Dissecting the Minds of Fraudsters

FROM THE PRESIDENT

James D. Ratley, CFE

During my years in investigative work, I’ve often pondered why perpetrators commit their crimes. Working as a police officer in the Dallas Police Department, I witnessed just about every type of transgression from fraud to child abuse to murder. As fraud examiners, we use the Fraud Triangle — pressure, opportunity, rationalization — to begin analyzing wrongdoings. Regardless, we find it difficult to pry open a fraudster’s mind. But Eugene Soltes is trying.

Soltes, a Harvard Business School professor, wants to know why some C-suite executives appear to risk everything to commit fraud. Middle management and employees further down corporate ladders might do it because they’ve found a ready source of cash to ease their economic problems. However, top-flight business people seldom lack for anything; their organizations often reward them spectacularly. Why would they need to steal?

Beginning in 2008, Soltes began to write prison letters to several convicted white-collar criminals whom you know — Madoff, Fastow, Kozlowski, Stanford — and some you might not — Richards, Waskal, Drier, Hoffenberg. He asked them the first dozen questions that came to mind. What were the most significant pressures they faced? How did the way they were compensated influence their decision making? What were their intentions once they were released?

He combined the material from close to 50 fraudsters with his criminology research into the 2016 book, “Why They Do it: Inside the Mind of the White-Collar Criminal” (PublicAffairs). Soltes was a keynote speaker at the 28th Annual ACFE Global Fraud Conference, June 18-23.

Soltes says he realized after interviewing these white-collar criminals that they failed to see the personal and professional consequences of their choices because they never deeply felt that their decisions were harmful to themselves or others. (The ACFE commonly calls that “diffusion of harm.”)

He says that stealing money from a victim’s wallet involves a high degree of intimacy. But executives who manipulate corporate conduct never need to get close — physically or psychologically — to their victims. Modern “arms’ length” transactions, Soltes says, have made it perilously easy to wander into that “gray zone” between right and wrong.

Soltes doesn’t condone the fraudulent behavior, but he says that studying these men (and they were all men) with the scarlet “F” on their chests changed him

“I became a lot less confident about how I’d respond to every difficult situation,” Soltes writes. “I think I’m more humble now that I’ve realized I have limitations much like anyone else, and I need to be diligent to watch those. Moral hubris is a remarkably easy trait to acquire and not realize when one actually has it.”

You can read more about Soltes in the cover article in the latest Fraud Magazine

From Fighting in the Cage to Fighting Fraud

MEMBER PROFILE

Josh Eckmann, CFCI
Registration Compliance Analyst, Allstate
Lincoln, Nebraska 

Many CFEs pride themselves on being fraud fighters, but it’s rare for a fraud fighter to also be an actual professional Mixed Martial Arts (MMA) fighter; Josh Eckmann is one of those few crossover talents. While not yet a CFE, Eckmann is currently participating in the ACFE 90-Day Challenge — a sprint to prepare for, and pass, his CFE Exam. Eckmann has worked in the insurance anti-fraud field for years and finds that pinning down fraudsters in an investigation is more similar to facing down opponents in the cage than one might think.

What steps led you to your current position?  
I started off in the company’s national catastrophe claims team and during that time discovered I had a knack for investigation. I was fortunate enough to find, and be mentored by, a retired Marine Corps counter-intelligence expert who taught me most of what I know. I was promoted to my company’s life insurance division where I found a home for my investigative skillsets. I discovered a large, and vastly unrecognized, problem with the use of life insurance policies to commit multi-lien fraud for mortgages and SBA loans.

It was during that time that I decided to go back to school and earn certification for my investigation skill sets and completed the CFCI program at Utica College in Utica, New York as a distance learner. Eventually I felt a stagnation in my growth as an investigator and worked hard to find a position within my company that would allow me to test my abilities, learn another facet of the business and expand my skillsets and knowledge base. That brought me to my current position that required that I secure the FINRA Series 6 license. Preparing for, and passing, the exam opened my eyes to a whole new world of applications and knowledge for my investigative skill set.

Are there any comparisons between MMA and fighting fraud? Or, has one profession affected the way you see the other? 
There are very few sports or professions in the world that are more taxing on body and mind than MMA. It requires passion, perseverance, and an undying obsession to continuous learning, improvement and results. When the price for giving up or being ill-prepared quite literally could mean your life, you must be tenaciously vigilant. That mindset translates into fighting fraud. When failure and giving up are not options, you seek out additional expertise, angles, insights and details that will get you closer to your goal. MMA is so different from other combat sports in that there are so many options, so many techniques, so many ways to win and so many different styles. Mentally treating a fraudster like my opponent in the cage drives me to study, experiment, trust my instincts, be willing to accept when I am wrong, try a different approach and persist until I am victorious. (Chances are pretty good that said fraudster is not actually going to try to punch me in the face … but even if so, I’ve spent my life preparing for those moments).

What activities or hobbies do you like to do outside of work? 
Outside of work, I spend much of my time training. I have gyms that I frequent and I have made a habit seeking out and training at new gyms that practice different styles of the same martial arts. If I am not in fight camp (eight weeks of extensive training for a specific fight or tournament), then I train three to four days a week. I take one day to focus on getting stronger and all the other days are MMA-specific. During fight camp I train six days a week: four of which are MMA-specific; one day is focused on strength training and one day is focused on endurance training. I specialize in submission wrestling and I spend a considerable amount of my time training in that style. I do like to travel as well, which I get as a two-for-one deal with MMA. Last October I was in Minsk, Belarus at the United World Wrestling Grappling World Championships representing Team USA, where I won the Bronze Medal at 92kg.

I also enjoy reading, mainly nonfiction. I love reading investigative case studies, the different sciences (physics is my favorite) and business journals. Latin dance is a fantastic way to bring body and mind together as well!

Read Josh's full interview in the Career Center on ACFE.com.

The Security and Utility of Blockchain Technology

FROM THE ARCHIVES

Zach Capers, CFE
Contributing Author, Association of Certified Fraud Examiners        

The technology underlying the virtual currency bitcoin has the potential to disrupt several industries while significantly reducing fraud. Known as blockchain, the technology was created to ensure the legitimacy of every bitcoin transaction by tracking them in a distributed public ledger. Bitcoin has endured a divisive reputation due to its volatile value fluctuations and use in illicit transactions on the Deep Web; however, the security and utility offered by its blockchain is anything but controversial.

Any addition to bitcoin’s chain of information represents a new block that must be validated by every copy of the ledger spread across a worldwide computer network. Because the ledger is permanent, public and decentralized, it is incredibly difficult to defraud. These characteristics have resulted in an influx of investment and research aimed at adapting the blockchain concept to a diverse array of new applications.

Illuminating Supply Chains
The information in a blockchain can consist of anything that can be represented digitally. As such, blockchain technology can be used to ensure the authenticity and source of any number of products from organic produce to jewelry. For example, a start-up named Everledger is betting that a diamond’s myriad attributes can be recorded and tracked using an inscribed serial number and a digital blockchain to ensure that the stone being purchased is authentic.

This idea can be applied to a host of high-end goods that have typically relied on paperwork and certificates of authenticity that can be faked far more easily than a blockchain can be manipulated. Furthermore, stolen goods that are recovered can be re-authenticated to regain their value, which is important to former owners and insurance companies that have paid claims on stolen goods. 

The Rise of Smart Contracts
One of the most heralded potential uses of blockchain technology is its ability to facilitate smart contracts. Rather than a standard legal contract that must be litigated or otherwise disputed if breached, a smart contract can enforce itself through digital means when preset terms are met, and revoke the contract automatically if the terms are breached.

Ethereum, a crowd-funded smart contract platform, might foretell the future of smart contracts. The network allows users to input virtually any stipulations (e.g., if this, then that) into the smart contract's blockchain and exchange value using virtual currency. For example, if one were to purchase an item from an online seller, a smart contract could be employed to hold the payment in escrow until a tracking system confirms that the item has been delivered.

Another example of a smart contract platform applies to the streaming music industry. Renowned English singer-songwriter Imogen Heap recently released a new single on Ujo Music, a company that allows artists to register and track their creations on a blockchain using associated smart contracts that allow the listener to stream the song only after specified conditions (e.g., payment, terms of use) have been satisfied. The idea is to foster an equitable method of music distribution that provides artists with more control over how their music is shared and for how much it is sold.

Impact on Financial Institutions
A key advantage of blockchain is its ability to allow two entities that do not necessarily trust one another to trust one another. Because a blockchain can only be updated when there is consensus among the participants, the need for a third party to mediate a transaction is lessened or removed. This can alleviate many factors that complicate financial transactions (e.g., need for collateral, time required for settlements) and automate many banking processes currently requiring human interactions that add time, costs, and opportunities to commit fraud.

Stock exchanges around the world have begun to experiment with blockchains. The Japan Exchange Group announced a collaboration with IBM to test securities trading in a blockchain environment. The Australian Stock Exchange has partnered with Digital Asset Holdings, a blockchain start-up founded by well-known former JP Morgan executive Blythe Masters, to increase efficiencies related to post-trade settlements. To keep pace, the Toronto Stock Exchange hired the co-founder of aforementioned smart contract platform Ethereum to serve as the organization's first chief digital officer.

Conclusion
While blockchain technology is still in its infancy, it is not too early to see bitcoin as the first use case of a versatile and potentially revolutionary concept. From proving an asset’s origin to the streamlining of high finance, various new uses for blockchain continue to emerge. And while applications might vary greatly, what they all have in common are enhanced audit trails, increased efficiency and improved transparency — each of which is a known foe of fraud.

*For background on bitcoin, I recommend listening to this Fraud Talk podcast by Jacob Parks , J.D., CFE.

**This article was originally published in the ACFE's members-only monthly newsletter, The Fraud Examiner in April of 2016.