The Changing Face Of Fraud

Wednesday, September 1, 2004 - 01:00

Juval Aviv

In today's world, corporate fraud is like a leak the plumber never got around
to fixing. What was once only a small drip from America's financial faucet has
developed into a full-scale flood. Twenty-five years ago, a typical major single
act of fraud involved losses of $5 to $10 million. In the past few years, the
losses have escalated into the billions. This dynamic growth is an indication
that fraudsters are changing, becoming bolder and much more sophisticated. By
taking advantage of the shifting corporate and political climates, fraudsters
are finding new ways to crack the company pipes.

Perpetrators of fraud recognize that America's corporate culture is always
evolving. From PDAs to business casual dress codes, the way Americans work today
is quite different from how they worked in years past. One of the most
significant changes has been the loss of company loyalty. Most workers no longer
stay at a single company for the duration of their careers, but choose instead
to hop from job to job in search of new opportunities and higher pay checks.
Fraudsters have capitalized on this trend because with a high turnover rate in
positions, it is harder to track where and how corporate assets and privileged
information are distributed.

Additionally, fraudsters have harnessed the fear of lawsuits to facilitate
their crimes. In order to avoid litigation and embarrassment due to the
incident, companies may terminate an employee who has perpetuated a fraud, but
will not publicly disclose the truth surrounding his or her dismissal. Fearing
defamation suits, the company will also fail to warn the perpetrator's new
employer. By keeping these acts secret, defrauded companies enable fraudsters to
strike again and again.

Recently, lawmakers have taken a stronger stance on white collar crime by
passing legislation, such as the Sarbanes-Oxley Act, aimed at combating fraud by
increasing the pressure on public companies to perform internal investigations
or face severe penalties. Despite these penalties, corporate malfeasance
continues to flourish. This is true because the government's ability to enforce
these new policies is questionable at best, and, perhaps worse, the regulations
create the façade of safety for companies who comply. Believing that they are
now protected, compliant institutions are less likely to be on guard, which in
turn, allows fraudsters to operate more easily under the radar. Conversely,
industries that were once closely supervised by the government, like defense
contractors, have entered an era of deregulation. The reduced scrutiny has left
industries that were seemingly immune to fraud suddenly susceptible.

Along with changes to domestic policy, the widespread implementation of
strict secrecy laws abroad has made engaging in fraudulent acts all the more
attractive. Jurisdictions such as Switzerland and the Cayman Islands are no
longer the world's only popular financial safe-havens; in recent years, Nevis,
Dutch Antilles, the Cook Islands, Gibraltar, Cyprus and Singapore have all
enacted asset protection legislation. When searching for a country to stash
funds, hide documents or open secured bank accounts, fraudsters now have more
choices than ever before. Thus, the assets can be divided up among various
locations making them harder to trace, more expensive to recover, and it is
substantially more likely that the fraudsters will get away with their schemes.

The most significant change to the face of fraud, however, is that of the
perpetrators themselves. The average fraudster is increasingly more
sophisticated; he or she is well-educated, well-spoken, well-traveled and
well-connected. Gone are the days of sneaking petty cash into one's pockets.
Today's white collar criminals treat their fraud schemes like business ventures.
They hire attorneys and financial professionals to aid and abet their schemes by
establishing offshore trusts or shell corporations to conceal misappropriated
assets. Take the recent story of a major Wall Street trader who convinced his
employer, an investment bank, to wire millions of dollars in insurance payments
to a company as part of an energy trade. It was later discovered that both the
trade and the company were fictitious; the trader had wired the payments through
a shell corporation and deposited the money into his own Swiss bank account.
Individuals such as these are willing to spend a lot of money to hide their
ill-gotten gains.

Therefore, as the business of fraud continues to grow, how can companies
combat these latest trends? By employing a good offense companies have the best
chance at a successful defense. It is imperative that all institutions take a
proactive role in protecting themselves. Continuous internal investigations are
a must, especially on employees who handle financial transactions or authorize
payment of substantial invoices. Auditor reviews should be kept confidential to
prevent investigations from becoming compromised by tipping off the wrong-doers.
Companies should watch foreign subsidiaries closely; executives in these offices
may be more tempted to engage in theft because they are not subject to daily
scrutiny. Finally, the expertise of outside specialists should not be overlooked
or underestimated. Fraud examiners and corporate investigation firms are trained
to spot red flags and differentiate false-positives from truly suspicious
activities. Fraudsters often use the same tricks over and over when they are
successful. Professional fraud investigators know what to look for; they've seen
it all before.

Fraud never rests; it is a twenty-four hour, seven day a week business that
is growing. But unlike a great flood that submerges an entire community, fraud
can be prevented or at least contained before causing irreparable damage. The
trick is to stay proactive, stay involved and know when it is time to call the

Juval Aviv is President & CEO of Interfor, Inc., an
international corporate intelligence and investigations firm, as well as the
author of Staying Safe: The Complete Guide to Protecting Yourself, Your Family,
& Your Business.