Volkswagen Exec Arrested: Dissecting the Fraud Triangle

AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

Steve Morang, CFE, CIA, CRMA, Senior Manager at Frank Rimerman & Co LLP, began his session at the ACFE Global Fraud Conference last June asking attendees to raise their hands if they believed the Volkswagen executives didn’t know anything about the fraudulent emissions tests built into more than 11 million of their diesel cars. Only one person raised his hand. That one person may have a hard time defending himself today since the FBI arrested a Volkswagen executive (a compliance head) on conspiracy charges.

No matter if you think the executives did know about the manipulation or not, there are lessons to be learned from dissecting what could have possibly led to an ethics failure that cost $35 billion in market capital in just five days.

One way to analyze the scandal is to place it into the Fraud Triangle. Identifying the pressures, rationalizations and opportunities, as Morang did, shines a light on the dark areas that plague many companies' ethical cultures.

Pressure
According to Morang, the former CEO’s management style was ruthless. Martin Winterkorn wanted the German car giant to be the No. 1 car maker in the world and that meant making it into the U.S. marketplace with their diesel engine cars. The tone at the top was to get it done and get it done now.

In a 2015 CNBC article, Bernd Osterloh, a supervisory board member for Volkswagen, was quoted as writing in a letter to staff, "We need in future a climate in which problems aren't hidden but can be openly communicated to superiors. We need a culture in which it's possible and permissible to argue with your superior about the best way to go."

The article goes on to reference former company executives describing “a management style under Winterkorn that fostered a climate of fear, an authoritarianism that went unchecked partly due to a company structure unique in the German motor industry.” Upon Winterkorn’s resignation in September of 2015, he said that he was “not aware of any wrongdoing.”

Rationalization
To the people responsible for the manipulation of the engines, Morang said the tampering was done for what the employees under pressure thought was the greater good. They were using the same utilitarian ethics that I described in a previous post. There was a mentality that it was okay to bend the rules so that Volkswagen, and the investors, could come out ahead. In other words, the ends (larger profits, notoriety and reputation) justified the means (fraudulent emissions tests).

Opportunity
When an employee or group of employees (the investigation is still ongoing) discovered that the diesel cars could be wired to cheat emissions tests, the legs of the Fraud Triangle moved quickly into place. By adding the pressure to enter the U.S. market with the rationalization of putting the company above all else, in addition to the opportunity to fool emissions tests, the slippery slope soon looked like an easy path to take.

By understanding the pressures, rationalizations and opportunities that contributed to the actions taken either by a few or many, the top, middle or the bottom, anti-fraud professionals can take away practical tools to use when examining their own company’s ethical culture.

ACFE Conference News Updates: Canadian Fraud Report, Calling all Super Heroes & More

AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

After a few months of toying with the idea to begin reporting on more of our global events, we have officially launched a new, and much improved, FraudConferenceNews.com. We wanted to highlight more conferences, interview more speakers and cover more topics. Basically, we wanted to give you more stuff.

Here are some of the latest updates that you might want to check out:

Fraud Report to Be Released at Canada’s Largest Gathering of Anti-Fraud Professionals
According to the Association of Certified Fraud Examiner’s latest report, Canadian fraudsters were more likely to receive no punishment from their employers than being asked to resign. More than 200 anti-fraud professionals will receive an early-access, exclusive look at this report during the 2016 ACFE Fraud Conference Canada, taking place in Montreal, September 11-14. Read more.

Calling all Super Heroes
We are excited to officially announce that registration for next year's conference is open. Dust off your cape, and maybe your boots, too, and plan to attend the 28th Annual ACFE Global Fraud Conference in Nashville, Tennessee, June 18-23, 2017. Read more.

You Gotta Know When to Hold 'Em...Behind Bars
When you think about Las Vegas, you probably think about the glitz and glamour of dazzling slot machines, beautiful people, spectacular shows, high-stakes casinos and a skyline that most would recognize immediately. What you might not think about is what happens behind the house. According to Sharon Tibbits, CFE, Executive Director, Fraud Control Group at MGM Resorts International, fraud is a concern in many areas of the casino industry. Read more.

How the Media Can Help Preach Fraud Awareness
While fraud examiners usually do most of their work behind the scenes to uncover fraud, they are often forced to turn over evidence and findings to organizations that keep the story of embezzlement under wraps. No company wants to freely admit that wrongdoing happened under their purview; however in order for people to understand the scope of fraud, some stories are best shared with the public. The onus to tell the story lands not on anti-fraud professionals, but another important piece in fraud awareness: the media. Read more.

We hope you enjoy this updated site and please let us know your thoughts! Find more conference news at FraudConferenceNews.com.

All the Advantages of Life Didn’t Stop Roomy Khan From Crossing the Line

FROM THE ACFE GLOBAL FRAUD CONFERENCE

Dick Carozza, CFE
Editor, Fraud Magazine

One question from prosperous hedge-fund trader Raj Rajaratnam changed Roomy Khan’s life: “How’s business?”

In 1997, Khan — who held graduate degrees in engineering and physics — was working in marketing at Intel in Silicon Valley. However, she told attendees at the closing session* of the 27th Annual ACFE Global Fraud Conference last week, she really wanted to become a high-tech stocks analyst on Wall Street, and she saw Rajaratnam — her mentor — as her ticket.  

So she called Rajaratnam who said that he was establishing Galleon Group — a hedge-fund firm in New York — and he was looking for information. Khan said she didn’t have access to any Intel financial data. “But I had marketing data on the top customers for Intel. I used this small piece of information combined with the guidance the company had given him in a previous conference call, and I made a mock Intel income statement for the upcoming statement,” she said. 

“I started sharing this information with Raj,” she said “It seemed wrong but harmless [because] this data on the top customer list changed on a daily basis,” Khan said. “Raj wanted this information and I wanted Wall Street.” However, Intel soon discovered that she was passing information to Rajaratnam and prosecuted. She had to pay a large fine, and was placed on house arrest for a time. Rajaratnam wasn’t touched.

Despite her brush with the law, Khan eventually landed a job at Galleon in Silicon Valley where she was introduced to the serious world of insider trading. She said she was careful to hide her fraud, but years later — after she had begun her own hedge-fund firm — the FBI eventually detected one of her illegal tips and pressured her into becoming a secret informant. Her testimony eventually helped bring down Rajaratnam — who was sentenced to 11 years in prison in 2011— and several of his associates.

When Khan was a young woman her father wanted her “to break the mold of a typical Indian woman, which was to be a housewife,” she said. He paid for her tuition to attend Columbia University for her Master’s in Electrical and Electronics Engineering. “‘That’s your dowry, your down payment for your future,’” she said he told her.

But all the advantages of a rich family life didn’t prevent her from succumbing to an ingrown fraud culture in hedge-fund trading where Rajaratnam expected her to pursue “The Edge”— his euphemism for insider trading.

She said fellow traders rationalized their actions and complained about the unrealistic trading rules. “But disagreeing with the law doesn’t give us the right to break it,” Roomy said.

Khan once lived the big life — a $15 million home, luxury cars, diamonds, designer clothes, expensive artwork. “Excessive spending. The more I spent, the harder I worked,” she said. But most of that is gone now. She speaks to university students, business groups and at conferences to share the insidious nature of insider trading and to warn others that they too can slip into the fraud culture.

“As a girl who grew up in India and came to the U.S. — I went to some of the top schools, worked for some of the best corporations, caught all the breaks that I wanted. … But I am responsible [for my fraud] and no one else,” she said. “The culpability is completely mine. I should have known better. Looking forward, I hope I can now be part of the solution.”

*The ACFE does not pay convicted fraudsters to speak.

Find more coverage from the 27th Annual ACFE Global Fraud Conference at FraudConferenceNews.com.

A Rough Reality: Fraud Victims and the Road to Renewal

FROM THE ACFE GLOBAL FRAUD CONFERENCE

Courtney Babin
ACFE Communications Coordinator

Shock, anger, depression and bargaining are all victims' reactions to fraud. When someone falls victim to fraud, there are issues that hinder healing — lack of sleep, overworking to earn money back, compulsive behavior and avoiding emotions. “Much is made of the fraudster,” said Andy Wilson, CFE, CCEP, VP Fraud & Compliance, Sedgwick, Inc. “But [the victims] are the real faces of fraud.” In his session at last week's ACFE Global Fraud Conference, “Fraud Victims Speak Out,” Wilson hosted victims of fraud who spoke about their experiences and how they overcame them.

In 2003, Jay Myers, President of Interactive Solutions, Inc., read an article about fraud that stuck with him. At work the next day, he checked his payroll records and discovered a fraud that was being carried out by his director of finance. “I was raised with honesty, integrity and ethics,” said Myers. “When I discovered the theft, it went against how I was raised and I became enraged.” In 2013, Brett Ray, Chief Operating Officer at Integrity Furniture Group, was brought in to assist a small business who was in the midst of investigating an internal fraud scheme. “They were robbing Peter to pay Paul; it was phenomenal,” said Ray. “What started out as an inkling of liberty being taken snowballed into everything they [did] being a lie.”

Fraud victims often say that going through the experience is one of the worst things they have gone through. After losing trust in coworkers, dealing with an unethical culture and losing financial security, victims need to fight to sustain their innocence. Wilson provided 12 steps that victims can follow in order to regain their emotional footing. A few of these include:

• Do not allow yourself to be casually judged. Remember that frauds cost $3.7 trillion annually. Frauds are convincing, hidden and criminal. If you have been defrauded, no one is in a position to judge you.
• Do not live in the past. Learn from the past, but do not dwell on it. Move on with your life and move forward.
• Give yourself time to grieve. Your trust has been violated. When you are defrauded you lose more than your money. You lose your pride, self-confidence and self-esteem.

When it’s time to move on, “You realize that anger can’t be a great strategy,” said Myers. You have had your trust violated, and it’s hard to deal with that. You must have the determination to do the right thing and hold the fraudster accountable in order to prevent fraud from happening in the future to someone else. “One day,” says Wilson, “you will wake up and you will say, ‘let’s move forward.’”

Find more coverage from last week's event on FraudConferenceNews.com.

How to Spot Liars and Achieve Balanced Interviews

FROM THE ACFE GLOBAL FRAUD CONFERENCE

Dick Carozza
Editor, Fraud Magazine

Your key interview subject walks in, removes his coat and takes his seat. You offer him a cup of coffee and begin building some rapport. You immediately begin watching his hands, face and posture. You scrutinize his sentences and ask yourself, “Is this person lying to me? How can I tell?” Your observations and analysis might make or break your case.

“I believe there’s no such thing as a bad interviewee, but there is such a thing as a bad interviewer,” said body-language expert Steve van Aperen during last week's 27th Annual ACFE Global Fraud Conference. “If your questions are not clear and concise during the interview, it will allow a deceptive person to lie.” Also, he said, it’s quite easy to misread visual cues.

He said that all of us lie in 30 to 38 percent of our interactions, and others lie to us or deceive us up to 200 times per day. And we lie to ourselves up to seven times per hour.

Van Aperen said some of men’s top lies are: “I’m on my way,” “I’m at the office,” “I’ll call you,” “You’ve lost weight,” “I didn’t have that much to drink.” Women: “There’s nothing wrong — it’s fine,” “It was on sale,” “It wasn’t that expensive.” Men and women lie with equal frequency, he said, but we can detect men better because they often pause mid-sentence when they lie, and they stutter more. “So women have a distinct advantage over men,” he said.

Though dishonesty surrounds us, van Aperen says anybody can think of a lie but it’s difficult to communicate that lie with believability and credibility. “Interviewees will always express the same verbal and nonverbal cues — I call them ‘leakage’ or ‘seepage’ — but the problem is we don’t know what to look for,” he said. “We listen to the content and structure … but there are other parameters we should look for. … We need to look at contradictions between what they’re saying and what in fact their body language is saying.”

Van Aperen provided several questions we can ask ourselves to assure more balanced interviews:

• Is the person answering your question or sidestepping the issue altogether?
• Is the person answering the question with another question or deflecting?
• Is the person denying or making objections to a question like, “Did you steal that money?” “No I didn’t” (denial) as opposed to “Why would I do that?” or “I don’t need to steal money” or “I’m not that kind of person” or “It’s wrong to steal.” The last statement is a view but not a denial.
• Is the person omissive, defensive, dismissive or evasive (behaviors that are often associated with avoidance)?
• Is there conflict or contradiction between what a person is saying and what their body language is doing (such as nodding his or her head in the affirmative while denying something)?
• Is the person using concealment, blocking or masking gestures such as a hand covering the mouth or face while talking?
• Are verbal statements accompanied by contradictory non-verbal cues of doubt, such as shaking of the head no when stating something is true?
• Is the person exhibiting genuine or fake expressions of anger, happiness, sadness, disgust, contempt or surprise?

“Remember this,” van Aperen said. “For every one lie a person tells you they have to invent another three or four to protect themselves from the first one. Secondly, they have to have a good memory because they have to think, ‘What have I said previously is likely to convict me now.’ ” With the right tools we can spot hard-working liars before they can complicate and obfuscate our cases.  

Find more coverage, videos and photos from the 27th Annual ACFE Global Fraud Conference at FraudConferenceNews.com.