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The Garden of Financial Crime

Most of us in the field of fraud examination have read innumerable articles, popular and scholarly, about preventing, detecting, and correcting for financial crimes. The collective counsel is generally solid and well-intentioned, but the persistence of financial crimes, especially fraud, over the preceding decades suggests that something essential may be lacking in how experts and lay persons think about the genesis of financial crimes. In brief, the problem is less about control systems and their periodic testing than about controlling persons and their goal divergence from their employers. It is not that multiple levels of review and approval, independent checks on performance, adequacy of documentation, etc. are not valuable in theory (and often in practice), it is that financial criminals and financial tortfeasors generally have real power within their organizations that dwarfs those whose responsibility is to check and expose these bad acts. Those who can cram down their personally drawn narratives within organizations tend to succeed greatly, especially in the context of hierarchical organizations that characterize much of the public, private, and independent sectors. Challenges by those within the organization to those with real and greater organizational power within the organization are hazardous to the upstart. (Exogenous challenges such as those from the external auditors or those from captured regulators present analogously hazardous conditions.)

A condition necessary to significant mitigation of the risk of financial crimes is having individuals with the right understanding and predisposition with organizational power over those without such understanding and predisposition, including a demonstrated commitment to ethics and morals and not a win-at-any-cost worshiper, a demonstrated commitment to team-based and not personal goals, a demonstrated commitment to self-sacrifice and not self-aggrandizement, etc. This approach should weed out the ‘I-me-mine’ within the applicant pool, as well as those habituated to domination of others and careerism for exclusive personal benefit. In the modern economy creating valuable and fairly priced goods and services is not the functional equivalent of an individual sport.

In explaining the occurrence of financial crimes, the reporter should focus more on root causes than proximate causes. For instance, the realization that individuals at different organizations cooperate at the expense of their employers’ clients is hardly new with LIBOR (e.g., Marsh). However, the story should not be told with the ‘bad guy’ at the center. Financial crimes are not discovered for two reasons:

  1. They are immaterial (and few see the need in our era of information overload to learn about these), or
  2. They are controlled by persons with the power to conceal (these are the stories that need to be told properly).

The story about how concealment is made effective requires the telling. It is generally not about Mr. / Ms. Big (which is not to conclude that the leader always has clean hands) but about the personal jockeying and relationship-building occurring within the organization by those creating by hook or by crook the credentials and professional narratives to rise up. In these cliques alliances are formed and concealments are devised. It is these cliques that mock reviews and approvals, ‘independent’ checks on performance, compliance with documentation requirements, etc. While Mr. Madoff swindles away millions makes a good headline, it is the review and approvals of his senior managers, the bogus documentation prepared by his clerks, the blind audits performed by his external CPA, the timid investigations and sleepy supervision performed by the SEC, the weak due diligence of outside investment advisers, etc. that comprise the root cause. Mr. Madoff was merely the proximate cause. It takes a village…

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