Fraud Symptom 11 – Deviant Fraud Risk Management Function

The biggest challenge an organization faces in respect to fraud, is when the fraud investigators turn deviant. It is a case of watchdogs turning rabid.  Generally, according to reports about 5% of the fraud investigators become fraudsters. As I have said previously, the only difference between a fraud investigator and fraudster is that of ethics. Both of them have equal knowledge and skills on modus operandi of frauds. In rare situations, the majority of the fraud department turns deviant. This is the worst-case scenario and the organization faces high risks if such a situation occurs.

In this post, I am discussing three situations – good, bad and ugly of fraud investigators turning deviant.  The battle between ethical fraud investigators and deviant fraud investigators is quite complex and definitely not available in the textbooks. To depict the various scenarios I am taking the example of a large multinational organization.

1.    The Good Situation

In organization ABC, the head of fraud risk reported to a senior executive X. The head of fraud risk was deviant; however, the second in charge was ethical. Now the head of fraud risk orchestrated a few frauds by attempting to show them as processing errors. However, senior executive X didn’t hold a high opinion of the head of fraud risk and confirmed information from the second in charge before taking any action. The second in charge had informal instructions to escalate matters to senior executive X if things started going wrong. In this situation, though deviant behavior existed but no harm was done to the organization. The senior management including the CEO controlled the deviant head of fraud risk.

2.    The Bad Situation

Continuing with the same example, senior executive X announced his retirement plans. During the same time, the global fraud office informed that two major frauds have occurred. The head of fraud risk deputed the second in charge to conduct investigations for both the cases. The second in charge chose to investigate the larger case first and travelled to the location. Meanwhile, the head of fraud risk went on a vacation. The junior was well versed with this behavior, because even previously whenever the head of fraud risk wished to create trouble, he did so and went on vacation. Hence, the second in charge was highly suspicious of the motives of the head of fraud risk.

While investigating the case, the second in charge realized that it was a fabricated case with no evidence available on the suspects identified by the global fraud office. The second in charge informally communicated to senior executive X on the dilemma of reporting. The senior executive X advised to do accurate reporting. Hence, the second in charge played a political card by issuing an interim report stating that no evidence is available locally and seeking global fraud office help in investigation. This caused political chaos in the organization as the report was circulated to the senior management. Moreover, the local head of fraud risk and second in charge were in the global offices at the same time. The second in charge was given a cold shoulder by the heads of global fraud office. This made the second in charge vary of the situation and somewhat suspicious.

Back at the local office, the second in charge investigated the second case, found evidence against the suspect and recommended to the senior management to lodge a police complaint. The senior executive X and other managers were in favor of filing the police case.

Meanwhile, a meeting was held amongst the senior management and decision taken to terminate the services of head of fraud risk. Now in this round the ethical fraud investigator won the battle, though after some losses to the organization.

3.    The Ugly Situation

One would assume that firing the head of fraud risk would solve the problems and things would improve. However, in such cases without addressing the challenges of the organization, the situation can become ugly. A change of a few key players can cause havoc to the organization.

To illustrate the point, the senior executive X succession transition took place. Senior executive Y was taking his place. Now for some rhyme or reason, which the second in charge couldn’t instantly fathom, senior executive Y took an instant dislike to the junior and was very friendly with the fired head of fraud risk. Senior executive Y didn’t want the police case filed and the second in charge was threatened with job loss if he proceeded with it.

However, as formally, the management had approved filing of police case, the second in charge followed formal instructions. During police interrogations, the suspect revealed that he was contacted by the global fraud office to do data theft. As usual, the head of fraud risk had again gone on vacation. Now the second in charge became very suspicious and thought that there were deviant fraud investigators in the global office too. The second in charge was now being politically isolated and constantly bullied.

Further,  the number of frauds increased and the similar type occurred repeatedly in the same location. This caused the second in charge to suspect senior executive Y’s role in them as in none of the cases there was any conclusive evidence available on the suspects identified by the global office.

The second in charge hoped that with the new head of fraud risk, things would improve. However, they deteriorated further as the new head was equally if not more deviant.

Meanwhile, senior executive Y had spread his network and established his power structure. Most of the staff was petrified of him and global fraud office supported him.

To add icing to the cake, the CEO changed. The old CEO did not brief the new CEO on the political events. The new CEO was clueless and senior executive Y took advantage of the situation.

The second in charge thought of a plan to connect the new CEO and brief him about the past events. However, senior executive Y understood the intentions of the second in charge. He discredited the second in charge, staged a ceremonial hanging and got him fired.

Now the senior executive Y had set the stage for creating a deviant organization culture, with no one having the guts to inform the new CEO on the various frauds occurring within the organization.

Recommendations

In any organization, things can really go bad if the fraud investigators and senior management who are in positions of most trust, start betraying it. Hence, in such situations timely and decisive action is required.

1)    If fraud investigators are suspected of unethical practices, terminate their services immediately. Don’t give those second chances or relocate them to another office. They will start the same behavior in another location, and then the disease will spread.

2)    In senior executives are suspected of orchestrating frauds, terminate them immediately. The financial, legal and reputation risks are highest when senior executives are involved in frauds.

3)    Clean up the whole system, and don’t address it by plugging one hole at the time. Undertake an evaluation of all fraud investigators of the department to check their ethics, behavior and other aspects. If suspected of deviant behaviors fire them. Establish new procedures and systems to monitor the new team.

4)    Senior managers must monitor fraud department regularly. They should do skip level meetings, keep communication channels open and ensure that the right action is taken on the fraud investigation reports.

To read more on Fraud Symptoms series, click here.

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