1 / 64

Public Finance for Public Administration, Northwestern University May 27th, 2014

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.

ramona-golden
Download Presentation

Public Finance for Public Administration, Northwestern University May 27th, 2014

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Public Finance for Public Administration, Northwestern UniversityMay 27th, 2014 THE PSYCHOLOGY OF FRAUD Daven Morrison MD Morrison Associates, Ltd.Asst. Clinical Professor of Psychiatry, Chicago Medical SchoolSubject Matter Expert, Institute of Fraud Prevention

  2. What a tangled web we weave when first we practice to deceive. Marmion an epic poem Walter Scott, 1808

  3. “As a fraudster, I succeeded for almost two decades because I understood how to exploit the psychological and emotional weaknessesof 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. Antar Former Crazy Eddie CFO, former CPA, and a convicted felon

  4. 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

  5. DEFINING FUNDAMENTALS FRAUD White Collar Crime Caveat Emptor

  6. 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

  7. A. B. C. of Fraud

  8. Advances are made by answering questions. Discoveries are made by questioning answers. Bernard Haisch; Director, Calphysics Institute Questions for Today

  9. Questioning Answers

  10. ABCs of Fraud:Book

  11. 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

  12. A.B.C.s of Fraud: Other Resources • Original Paper: http://theifp.org/research-grants/IFP-Whitepaper-3.pdf • Blog

  13. Fraud: Ideas from “A.B.C.” Text:Highlights of Bringing Freud to Fraud IS IS NOT • 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

  14. 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

  15. Questioning Answer #2: Greedis the motivation What is Happening in the Mind?

  16. THE FRAUD TRIANGLE Opportunity: Find a hole in accounting process FRAUD Rationalize: Justify theft to self Pressure/Incentives: Knowingly commit fraud for a perceived need

  17. THE FRAUD TRIANGLE IN MOTION Step One: Opportunity Find a hole in accounting/oversight process The “unofficial”legal line FRAUD Step Two: Pressure Knowinglycommit fraud for a perceived need Step Three: Rationalize Fraud is expensive over time $$$ $$$$$

  18. The Values of the 8 Motivational States Serious Achievement Conforming Mastery Fitting In Control Individualism Self Collectivism Other Caring Freedom Rebellious Sympathy Enjoyment Playful Playful

  19. How Honesty Reverses STARTING Motivation: Follow the rules The “unofficial” legal line Fraud FINAL Motivation: Disobey the rules ? ! Fraud Perpetration requires repetition Question: Do I keep the money? Answer: Yes The Reversal

  20. START: Rules Matter • 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 Sustaining Large Scale Fraud is Sustaining the Reversal Fraud Over time the fraudster’s believes: “the rules are not for me” Reversal $$ $$$$$ Time remains the enemy . . . because the cost grows

  21. Motivations to recruit others (rationalizations) • Self: They don’t care ‘bout you! • Other: Youneed $ for our medical bills • Play: who can catch us? • Mastery: Now they will know we ‘re in charge! • 4 More possible motivations START: Rules Matter Fraud Over time the fraudster’s TEAM believes: “their rules are not for us” Reversal $$$$$ $$ Time/Title is the enemy . . . As the cost grows Sustaining large frauds requires getting others to Reverse Motivation

  22. Questions?

  23. Mark Whitacre Video example

  24. Questioning Answer #3 The answer to halting fraud is a: Profile What is Happening in the Mind?

  25. Recent Banking Fraud Scenario Friday Afternoon, Wire Transfer

  26. Predatory Fraud is a Dance • Predator • Nigerian Prince(ss) • Spider • Madoff • Prey • Grandma • Fly • Madoff’s friends

  27. IMPORTANT TOPICS AND NEGATIVE AFFECT Trivial Important IMPORTANT IMPORTANT TOPICS: IMPORTANT IMPORTANT IMPORTANT Important Trivial

  28. The Progression, Examples I and II: We (I) Need Money 419 • Excitement • Enjoyment • Fear • The A.B.C.s p. 236 • Shame • Distress • Excitement

  29. INNATE AFFECTSFrom Tomkins Positive1. Interest—excitement 2. Enjoyment—joy Neutral3. Surprise—startle Negative 4. Fear—terror 5. Distress—anguish 6. Anger—rage 7. Shame—humiliation 8. Contempt (Dissmell) 9. Disgust

  30. Context

  31. Our biology

  32. Our biology

  33. Predatory Dynamic

  34. Higher CPUs: Blends of blends (Prefrontal Cortex) Blends of emotion (Paralimbic) Discrete emotions (Limbic) Action tendencies (Diencephalon) 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

  35. Recent Banking Fraud Scenario Friday Afternoon, Wire Transfer

  36. Predator Tactics • Masking • Dazzling • Decoying • Mimicking • Repackaging • Double Play • The A.B.C.’s p 182

  37. The Seduction of the Profile Imagine how hard physics would be if particles could think. • Murray Gell-Man, Physics Nobel Laureate

  38. 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!

  39. Affects are the tracer bullets flying on the battlefield of fraud What level of the human brain is your team using? GOOD LUCK!

  40. Questions?

  41. Fraud: Ideas from “A.B.C.” Text:Two New Models: Bringing Freud to Fraud The Bad Apple? Predatory vs Accidental • 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?

  42. Professional Competence Professor Harry Kraemer, MBA Having the Answer vs Getting the Answer 100% Interpersonal Knowledge Knowledge Percentage Technical Knowledge 0% TIME on the JOB Day One First Year

  43. Tone at the Top:Executive Assessment Strengths and Weaknesses in Judgment

  44. Emotional Elements Impulsive Procrastinate Shame Emotional energy Changing Conceptual Sets Act Predict interpersonal environment Competitiveness Practical problem solving Standards Verbal Abstractions Boil Down To Essence Need for nurturance Trust Collect All Relevant Available Data Need for structure High Minimal Relationships Task Tolerance of ambiguity Low High Effective Judgment

  45. Executive Judgment Strengths Vulnerabilities • 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

  46. Prime Fraud Sources inFinancial Services Clients Vendors Employees

  47. 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

  48. 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?

  49. Employees Avoid Accidentals Innoculate against Predators • 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?

More Related