Fraud, Bribery and Corruption have serious consequences for organizations operating in an international business environment. In such an environment, organizations are operating under serious pressure, competition is stiff and margins are tight. This, in conjunction with trying to adapt to unfamiliar legal systems, conventions and specific political circumstances, can make doing business in an international environment very difficult. There is therefore much depending on whether an organization can win a contract, obtain a license or market a product in good time.
What is Fraud?
There is no universal definition of fraud in law and definitions and scope what constitutes fraud vary from one jurisdiction to another. There are three main categories of fraud that affect organizations:
- Asset misappropriation, which involves the theft or misuse of an organisation’s assets.
- Fraudulent statements usually in the form of falsification of financial statements in order to obtain improper benefit.
- Corruption such as the use of bribes or acceptance of kickbacks, improper use of confidential information, conflicts of interest and collusive tendering.
Who commits Fraud?
Fraud perpetrators usually cannot be distinguished from other people on the basis of demographic or psychological characteristics. People that commit fraud are usually good people who consider themselves to be honest – they just get caught up in a bad situation as a result of pressure, opportunity and rationalization.
The Fraud Triangle
People commit fraud because of a combination of perceived pressure, rationalization and opportunity. The majority of frauds starts small as the result of an immediate financial need. Once individuals gain confidence in their fraudulent scheme, the fraud continues to get larger and larger until it is discovered. The fraud triangle provides a lens from which to examine any fraud. The fraud triangle is comprised of perceived pressure, perceived opportunity and rationalization. Fraud will only occur if all three elements of the triangle are present.
- Pressure is one of the three elements of the fraud triangle. Pressure is especially important because it is typically an immediate financial pressure that leads people to engage in fraud, e.g. money problems, gambling debts, alcohol or drug addiction, overwhelming medical bills.
- A perceived opportunity to commit fraud, conceal it, and avoid being punished is the second element of the fraud triangle. Opportunity is an essential part of every fraud because if fraud perpetrators don’t have the opportunity to commit fraud then fraud becomes impossible to commit. While eliminating all fraud opportunities may be impossible, reducing or minimizing the opportunity for fraud to occur can pay big dividends for organizations.
- Rationalization is one of the three elements of the fraud triangle. Rationalization is important because it is the mechanism that allows otherwise ethical individuals to justify unethical behavior. People rationalize to eliminate the inconsistency between what they do and what they know they should do.
People typically become involved in already existing fraud schemes as a result of power that is exercised on them by another individual. The five (5) separate types of power include: reward, coercive, expert, legitimate and referent. It is through either one or a combination of several types of power that a potential fraud perpetrator is influenced to become involved in a fraudulent scheme.
Reward power is the ability of a fraud perpetrator to convince a potential victim that he or she will receive a benefit through participation in the fraud scheme.
Coercive power is the ability of a fraud perpetrator to make an individual perceive punishment if he or she doesn’t participate in the fraud. This punishment is typically based on fear.
Perceived Expert power is the ability of the fraud perpetrator to influence another person because of expertise or knowledge.
Legitimate Power refers to the ability of the fraud perpetrator to convince a potential fraud perpetrator that he or she truly has power over him of her. For example, het CEO and other member of management may claim to have legitimate power to make decisions and direct the organization, even if that direction is unethical. Legitimate power can be an extremely powerful tool in recruiting individuals to participate in fraud in authoritarian cultures.
Referent Power is the ability of the fraud perpetrator to relate to the potential co-conspirator. Fraud perpetrators will often use perceived referent power to gain confidence and participation from potential co-conspirators when performing unethical acts. Many individuals , when persuaded by a trusted friend to participate in fraud will rationalize the actions as being justifiable.