Taking the Law Into Your Own Hands — Legally

Folks in the fraud-fighting business rightfully complain about the large number of fraudsters who are: Never prosecuted; given a “slap on the wrist” by the criminal justice system; allowed to walk around freely until they’re brought to justice.

 

September 2012 

By Peter Goldmann, CFE 

Folks in the fraud-fighting business rightfully complain about the large number of fraudsters who are…

Never prosecuted 

Given a “slap on the wrist” by the criminal justice system 

Allowed to walk around freely until they’re brought to justice 

 

Take the case of Robert Moffat, a former senior executive at IBM who admitted in 2010 to participating in the largest insider trading scandal in U.S. history. He received a prison sentence of six months for his misdeeds.

 

And then there are those disturbing statistics reported by the ACFE in its biannual Report to the Nations on Occupational Fraud & Abuse showing that most internal frauds last some 18 months before being detected. 

 

Which means, of course, that many last much longer. Take the case of Sujata "Sue" Sachdeva, former vice president of finance and secretary of the $50 million-per-year Milwaukee-based headphone manufacturer, Koss Corporation. Sue was able for eleven years to perpetrate an embezzlement that cost her employer nearly $34 million. She received a sentence that matched the age of her fraud: 11 years for a crime the government called “complex.”

 

Justice eventually caught up with Sachdeva, but it boggles the mind that she was able to perpetrate her fraud for more than a decade before being caught. These and thousands of cases like them are enough to dampen the motivation of any hard-working fraud examiner, prosecutor, auditor or law enforcement official. After all, why should they invest endless hours of grueling work in a case that may never see the perpetrator punished in a way that doesn’t scream “fraud pays?”

 

However, despite the fact that the list of lengthy larcenies is pretty much endless, we can take away from them some potentially valuable lessons in fraud loss mitigation.

 

Here’s the idea: We (meaning: management) focus more on identifying and catching the bad guys and less on the discouraging odds that they’ll ever get brought to justice (or the high cost of attempting to see meaningful punishment dispensed). 

 

In other words, by concentrating limited resources on detecting and deterring fraud before it occurs, organizations avoid both the lengthy and costly process of prosecution as well as the inevitable reputational damage that  bosses so desperately fear when legal proceedings actually materialize.

 

This is not to say that suspected fraudsters should not be prosecuted. Especially the “uber”-fraudsters who commit Enron-size mega-crimes. And, despite management’s fear of bad publicity, reporting incidents to the authorities usually is better than just sweeping them under the rug and dismissing them with the attitude that “they’ll probably just get probation anyway.” Or: “who needs the headache of bad publicity?” That is undoubtedly among the best ways to encourage employees to steal from you.

 

In the long run, as seasoned fraud fighters know well, when an organization takes a hard legal line on fraud by choosing not to let employee-fraudsters “slide” with mere termination — the deterrent message is that much more powerful. By making it clear that if you commit fraud and you get caught you are either gone, or in custody (or both), management does itself and its workforce a great service.

 

If Prosecution Is Really Not an Option 

Meanwhile, for average fraudsters —  the ones represented in the ACFE’s data on duration of fraud incidents — choosing not to prosecute should at least be substituted for with other strong anti-fraud measures. Specifically, management should consider concentrating resources on what can be controlled: catching the offenders quickly, dismissing them immediately and communicating to the surviving workforce that this is what is meant by “zero tolerance” toward fraud (also known as “tone at the top”).

 

Certainly, there is also the option of alerting the local media of the successful apprehension of fraud suspects. An article in the local newspaper — along with a mug shot of the alleged perpetrator — adds even more deterrent ammunition to your anti-fraud arsenal. While this may draw negative attention similar to that which management tries to skirt by deciding not to prosecute, it is often less damaging than the publicity fallout from a court case, and it can add substantially to the deterrent and preventive effort over the long run.

 

Sometimes There Is No Choice 

In some instances, reporting fraud cases to law enforcement may be obligatory in order to comply with company insurance policies. For example, Lisa McGaughey of Richland, Wash., a former office manager for &yet, a local software company, stole $14,500 over four months -- but Adam Brault, owner of &yet (no typo — it is the actual name of the company), did not want McGaughey prosecuted. However, prosecutors were quoted as saying the case had to be reported to the insurer — suggesting that legal proceedings were unavoidable.

 

Yet the fact that Brault fired McGaughey as soon as the fraud was discovered probably made a strong impact by itself on the remaining employees of the small company.

 

The point is that since it takes months, if not years, to either catch or legally process fraudsters — or both — and managers/owners/board members aren’t keen to draw the public scrutiny that invariably results from legal action, why not just focus on a) bolstering internal anti-fraud controls so that these cases don’t happen in the first place – since it is, after all, almost always a failure of controls that lies at the heart of most internal fraud cases... and b) enhance fraud detection and/or continuous controls monitoring to catch frauds much sooner than they tend to be caught now? 

 

These powerful measures not only minimize financial loss, they give management the opportunity bolster the deterrent effect of swift action and to reiterate its tone at the top.

 

In an ideal world, employees who steal, deceive or conceal would all be quickly fingered — and the ACFE’s statistic of 18 months as the average duration of occupation fraud would drop precipitously.

 

In the same ideal world, dishonest employees would all get fired and turned over the authorities and then be moved smoothly and efficiently through the criminal justice system and on to pay their debt to society.

 

This would make the jobs of fraud fighters almost dreamlike. But alas, such is not the case in the real world.

 

Thus, to avoid the messiness of a legal initiative, why not shift emphasis to the detection, deterrent and monitoring measures discussed above, thereby facilitating the quick apprehension of fraudsters and demonstrating the sincerity of your tone at the top?

 

 

Peter Goldmann, CFE, is president of White-Collar Crime 101 LLC/FraudAware. Contact Peter at  pgoldmann@fraudaware.com. 

Editor's note: Don't miss this month's video feature, "Hard Time for Fraud: Repeat Offenders."