The recent case of Christopher Watson, jailed for defrauding the Bannatyne Group of £7.9m, is a classic example of fraud and contains the three elements of the Fraud Triangle: Pressure, Opportunity and Rationalization. Add in a fourth factor, Capability, and you have a perfect Fraud Diamond.
If we analyse each element against those in the case we can see that they are common factors on how and why fraud is committed:
As Donald Cassey described in his definition of rationalization "trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware that this problem can be secretly resolved by violation of the position of financial trust..." After more than 40 years, that quote is still valid and applicable to all cases of fraud including this one.
One of the major risk factors in any company or organisation is the culture and the tone set by those at the top. Senior management should lead by example. They should ensure anti-fraud and anti-corruption policies are in place and are seriously implemented so that they can act as an effective deterrence. It may not be possible to completely eliminate the risk of fraud but it can be significantly mitigated.
When individuals see that others are doing the same and no punishment is applied, those individuals feel that nobody cares and they can do likewise, as 'everyone is doing it' (a clear example of rationalisation). This takes us to the Differential Association theory which states that criminal behaviour is something learnt together with others. Therefore, the same fraudulent behaviour spreads rapidly within an organisation.
Another typical factor is that fraud may go undetected for some time, normally a few years, and in this case 6 years. Of course, that prompts the usual questions: Why wasn't the fraud detected earlier? Where were the auditors? Is it a failure in internal controls?
Over six years, Christopher Watson was able to defraud his employer almost £8m - that is more than £1m per year, or £100,000 a month on false invoices. Asset misappropriation committed by employees involves smaller amounts than white collar crime but it has a higher frequency, building up the amount defrauded over a number of years. A fact that is confirmed by the Report to the Nation published by the Association of Certified Fraud Examiners (ACFE) every two years.
Moreover, committing fraud may also involve money laundering in order to conceal the proceeds of crime. This case is no different and the method used was the repair and purchase of properties, as large amounts of money in a bank account would raise suspicion. An analysis using the net worth method or the expenditure method would have helped to identify the funds from illicit transactions, commonly used in cases of money laundering and tax fraud.
This case is a very good example of fraud and money laundering. The false invoices scheme was used in order to conceal the fraud and misappropriate the assets of his employer, in this case the cash, giving the impression that they were genuine purchases. However, the payments were made to his own accounts. Everything started as a loan, but as is so commonly the case, it all gets out of hand and quickly becomes a slippery slope.
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