Fraud on Main Street: Investigating Civil Records as Predictors of Fraud

September 2008

IN THIS ISSUE

— Everyday Thieves: What Makes Honest People Do Dishonest Things
— Indicators of Financial and Emotional Stresses That Can Motivate Fraud
— In the next issue

GREETINGS!

Welcome to the September 2008 edition of our newsletter! In this issue, we’ll examine the role civil records play in serving as potential predictors for embezzlement or asset misappropriation.

EVERYDAY THIEVES: WHAT MAKES HONEST PEOPLE DO DISHONEST THINGS

It’s something that has happened to everyone at some point — an employee abuses their position, often acting seemingly out of character. The water cooler starts to buzz with shock and innuendo. “Did you hear what Johnny did?” “I never thought he was capable of doing something like that …” “Why would he steal from the company?”

That last question is the most important, and often the most difficult to answer. Most white-collar criminals do not have prior criminal records, and are often motivated by a variety of reasons. While there is no fail-safe approach to identifying the stresses that motivate people to defraud their company, there are ways to identify ‘red flags’ that may make someone more likely to commit fraud.

Most employees, multiple surveys have shown, consider themselves honest people, and are further deterred from dishonest behavior by the shameful regard in which their community — be it religious leaders, neighbors or colleagues — would hold such actions if they were caught. Yet several factors can drive someone to override this pressure, to do what had previously been unthinkable — these pressures often build over time, and are often documented as they escalate.

INDICATORS OF FINANCIAL AND EMOTIONAL STRESSES THAT CAN MOTIVATE FRAUD

The two main types of stressors that can lead someone to commit fraud are financial and personal, or emotional, stresses. Financial stresses for someone who is gainfully employed can include maintaining a lifestyle beyond his means, sudden and/or prolonged illness or other medical issues, even having to send several children to college in a short period of time. Personal and emotional issues that may lead to fraud would include divorce, which could in turn lead to loss of communally obtained assets, such as houses and investment portfolios.

Detection of these stressors can be difficult to obtain – for instance, if an employee just moved to the area and had a divorce in another state two years ago from which he was still reeling, you would need to check records in every county in which he had lived to be thorough. Liens and judgments levied against someone can indicate levels of unsecured debts that someone might need to repay, while a multitude of automobiles, homes or watercraft might be unusual depending on an employee’s income. Finally, civil litigation — often a step taken if a lien or judgment is issued and left unpaid — can offer greater details as to how someone got into a situation where they owed far more than they could repay, and would thus have reason to attempt financial crimes.

While outstanding debts are not – in and of themselves – proof that a person is likely to commit fraud, annual or bi-annual review of such public records, along with interviews when such red flags appear, would help to protect against fraud. It is best to obtain consent for such reviews when the employee is hired, or as a condition of continued employment for existing employees. Also, by cooperating openly with employees about that process, their perception that the company is looking out for fraud will be heightened and fraud will be less likely to occur.

IN THE NEXT ISSUE

In the next issue, we’ll look into detecting fraud and corruption among public officials, on both local and national levels.