Can Fraud and Corruption be Stopped?
We must now consider if fraud can ever be eliminated: and under this head there are three points of inquiry.
(1) Whether fraud can ever be clearly defined.
(2) Whether fraud can ever be predicted.
(3) Whether fraud can ever be eradicated.
Whether fraud can ever be clearly defined.
Objection 1: Fraud is loose term that is not well defined even in western cultures. What is considered fraud in one country in one place at one point in time would not even rate as a crime in other locations at other points in time. Many cultures also grade or have accommodations for various degrees of lying… so why should we not also have accommodations for various degrees of fraud – many of which would harvest little gain and no punishment?
Objection 2: Fraud is nothing more that an undesired consequence of an enchantment. After all fraud is nothing more than two people entering into an arrangement, for what purposes we might never know, and one is using their skills of enchantment to move the speed of the relationship along. It everything works out well it is enchantment – if not it is fraud… It seems so much sits upon poorly formed expectation as opposed to fact.
Objection 3: One mans fraud is another man’s ignorance. We cannot protect people from their collective ignorance’s and their uninformed and misinformed acts, founded upon these faulty foundations of fact. So what the law has done, since it is rightly so often hard to prove a fraud – a specific act is now a fraud by statute – thus eliminating any need for a messy complex and tiresome inquiry into the nature of a man’s actions that caused a loss.
On the contrary: We all know a fraud when we see it.
Permit me to address these for you our readers…
We as a population consider fraud, in a commercial transaction, as an unfair outcome. If one party has more knowledgeable, or superior set of facts, or just is in a position to make better use of that knowledge – and makes what one person seems as an unfair profit or some unfair advantage – this is sufficient to allege fraud.
Fraud is necessarily a dance between two parties were Party B is being steered by Party A to take an action that is favorable to A. Yet this seems weak, as this would describe any sales transaction. Fraud thus is not one element but several chiefly consisting of a known lie by Party A to Party B (either by commission or omission) as an inducement into a transaction that based upon the lie B is unable to clearly ascertain the probable outcome(s) of the transaction.
Reply to Objection 1: Fraud is well defined. What varies from culture to culture is the acceptability of the scope of a fraud, and or ethnic group was the victim, not whether some is or is not a fraud.
Reply to Objection 2: Enchantment or deception is part of the process of a fraud to get a partying to willingly make a choice that is most likely to be detrimental to themselves, if only they had an awareness or understanding of the full ramifications of a choice opportunity.
Reply to Objection 3: Very smart people make some very bad choices, agreed. Many act impulsively or out of an unfounded trust. Yet, we ignore in this the subject matter. A doctor of medicine is not likely to know the intricacies of international bonds nor is the bond dealer knowledgeable enough to make a fully informed choice on a new medical device offering a cure for a dreaded ailment. The choices of smart and dim can both be mislead and thus there should be no safe harbor based upon the status or qualifications of a victim. Further, while it is in your authors firmly founded opinion that a fraud should be proven and not permitted by statute I understand how a well meaning though mis-guided choice has been made into law.
Whether fraud can ever be predicted.
Objection 1: Lightening and fraud have similarities, while mostly unpredictable – when the financial storm hit, lighting is more likely to strike the high ground as fraud is to strike the dim wallet.
Objection 2: Fraud is easy to predict it is like any other crime one of opportunity. If you give someone the opportunity to defraud you they will.
Objection 3: As long as you never hire a criminal and do good background checks people will not commit an act of fraud. Background checks reveal a great deal.
Again, permit me to address these objections:
We have long been taught that fraud requires Opportunity, Pressure, Rationalization – this is the fraud triangle, but I would also like to add – two more points to give a 2 dimensional model a third dimension – a fraud tetrahedron if you will. Those two points I would add are Certainty and Chutzpah. The certainty that in their minds they will “get away with the fraud and the chutzpah to actually commit the fraud.
Reply to Objection 1: The analogy of the storm is a good analogy as the shift in winds and heavy cloud cover precedes most storms and lightening strikes. So to are the predictable “weather patterns” with fraud. One can see a storm when one finds lax processes and controls, lack of understanding vulnerabilities of a given organization, or choices made without proper due diligence. The weather not always predictable nor is a particular fraud – but we can make educated assumptions based upon ambient conditions and knowledge of fraudulent behavior.
Reply to Objection 2: Fraud is at least a two party dance. We all know people who, if they came into a store that was for the moment unattended as the attended was in the lavatory would not take even the smallest of items. We also know others that would pocket goods even if the attendant just glanced the other way. It is as much about the person and their sense of right and wrong as it is about the climate
Reply to Objection 3: Background checks provide support in choice making if two things and looked at and IF the background checks are done correctly. The first is to check all of the references and credentials to see if they are congruent to the person in front of you. For example, a 50 year old with 25 yeas experience in one field and 15 years in a second (different) field would have to have started work when they were 10 years old.
The second part of a background check involves checking to see if there are any undisclosed legal matters that would impact negatively on the selection of the person. For certain checking this type of information is not included in the all too common $35-$50 cheap and cheerful background checks. Further, one also needs to perform follow-up checks to monitor ones employees and professionals to see that they do not subsequently run afoul of the law or?
There is also a growing body of science that will allow one to select away from those who are more likely to become a fraudster if the opportunity were to present itself. Yet, concurrently one also adversely selects against creativity and initiative. Note 1/3 of all resumes posses exaggerated claims.
Whether fraud can ever be eradicated.
Objection 1: Once one has clearly defined fraud one can clearly defend against a foe that is now both identified and defined.
Objection 2: We already know companies are lax thus we need to pass laws and require all of the companies to have an internal anti fraud division.
Objection 3: With modern computing all we need is to work had and develop the algorithm that can predict the fraud before it occurs.
Permit me to address these objections:
We are convinced that if we have all of the knowledge and we have all of the right check lists that we can solve all of the problems of the world with diligence. First assuming that we have all of the knowledge – we only have knowledge of history and that is only if we correctly understood the risks set forth in history. Clearly we do not as financial crisis after tsunami, after pandemic shows us (or attempts to show us) how ignorant we are about our existence. So much of lie and thus the risks of life are unknown that it is hubris and utter folly to be able to eliminate just one of those risk called fraud.
Response to Objection 1: This assumes that by definition and identification fraud can be prevented. That also assume we have a correct definition, our identification is accurate and that the circumstances of the risk never change. Clearly there are too many if and imponderables for this to make any sense whatsoever.
Response to Objection 2: This assumes that by passing a law it curbs the behavior. There are laws against speeding, laws against betting, and laws against pollution. The innumerable laws we have and will continue to pass do not prevent anything. The law merely provides the state for a mechanism for punishment through fines or imprisonment.
Response to Objection 3: There are many algorithms that both help predict fraud, predict fraudulent behavior as well as those that detect fraud as or after it has occurred.
There are serious problems with the math – as they use Bayesian math and not fractal math, they are models of what has occurred not what might occur thus they miss the impact of a changing environment and they adversely select when applied to people, against creativity and initiative. Are models an answer to frau, no they are not. A tool with severe limitations that need to be understood – perhaps…
Comment: I hope this experiment will get more of us to think about fraud and the role due diligence can go a long way to preventing fraud. Further it is my experience that one must test their systems on a regular basis against potential frauds to make their business models and systems more robust and more effective in identifying or combating fraud. Only ongoing testing, breaking and fixing of processes and systems will help to make a firm more robust in its fight against fraud. As each business is unique so are the solutions to the problems they are facing are unique. Sorry – there is no one – or even 20 “common cures” that will work to prevent fraud.