enemy . . . As the cost grows
Over time the fraudster’s TEAM believes: “their rules are not for us”
+ Predatory Fraud is a Dance
Predator Nigerian Prince(ss) Spider Madoff
Prey Grandma Fly Madoff’s friends
+IMPORTANT TOPICS AND NEGATIVE
AFFECT
Trivial
Important
IMPORTANT
IMPORTANTTOPICS: IMPORTANT
IMPORTANTIMPORTANT
Important
Trivial
+The Progression, Examples I and II: We (I) Need Money 419
ExcitementEnjoymentFear
The A.B.C.s p. 236
ShameDistressExcitement
+INNATE AFFECTS
From TomkinsPositive 1. Interest—excitement2. Enjoyment—joy
Neutral 3. Surprise—startle
Negative 4. Fear—terror5. Distress—anguish6. Anger—rage7. Shame—humiliation8. Contempt (Dissmell)9. Disgust
+Affects as Data and the BrainThe A.B.C.s: Appendix B
Richard D. Lane and David A. S. Garfield, “Becoming Aware of Feelings: Integration of Cognitive-Developmental, Neuroscientific, and Psychoanalytic Perspectives,” Neuropsychoanalysis 7, no. 1 (2005): 5–30
+The Seduction of the Profile
Imagine how hard physics would be if particles could think.
Murray Gell-Man, Physics Nobel Laureate
+Summary
Two new ways of thinking means questioning answers:
Blaming “Greed” will limit your seeing the larger ecology/environment of fraud
Profiling Employees will make more anxiety and distance than you want and will provide a road map for those fraudsters motivated to read from the play book!
+
Affects are the tracer bullets flying on the battlefield of fraud
What level of the human brain is your team using?
GOOD LUCK!
+Fraud: Ideas from “A.B.C.” Text:
Two New Models: Bringing Freud to Fraud
Who is (s)he? What about the victim? Is there a Bad Bushel or
Crop?
ABC’s of Behavioral Forensics
What is in the Headlines? What is most common? What do you need to
know about each of them?
The Bad Apple? Predatory vs Accidental
+Professional Competence
TIME on the JOB
KnowledgePercentage
0%
100%
Day One First Year
Professor Harry Kraemer, MBA
Technical Knowledge
Interpersonal Knowledge
Having the Answer vs Getting the Answer
+ Effective Judgment
High
Need for structure
MinimalRelationships Task
Emotional Elements
Competitiveness
Trust
Emotional energy
Standards
Need for nurturance
Shame
Collect All Relevant Available Data
Boil Down To Essence
Act
Impulsive
Procrastinate
Predict interpersonal environment
Practical problem solving
Verbal Abstractions
Changing Conceptual Sets
Low HighTolerance of ambiguity
+Executive Judgment
Strong Perceptions in ambiguity
Strong intellect in abstractions, and practical problem solving
Work Ethic
Reality-based approach (pragmatic)
Narcissism
Poor Capacity to read Emotions and fit with Context (EQ)
Hyper-Competitiveness
Absent Self-Reflection
At risk of mid-life challenges
Strengths Vulnerabilities
+Bad Bushels and Beyond: Leadership Tone
The Role of Psychopathy The A.B.C.s Ch 5
The Role of Narcissism The A.B.C.s Ch 7
The role of the Charismatic Leader The A.B.C.s Ch 7
The Challenge of the Entrepreneur
The critical answer to question
+Clients: When does your
organization say “no” to a client? Corporate
What are the clients sharing?
What is the tone of their leadership?
How self-reflective are they?
How do they make you feel? Is there Narcissism in
leaders? How charismatic are they?
Do the leaders understand and manage their executive presence?
Individuals Are they at risk of being
victim of an email scam? Distress? Excitement? Pride? Narcissism?
What of the family What is their tone? Is there potential for
fraud in the family?
+Employees
When do they get the message to “do the right thing” vs ask if it’s legal?
Do they have a reason to feel taken advantage of by the organization and want something in return?
Are they emotionally competent?
Can they be seduced by a predator?
How would a fraudster turn the culture to his advantage?
What are the subcultures that put the organization at risk?
Avoid Accidentals
Innoculate against Predators
+Vendors:
Who interfaces with them?
Service Providers to the organization
Providing Service to Clients
+Leadership
What is the tone of the leadership? Do the leaders understand their presence?
How well do they understand emotions? Are they competent? Are they creating a sense of belonging or alienation? Interpersonal Misfits are a breeding ground for risk/fraud? How competitive are they?
Are there Charismatic-Leader Follower Dynamics?
Do they understand their impact on culture?
+Op Risk Officers
Acts of Nature
Theft
Sabotage (non-IT)
Work Place Violence
Hackers: internal, external, contractors
Fraud
Navigate Regulators
Recruit and Retain Top Talent
Leverage Core Organizational Competencies
Asked early in the planning of new initiatives – is your perspective sought out? . .. Or avoided.
Managing Organizational Operational Risk
Running and growing the Organization
+To SELL: The challenge of convincing leadership to address fraud
1. Their attention
2. Their understanding
3. Their perspective
4. Their willingness to change
1. Your understanding of the business/strategy
2. Your willingness to change
3. Your efforts in executing the strategy
What you need What they need
+Required Dialogue on Risk
0% Low High100%
Safe Zone
Securities Traders
RegulatorsInternal Governance
+Fraud Defined
A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. . . .
Elements of a cause of action for “fraud” include false representation of a present or past fact made by defendant, action in reliance thereupon by plaintiff, and damage resulting to plaintiff from such misrepresentation.
Black’s Law Dictionary
+White Collar Crime
“Those classes of nonviolent illegal activities which principally involve traditional notions of deceit, deception, concealment, manipulation, breach of trust, subterfuge or illegal circumvention.”
Caveat Emptor
+ Op Risk NY CityFederal Reserve Bank of Chicago
Operational Risk Specialist
ABU Dhabi Investments Authority Deputy Director
Intact Financial Corporation Vice President
Freddie Mac VP Internal Controls
International Monetary Fund Accountant
US Securities and Exchange Commission Staff Accountant
National Bank of Canada Vice-President, Operational & Reputation Risks
ABU Dhabi Investment Authority Senior Manager
Santander Director of Technology & Operations
Banque Pictet & Cie SA
Banco Bradesco SA - Controller
Brazilian Development Bank – BNDES Operational Risk Manager
Banco de Mexico Deputy - Manager
IMF Accountant (2)
UniCredit Bank AG - Managing Director
Banco Bradesco S/A- Compliance Analyst Sr.
Zions Bancorporation Risk Management Administrator
Banco de la Republica - Deputy Manager
+A Psychiatrist’s PerspectiveGetting into the Mind of the FraudsterAn Exploration of your ChallengesActions to Consider: Convincing Leadership to take it Seriously
+Background: Focus on Private Industry Morrison Associates, Ltd.
Arthur Andersen Continental Bank Conseco Insurance Food Lion
Daven Morrison Psychiatric Resident and Chief Resident (1996) Morrison Associates since 1996 Consultation to Leadership Teams Anti-Fraud Efforts
Institute of Fraud Prevention Tomkins Institute of Emotion and Cognition Senior Editor and Author: The A.B.C.s of Behavioral
Forensics