The relationship between fraud offenders and their victimised organisation and the crucial role of security management by Dutch author Ralph van Os.
This article will analyse how it is that the overwhelming proportion of fraud is carried out by people who have an established relationship with the victim organisation. Several examples will be used to illustrate the mentioned arguments. Based upon this analysis, this article will further describe and justify the range of fraud counter-measures that acknowledged this relationship.
To enable effective and methodical discussion this article will be divided into four parts. All parts of this article are seen through the eyes and background of a security manager who is responsible for the prevention and battle against cases like fraud. The first part of the discussion will focus on the characteristics of fraud and their aspects. What is meant by fraud? The second part will highlight some figures concerning fraud offenders, who are they? Which groups could be a risk? The third part will examine organisations, the various organisational cultures and how organisations combat fraud. In the final part and as a conclusion, the writer will summarise all the relevant arguments and offer an opinion.
However, first to be defined are fraud, fraud offenders, organisation, organisational culture, management, security and security management.
Fraud
Fraud can be seen as an organisational as well as a society problem. The Longman Dictionary of Contemporary English defines fraud as: a method of illegally getting money from someone, often by using clever and complicated methods: financial losses due to theft; tax/share/bankruptcy etc fraud (=fraud in a particular financial area); and someone who deceives people to gain money, friendship etc: She realised later that the insurance salesman had been a fraud. (Longman Dictionary, 1995: 561). Another definition of fraud can be find in Kluwer (5.8-0.2) as quoted in Module D of the Postgraduate Programme in Security Management of Loughborough University (CHaRM) Unit 11 page one: “an intentional perversion of truth in order to induce another to part with something of value, or to surrender a legal right”. A standard definition of fraud is hard to find; this is not only a national but also an international problem depending on justice systems.
In The Netherlands one definition of fraud is given by the NIVRE, The Dutch equivalent of the English Chartered Institute of Loss Adjusters. Their definition of insurance fraud translated from the Dutch by the author as: “The intention to mislead an assurer in order to receive a payment with restriction to the insurance policy without having a lawful right.” (NIVRE, 1997: 2)
Another definition from the side of science, can be found from the Dutch criminologist Niemeijer, whose background is originally juridical, by using the definition of the Dutch sociologist Ruimschotel (translated by the author): “Fraud has to do with: deceitful acting, giving inaccurate or incomplete information to persons, companies or government which causes financial or otherwise injure those and prejudiced the person who did this.” (Ruimschotel, 1993)
It is clear that there are in the Netherlands many legal descriptions and definitions of fraud. It is regulated in a combination of social and penal laws, and punishable. It can be stated that there are several definitions of fraud, all seen from their own background; law, organisational, scientifically. It is clear that they all have one thing in common, the element of deceitful acting, to gain a benefit by lying to someone else.
Besides the scientifical definition the Van Traa Committee formulated a political and social definition which they used in their parliamentary inquiry (translated by the author): “Fraud can be seen as the misuse of confidence with the intention to illegally benefit yourself or others. “ (Van Traa, 1996: 57) This definition incorporates those common elements. This article will therefore focus and use the working definition of Van Traa.
Fraud offenders
Having decided upon a definition of fraud, we can now focus at the general characteristics typical of most offenders of fraud. While writing this, it is time to highlight other forms of fraud i.e. corporate crime. Fraud can occur besides from the inside of an organisation, also from outside. Fraud that occurs from outside an organisation is commonly known as external crime. Fraud that occurs inside an organisation is commonly known as internal crime which forms an important part of organisational i.e. corporate crime as shown in the 1986 year report of the Australian company Coles Myer Ltd: "1,450 of the 139,243 employees were detected stealing from the company". (quoted in Felson, M and Clarke R.V., 1997: 38). In spite of the limitation of this article other fraud forms will only be briefly mentioned. Suppliers, customers, retailers et cetera, can also commit fraud. This article will mention the existence of these forms of fraud. However forms of fraud committed by insiders occur more often, which is partly caused by the fact that the insiders have easy and mostly direct access to the good(s), such as information. This article will further focus on the inside part of fraud which is in this particular case part of corporate crime.
Figures of 2001, SEC 2002 based on the results of Hoffmann Detectives indicate that (translated from Dutch): “Sixty per cent of the offenders of fraud in the trade of industry are younger than 36 years of age. Fifty-seven per cent of these offenders work four years or less with the company that they victimise. Twenty-six percent of these offenders has an engagement between 11 and 30 years before they victimise their company! The perpetrators are mostly aiming for money (54 per cent), or goods, (44 per cent). Remarkable is the mild advance of female offenders: only ten per cent in 1999 against 22 in 2001. (visit http://www.hoffmannbv.nl/statis2001.htm )
Hoffman also produced evidence, based on their own investigative results, where the offenders belong. A remarkable fact was that two groups scored highly as perpetrators of fraud: sales staff and managers. One of the remaining questions is why people commit fraud. Therefore this part of the article will focus on the reasons why people commit crimes like fraud. Especially focused on the relationship of the perpetrators and the victimised organisation. Prof Hoogenboom, a professor in Forensic Business Studies at Nyenrode University in the Netherlands, argued in his presentation at the IT Security Management Congress 2001 (Van Os 2001c & 2001d) that the cause of fraud lies in greed. To proof his case, Hoogenboom showed the audience a small part of the 1987 movie Wallstreet by Oliver Stone. The actor Michael Douglas uses this form of greed for his own benefit. After this fragment Hoogenboom produced some samples and scientifical figures. The Dutch National Platform of Crime Control (NPC) noticed that financial institutes suffer a fraud related loss of one million in guilders in 1997 in relation to fraud. Worldwide, PriceWaterHouseCooper figured a loss of four billion US dollars. In The Netherlands two out of three companies are victimised by internal crime. Other investigation done by the NPC partner; the Dutch Foundation ‘Trendmeter’, proves that more than half of the perpetrators of these crimes worked within the victimised organisation.
Prof Dr Marc Cool CFE from Belgium prove partly that Hoogenboom’s point of view is correct. In his thesis ‘employee crime’ Cools describes the process of how employees crime can arise within an organisation. Cools offers his own definition of employees crime (translated by the author): Employee crime is: the total of punishable acts, as crime against organisational goods, committed by employees in large enterprises caused by the criminogenic organisational culture….” (Cools, 1994: 224)
As Cools proved in his thesis, criminogenic influences together with the organisational culture can lead to offenders within an organisation. It is interesting to see how other scientists look at this. Slapper and Tombs for instance came to these findings (Corporate Crime): “Corporate crime however, as is shown in this book, can not only prove harder to detect, but harder to prove. As the authors demonstrate, this is because it can not only be a crime devised and perpetrated by the lone individuals within the corporate structure, but also a problem inherent in, and perpetrated by, the whole corporate structure it self.” (Slapper and Tombs, 1999: Foreword x)
Bologna classified several factors that make fraud more likely, as he argued in the 1993 Handbook on Corporate Fraud as mentioned in module D of CHaRM. Bologna describes eight factors as likely to generate fraud:
1 no recognition and job security mentioned as ‘inadequate rewards’;
2. ambiguity of job roles and failure to advise on minimum acceptable standards and personal conduct mentioned as ‘inadequate management controls’;
3 failure to counsel or take administrative action when performance level or personal behaviour drops to unacceptable level mentioned as ‘either lack of or poor performance feedback mechanisms’;
4 insufficient resources to meet required standards mentioned as ‘inadequate support’;
5 failure to have timely audits, inspections and related follow up mentioned as ‘inadequate periodic reviews’;
6 social values and ethical norms are ambiguous mentioned as ‘lax enforcement of disciplinary rules’;
7 either promoting or allowing destructive inter-personal or inter-departmental competitiveness mentioned as ‘fostering hostility’;
8 failure to give training in ethical norms, security issues et cetera mentioned as ‘other motivational issues’.
Any organisation where one of these above mentioned factors occurs will have a high change of being swindled by their own employees. Other scientifically research is undertaken by Karen M. Gill. In Gill (1994: 125-138) she investigated why personnel who worked in hotel bars fiddle. She found three reasons for the motivation of the offenders. The first one that she found was a combination of frustration and need: “Individuals fiddle to satisfy intrinsic needs…. they do indicate a level of staff frustration. Fiddling could provide a channel for this frustration although further research needs to examine this. (Gill, M. 1994: 130-132). The second explanation she found was part of the (organisational) culture: “Fiddling may be a product of environmental conditioning, not only related to the nature of the job but also the culture of the organisation….. fiddling was part of the fundamental fabric of the hotel trade….. Senior management may actively encourage or ignore fiddling if they or their business receive some form of benefit….. an employee who fiddled for the benefit of the company was regarded as a ‘good employee. The first and last explanation she found lies in the opportunity: “Staff have access to cash and products (food and drink), they often work in isolation from colleagues, and frequently have total autonomy over a transaction. In short, temptation is placed before them, and combined with lo wages and a culture which accepts and even encourages some fiddles, it is not surprising that staff dishonesty is perceived to be common..”
Prevention is not easy. Gill concluded that hotels should make several managerial decisions. Like for instance; the separation of job functions; management training and practice and the use of price lists. The social part of science, especially the criminology, did produce some theories about why people commit a crime like fraud. A well known criminological theory is the rational choice theory. The rational choice theory describes that the reason that someone become an offender in an organisation who commit a crime such as fraud, is because he or she get the opportunity and caused by the fact that they work there.
Dennis Challinger mentioned in his article Will Crime Prevention ever be a Business Priority? as published in Felson and Clark eds. (1997:48-52), that: “Criminologists can, however, make contributions to business. I see the following three areas as being the most useful. 1 Reducing Opportunities; 2 A Clear Position on Crime; 3 Workplace Culture. (Felson, M and Clarke R.V., 1997: 48 – 52).
This rational choice theory can be of any use in preventing an organisation to be victimised. For instance the rational choice theory aims on the fact that offenders commit a crime by making a kind of calculation on the risk to be detected against the benefit the will get by taking things – commit fraud. When the risks are acceptable the offender will commit the crime. With this theory in mind we should reduce the opportunities. So that the calculation part will always be too risky for the candidate offender. Other parts as mentioned by Challinger are ‘a clear position on crime’ regarding how an organisation deals with any form of crime. And workplace culture which focus on the positive approach within an organisation. The positive approach will lead to motivated, well-informed and loyal employees according to Challinger.
As shown the reason that people who work in an organisation commit fraud is various. These reasons are partly caused by how management interpret the rules and regulations, which is mostly to their own benefit. Other reasons can be find in the emotional aspects of the human mind like the frustration of the employees. Fraud seems to exist by the typical way of human (mis)behaviour and how we as humans naturally act together, in combinations with the organisation, that is, organisational structure and culture.
