Oh what a tangled web we weave Fraud

“Oh, what a tangled web we weave. . . ” Fraud and the Mind Grand Rounds, Winter, 2014 Elgin State Hospital Daven Morrison MD Asst. Clinical Professor of Psychiatry Chicago Medical School

Financial Fraud Organizational Psychiatry Certified Fraud Examiners White Collar Crime

Psychiatry and Fraud Have you ever been deceived?

EXHIBIT 9. 1 The Multi-Disciplinary Team for Managing Fraud Criminology Psycholog y/Psychiat ry Accounting Fraud prevention requires these three cogs to turn together

Fraud Defined A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. . Elements of a cause of action for “fraud” include false representation of a present or past fact made by defendant, action in reliance thereupon by plaintiff, and damage resulting to plaintiff from such misrepresentation. Black’s Law Dictionary

White Collar Crime �Those classes of nonviolent illegal activities which principally involve traditional notions of deceit, deception, concealment, manipulation, breach of trust, subterfuge or illegal circumvention. ” �Caveat Emptor

Fraud Background: Focus on Private Industry �Morrison Associates, Ltd. �Arthur Andersen �Continental Bank �Conseco Insurance �Food Lion �Daven Morrison �Psychiatric Resident and Chief Resident (1996) �Morrison Associates since 1996 �Consultation to Leadership Teams �Fraud �Institute of Fraud Prevention �Tomkins Institute of Fraud Prevention �Senior Editor and Author: The A. B. C. s of Behavioral Forensics

EXHIBIT 6. 1 THE FRAUD TRIANGLE Opportunity: Find a hole in accounting process FRAU D Pressure/Incentives: Knowingly commit fraud for a perceived need Rationalize: Justify theft to self

Recent Cases of Fraud in the News �NY Times: Fraud in Army Recruiting Bonus Program May Cost Nearly $100 Million �Chicago Tribune: Republican Party wing creates 18 fake websites for Democrats �WSJ: Ex-SAC Trader Found Guilty �Rita Crundwell �Jesse Jackson �LIBOR �Raj Rajaraptnam

Dixon Illinois The Best Reason Ever to have Professional Management

Questions for Today Advances are made by answering questions. Discoveries are made by questioning answers. Bernard Haisch; Director, Calphysics Institute

Alan Greenspan: I've always considered myself more of a mathematician than a psychologist. It all fell apart, in the sense that not a single major forecaster of note or institution caught it. The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely. “What Went Wrong”

Brief Test

Answers to Question 1. Profile the Fraudster 2. Greed is the motivator

Fraud: Ideas from “ABC” Text: Highlights of Bringing Freud to Fraud New Perspective Building on What’s Known �Challenging old �Known Cases theories on motivation – beyond greed �Designed to get financial mind sets to see the human element �Two new ways of thinking about the crime of fraud �Science of the Brain � ABCs of Behavioral Forensics: Using Psychology to Prevent, Deter, and Detect Fraud �Models of Deception �Experience with Senior Executives �Assessment of Senior Executives

Fraud: Ideas from “ABC” Text: Highlights of Bringing Freud to Fraud IS IS NOT �A Human Act �Mental Illness �Driven by emotions �One size fits all �Natural �Not a “shameless” act �Expensive �Easily profiled �Likely reflects a �A “solo” act “change of mind” � ABCs of Behavioral Forensics: Using Psychology to Prevent, Deter, and Detect Fraud

Fraud: Ideas from “ABC” Text: Two New Models: Bringing Freud to Fraud The Bad Apple? Predatory vs Accidental �Who is he? �What is in the �What about the Headlines? �What is most common? �What do you need to know about each of them? victim? �Is there a Bad Bushel or Crop? � ABCs of Behavioral Forensics: Using Psychology to Prevent, Deter, and Detect Fraud

Fraud Fundamentals Fraud Triangle The Crime A Shared Daily Fraud Experience

Questioning Answer #1 The answer to halting fraud is a: Profile What is Happening in the Mind?

Predatory Fraud is a Dance �Predator �Prey �Nigerian Prince �Grandma �Spider �Fly �Madoff’s friends

IMPORTANT TOPICS AND NEGATIVE AFFECT Trivial Important IMPORTANT TOPICS: IMPORTANT Important Trivial

INNATE AFFECTS From Tomkins Positive 1. Interest—excitement 2. Enjoyment—joy Neutral 3. Surprise—startle Negative 4. Fear—terror 5. Distress—anguish 6. Anger—rage 7. Shame—humiliation 8. Contempt (Dissmell) 9. Disgust

Context

Our biology

Our biology

H F C A A D Affects are G E E Data B

The Progression, Examples I and II: We (I) Need Money 419 �Excitement �Shame �Enjoyment �Distress �Fear �Excitement

Predatory Dynamic

Richard D. Lane and David A. S. Garfield, “Becoming Aware of Feelings: Integration of Cognitive-Developmental, Neuroscientific, and Psychoanalytic Perspectives, ” Neuropsychoanalysis 7, no. 1 (2005): 5– 30

Affects as Data and the Brain Higher CPUs: Blends of blends (Prefrontal Cortex) Blends of emotion (Paralimbic) Discrete emotions (Limbic) Action tendencies (Diencephalon) Richard D. Lane and David A. S. Garfield, “Becoming Aware of Feelings: Integration of Cognitive-Developmental, Neuroscientific, and Psychoanalytic Perspectives, ” Neuropsychoanalysis 7, no. 1 (2005): 5– 30

Searching for the profile Summary of the first of two wrong questions

The Seduction of the Profile �Self Reflect: �Can you use emotions as data? �Can the critical people on your team? �what can con you? �When there is a need for primary prevention, the profile is a waste of time �May even be causative of fraud. �Predatory fraudsters adapt to what you give them.

Professional Competence Professor Harry Kraemer, MBA Having the Answer vs Getting the Answer 100% Interpersonal Knowledge Percentage Technical Knowledge 0% Day One TIME on the JOB First Year

Questioning Answer #2: Greed is the motivation What is Happening in the Mind?

Accidental Fraud is a Wall Flower �Rita Crundwell �Diann Cattani

EXHIBIT 6. 2 The Values of the 8 Motivational States Serious Achievement Conforming Mastery Fitting In Self Control Individualism Collectivism Caring Freedom Sympathy Enjoyment Playful 38 Other Rebellious

Sources of Motivation are Limited Helps those who are listening for Risk Factors to be focused on a finite list of options

EXHIBIT 6. 3 THE FRAUD TRIANGLE IN MOTION Step One: Opportunity Find a hole in accounting/oversight process The “unofficial”legal line FRAUD Step Two: Pressure Knowingly commit fraud for a perceived need Step Three: Rationalize Fraud is expensive over time $$$$$

EXHIBIT 6. 3 How Honesty Reverses STARTING Motivation: Follow the rules The “unofficial” legal line FINAL Motivation: Fraud ? ! Question: Do I keep the money? The Reversal Answer: Yes Disobey the rules Fraud Perpetration requires repetition

Sustaining Large Scale Fraud is Sustaining the Reversal START: Rules Matter EXHIBIT 6. 4 Motivations to sustain fraud (rationalizations) • Self: They don’t care ‘bout me • Other: I need $ for our medical bills • Play: who can catch me? Fraud • Mastery: Now they will know who’s boss! • 4 More possible motivations Reversal Over time the fraudster’s believes: “the rules are not for me” $$ $$$$$ Time remains the enemy. . . because the cost grows

EXHIBIT 6. 5 Sustaining large frauds requires getting others to Reverse Motivations to recruit others (rationalizations) START: Rules Matter • Self: They don’t care ‘bout you! • Other: You need $ for our medical bills • Play: who can catch us? Fraud Reversal • Mastery: Now they will know we ‘re in charge! • 4 More possible motivations Over time the fraudster’s TEAM believes: “the rules are not for us” $$ $$$$$ Time AND Title is the enemy. . . As the cost grows

Bad Bushels and Beyond: Leadership Tone �The Role of Narcissism �The Role of Psychopathy �The role of the Charismatic Leader �The Challenge of the Entrepreneur �The critical answer to question

Cases: �On Making * The Numbers �Powerful CFO �Bank President �Video: From $200 K to several million dollars

Fraud Overlap: Psychiatry and Forensic Accounting AKA “Shrinks and Spread Sheets” Financial Services Mental Health �Expensive �Harms trust �Affiliation Scam �“malingerer” �Insider Training �“Crock”, Drug seeker �Regulatory Environment environment �HIPPA �COSO �Conflict of Interest �Sarbanne-Oxley Disclosure

Leadership �What is the tone of the leadership? �Do the leaders understand their presence? �How well do they understand emotions? �Are they competent? �Are they creating a sense of belonging or alienation? �Interpersonal Misfits are a breeding ground for risk/fraud �How competitive are they? �Are there Charismatic-Leader Follower Dynamics? �Do they understand their impact on culture?

Clients �Corporate �What are they sharing? �What is the tone of their leadership? �How self-reflective are they? �How do they make you feel? �Is there Narcissism in leaders? �How charismatic are they? �Individuals �Are they at risk of being victim of an email scam? �Distress? �Excitement? �Pride? Narcissism? �What of the family �What is their tone? �Is there potential for fraud in the family? �When does the Northern say “no” to a client?

Employees Avoid “Accidentals” �When do they get the message to “do the right thing” vs ask if it’s legal? �Do they have a reason to feel taken advantage of by the bank and want something in return? Innoculate against “Predators” �Are they emotionally competent? �Can they be seduced by a predator? �How would a fraudster turn the culture to his advantage? �What are the subcultures that put the bank at risk?

Summary Two new ways of thinking means questioning answers: �Blaming “Greed” will limit your seeing the larger ecology/environment of fraud �Profiling Employees will make more anxiety and distance than you want and will provide a road map for those fraudsters motivated to read from the

Final Thoughts: Use Affects as Data for Fraud Prevention Only two ways to tell a malingerer GOOD LUCK!