PROBLEM GAMBLING AND FRAUD

The Cardsharps Michelangelo MERISI da CARAVAGGIO (1573 - 1610)

Problem Gambling & Fraud

1. Is due to a fault in the financial system, whether present or created

2. The fault is hidden3. It gives access to ‘credit’4. A thief is motivated to steal the ‘credit’5. A problem gambler ‘needs’ more ‘credit’

to spend more time gambling6. The longer the fraud lasts the greater the

effect

A Neglected Hungry Elephant

Financing Fraud

In the roaring 20s, during that fantastic stock market boom, people were allowed to purchase stock on just 5% margin.

Economists widely regard the Florida real estate crash of 1927 to be a material factor in triggering the 1929 crash.

1933 Glass-Steagall Act

'Fraud on the market’ judicial approaches to causation and loss from securities nondisclosure in the United

States, Canada and Australia

All common stock purchases to be backed by at least 50% margin.

Act Shattered in 1999

Express Glass

The Crash of 2008

Enormous derivatives markets traded typically on 3-5% margin.

Seeking Alpha. 18.3.08 Matt Dubuque

Resale (house) prices collapsed at a pace reminiscent of the Great Depression.

Bob Willis and Shobhana Chandra. Blomberg.com 23.12.08

When the Tidal Wave of Credit Retreats

mooyo-inthai.blogspot.com

Authorities chained up Madoff's $7 million yacht "Bull“

Associated Press 6.4.09

Most Credit=Biggest Fraud

• Bernie Madoff was Chairman of the NASDAQ stock exchange:

– Committed the largest investment fraud in Wall Street history. Investors lost $22.77 billion dollars in cash.

– Is serving a 150 year prison sentence for fraud.

Non-Punitive Rehabilitation

• Clifford Douce, formerly a senior constable in Victoria, Australia, tried to get $5,000 form an accused man for helping him in court

• In serious financial problem after seeking solace in pokies after helping his wife who had a gambling problem

• Sentenced to a four-month intensive correction order – custodial sentence served within the community. theage.com.au 6 August 2010

Australian Gambling Mirrors Finance Industry Reform

• 1999 Australian Productivity Commission promoted the liberalisation of gambling in Australia.

• 2009/10 Australian Productivity Commission promoting further regulation of gambling in Australia. The aim is to reduce problem gambling, without discouraging social gambling.

The Costs

In its 1999 inquiry, the Productivity Commission estimated the costs of gambling in Australia. Between $1.8 billion and $5.6 billion, the costs arise from a multitude of problems, including crime.

The Commission noted that gambling is one of the most common single motivations for fraud.

Don’t Mention The Fraud

Organisations tend not to comment on fraud for fear of undermining customer, investor or stakeholder confidence in them and/or attracting the attention of the regulators.

Stephen Horne, Managing Director at NSW Internal Audit Bureau Services

It is the corporate stain which dare not speak its name.

Fairfax Digital Business Day. Adam Courtenay. 12.11.09

Gambling, Fraud and Regulation

1. Deregulation of gambling increases access to gambling

2. Increased access to gambling increases problem gambling

3. Problem gambling is the primary cause of fraud4. Increased problem gambling leads to increased

fraud5. Regulation to decrease problem gambling will

decrease fraud6. Regulation to reduce fraud will reduce problem

gambling

Gambling, Fraud and Money1. Money is a medium for exchanging goods and services. 2. Exchange of goods and services is a win:win event. All

parties benefit ‘equally’.3. Social gambling is a win:win event where money is fairly

exchanged for entertainment and leisure.4. Gambling is a win:lose event where monetary gain is

the sole driver. 5. Rules of law are designed as win:win social

conventions.6. Those who breach rules of law for personal, or win:lose,

gain have committed a crime of deception or fraud. 7. Access to gambling encourages fraud.

Gambling, Fraud and Patrons

The American Psychiatric Association’s ‘Diagnostic and Statistical Manual of Mental

Disorders’(DSM-IV), contains a set of questions that is used to determine whether a person is a

problem gambler.

‘Problem gambling is characterised by difficulties in limiting money and / or time spent on

gambling which leads to adverse consequences for the gambler, others, or for the community.’

The DSM-IVPersistent and maladaptive gambling behaviour is indicated by five (or

more) of the following:• 2. needs to gamble with increasing amounts of money in order to achieve

the desired• 3. has repeated unsuccessful efforts to control, cut back, or stop gambling;• 6. after losing money gambling, often returns another day to get even

(“chasing one’s losses);• 7. lies to family members, therapists or others to conceal the extent of

involvement with gambling;• 8. has committed illegal acts such as forgery, fraud, theft, or embezzlement

to finance gambling;• 9. has jeopardised or lost a significant relationship, job or educational career

opportunity because of gambling;• 10. relies on others to provide money to relieve a desperate financial

situation caused by gambling.

Non-Fraud Indicators?

‘How greedily I gazed upon the gaming-table, with its scattered louis d'or, ten-gulden pieces, and thalers upon the streams of gold as they issued from the croupier's hands, and piled themselves up into heaps of gold scintillating as fire; upon the ell—long rolls of silver lying around the croupier. Even at a distance of two rooms I could hear the chink of that money—so much so that I nearly fell into convulsions.’

By FYODOR DOSTOYEVSKY, 1867

THE GAMBLER

FYODOR DOSTOYEVSKY

Wikipedia says that Dostoyevsky is often acknowledged by critics as one of the greatest psychologists in world literature.

Sigismund Schlomo Freud

Freud attributed Dostoevsky’s gambling to fits of pathological passion. EDITH KURZWEIL

1856 - 1939

Problem Gamblers

‘Investigations suggest that the most common underlying stimulus to lead people into fraud is gambling.’

‘It may add into a complex melting pot of other motivators, but I feel it is not at all unreasonable to say that gambling

is one of the top, if not outright no. 1, causes of employees committing internal fraud.’

Stephen Horne, Managing Director at NSW Internal Audit Bureau Services

Casino FraudMonte Carlo Casino Picture

Monaco Tourism Office

In China …• Li Weimin, the mayor who gambled away more than 90

million yuan in Macau, did not spend a penny of his own money

• As mayor and head of four township companies, Li could take money from company accounts as easily as if it were his own money. And his power was totally unmonitored: nobody launched any complaints and no auditor raised any questions. He was not caught until after he left his position in 2004. Beijing Losing the Gambling Battle. Stephen Wong. Asia Online Times 27.6.9

Racing Fraud

Royal Randwick, about 1968, photo

by David Mist. ’Gambling in Australia: Thrills, Spills and Social Ills’

In Karratha …"He'd keep betting in huge amounts until all the money was gone" . . .

Kim Faithfull, centre, after being charged. SMH.com.au 18.10.03. Photo: Sean Cowan

Extent of Fraud

‘Gambling Motivated Fraud in Australia 1998-2007’ Brett Warfield. May 2008

The study included any conviction in an Australian court of law during the period 1 January 1998 to 31 December 2007 for deception related offences where evidence was led that the proceeds of the crime were mostly gambled or where existing gambling debts were the motivation for committing the illegal acts.

Some of Warfield’s Findings

• 528 persons convicted for deception related offences

• Over $269 million taken• Employees were responsible for 2/3 of all

fraud perpetrated by problem gamblers• At least five murders were the result of

gambling addicted fraudsters trying to cover their frauds.

Warfield’s Assessed Gambling with Fraudulent Proceeds

Mode of gambling Cases Amount ($m)

Poker machines 184 64 Casinos 74 71 Horseracing 27 71TAB 18 6Other 23 22Total 326 234

Measures to Combat Fraud

1. Transparency2. Analysis of trends3. Credit control4. Time out from the workplace5. Time out from gambling6. Adult only gambling7. Non-punitive rehabilitation

Transparency and Fraud• Under accounting standards fraud is rarely, probably never, classed

as “material”. Barings Bank would be an exception, as would NAB a few years ago. Materiality tests are one of the hurdles to transparency that we face.

• More pragmatically, organizations tend not to comment on fraud for fear of undermining customer, investor or stakeholder confidence in them and/or attracting the attention of the regulators.

• What I think organizations should do in their annual report, either under governance or risk management, is to show that they have taken steps to keep up their level of awareness about fraud risk factors, and adjust their corruption prevention strategies accordingly.

• Fraud is but one of many risks that an organization faces, but especially in the public sector, it is an area that warrants more attention that its absolute dollar materiality suggests.

Stephen Horne, Managing Director at NSW Internal Audit Bureau Services