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how can we use such information in the prevention of future acts without falling into the same pattern of problems law enforcement has encountered with racial enforcement? If we know left-handed redheads are more likely to commit fraud than others, is the answer to avoid hiring left-handed redheads in the future? I think not.
We may, for example, be able to learn of warning signs in our employee populations. Perceived financial hardship is a common element cited by every theorist who has studied occupational fraud. Would we be better served in the long run to make employees aware of professional resources available to them when they experience such events, and thereby perhaps reduce fraud occurrences? I believe such matters are worthy of greater consideration, especially when we expand the circle to include compulsive gambling, living beyond one’s means, and credit card addiction.
Steve Albrecht, the noted fraud researcher and theorist has also commented on items we may wish to think about in this regard. Much like the previous FBI example, these items may be best suited for inclusion in management/supervisor awareness training:
Research in psychology reveals that when a person, especially a first-time offender, commits a crime, he or she becomes engulfed by emotions of fear and guilt. Those emotions cause the individual to experience a significant amount of stress, and in order to cope with stress, the individual will exhibit unusual and recognizable behavior patterns. Some recognizable behavior patterns are insomnia; increase in drug and alcohol abuse and smoking habits; unusual irritability and suspiciousness; inability to relax; lack of pleasure in things usually enjoyed; fear of getting caught; inability to look people in the eye; visible embarrassment around friends and others; defensiveness or argumentativeness; unusual belligerence in stating opinions; unsolicited confessions; obsessive contemplation of possible consequences; constant development of excuses and identification of scapegoats; tendency to work standing up; and increased perspiration.
It is not any particular behavior, but rather changes in behavior that signals fraud. People who are normally nice may become intimidating and belligerent; people who are normally belligerent may suddenly become nice.22
Albrecht also raises two issues frequently associated with occupational frauds. The first is lifestyle changes. Apparently, once perpetrators of workplace fraud get more comfortable with their new identity and activities, it is time to begin to enjoy the fruits of their labor. He notes that sometimes the fraud in question could have been detected because it was, to use the classic phrase, “too good to be true.” Albrecht uses the experience of General Motors to make both points. In early 1992, it was discovered that John McNamara, a Long Island car dealer, had defrauded General Motors of approximately $436 million. While not technically
an employee of General Motors, McNamara’s relationship with that company was such that his activities exhibited all of the symptoms of a classic occupational fraud. The interesting thing is, General Motors thought of him as a star performer for most of the time the fraud was being committed. Albrecht describes the scheme as follows:
Essentially, what McNamara did was to establish a phony van-assembly company, Kay Industries, in Indiana. Supposedly, McNamara Buick, a company owned by McNamara, paid Kay Industries for customized vehicles he claimed to be exporting overseas. At one point he was supposedly purchasing as many as 17,000 vans per month. Kay Industries would give McNamara Buick invoices stamped paid. McNamara Buick submitted the invoices to GMAC, which gave McNamara a 30-day loan of approximately $25,000 on each customized vehicle.
McNamara Buick would then supposedly sell the vehicles to another McNamara-owned corporation, which in turn, claimed to be shipping them to a McNamara-owned buyer in Cyprus, Cydonia Trading CTD. McNamara Buick would then repay the loans within 30 days while, at the same time, borrowing additional funds from GMAC for the next shipment of vehicles. All but the last round of loans, totaling $436 million, were repaid. GMAC loaned McNamara $715 million in 1989, $1.88 billion in 1990 and $1.93 billion in 1991. The total loans made to McNamara over a four-year period exceeded the gross domestic product of the country of Panama.
McNamara’s fraud was possible because he always paid GMAC on time. He was a valued customer who consistently increased his line of credit. GMAC was obviously making a “profit” on his transactions at a time when the company was very hungry for sales. GMAC managers were under pressure to generate profits, and McNamara was an answer to their profit concerns. GMAC officials got raises and promotions based on the quantity of his loans.23
While the experience of General Motors and its commercial lending arm, GMAC, is a classic case of news that was too good to be true—17,000 vehicles per month is more than 565 vehicles a day!—Albrecht also goes on to point out some of the behavioral warning flags that might have been worthy of attention. Even an apparently successful dealer like McNamara might be hard-pressed to justify the following level of expenditure described by Albrecht: