Psychology of

Fraud Understanding Gender Bias

and

Applied Interviewing

Psychology

Tommy Seah

ACFE, Regent Emeritus

© 2014 by Tommy Seah

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FOREWORD

Dr. Frank LAW, Chief Inspector of Police, Head,

Cyber Security Centre,

Technology Crime Division,

Commercial Crime Bureau,

Hong Kong Police Force

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ACKNOWLEDGEMENTS

All books are, in a way, the work of others….those who

inspired me as a kid, taught me to be a an accountant, an

auditor, a computer science lecturer, a fraud examiner, a

writer, a father. Those of you who grew up during the Cold

War will remember what it was like to be caught on the

wrong side. The nightmares of that time did not happen to

me directly but one does wonder if such warnings ensued

that indeed such things did not happen at all when I was a

involved in the war against fraud. I remember distinctly one

of the first lesson learned was a maxim borrowed from an

intelligence agency that drilled into us that it is “In

Deception, We shall do War”. Their impact on me is obvious

with this work, their warnings as real then as the warning of

this book the potential reality now. Just in case you are

confused, I am talking about the intense psychology exerted

upon opposing forces during the Cold War. I am a product of

that war and I used that knowledge to write this book. I am

hoping that this book which comes in a series, might give the

reader some insights into the psychology of fraud.

Special thanks must go to early pioneers and researchers

Graham Davies and Ray Bull from the University of Leicester,

UK who published the authoritative manual on The

Psychology of Crime, Policing and Law. I am also deeply

indebted to David E. Zulawski and Douglas E. Wicklander who

edited Practical Aspects of Interview Interrogation. These

folks have been inspirational in my writing, Last but certainly

not in the least, I am extremely grateful to Dr. Gerald L.

Kovacich who wrote Fighting Fraud - How to Establish and

Manage an Anti-Fraud Program. The author wishes to

express his deep appreciation to Dr. Frank Haronian and

Dr.Roberto Assagioli, M.D. for their helpful publication on

The Psychology of Woman And her Psychosynthesis. I have

learned much from all of them.

I am particularly indebted to Dr.Frank LAW, Chief Inspector

of Police, Head, Cyber Security Centre, Technology Crime

Division, Commercial Crime Bureau, Hong Kong Police Force

for writing the foreword.

I am also grateful to transparency international in its

publication Global Corruption barometer 2013, Transparency

International is the global civil society organization leading

the fight against corruption. through more than 90 chapters

worldwide and an international secretariat in Berlin.

Transparency International raise awareness of the damaging

effects of corruption and work with partners in government,

business and civil society to develop and implement effective

measures to tackle it.

Lastly, a writer cannot function without good editors,

publishers, Seminar organizers and Sales agents. Stanley Chia

will always stand as one of the best in carrying my books. As

for my many friends and supporters who believe in this work,

all I can say is thanks.

Introduction

Crime is a blight on any societies. From Australia to the

United States, Russia to South Africa, Singapore to Argentina,

crime has a major impact on how people live their daily lives.

Minor crimes such as larceny and petty theft are a nuisance,

and while they typically have comparably little economic

impact, they create an environment of distrust and suspicion

that can poison communities. More serious white-collar

crimes such as bribery, extortion, misappropriation of assets

and conflict of interests have a more profound impact both

on business organization and their communities, leading to

fear, hatred and isolation of the alleged perpetrators.

Technological advances, for example DNA testing and CCTV,

have improved our methods of investigating and prosecuting

crime, but despite these advances the majority of forensic

investigations and prosecutions still rely on human factors. In

this respect forensic investigations and prosecutions have

changed little over the past couple of centuries. Investigators

still rely on their own conceptualizations of who commits

certain crimes to identify potential offenders, eyewitnesses

are still integral to most investigations and prosecutions, and

a suspect confessing still has a major impact on decisions to

convict a suspect. It is in these human factors where

psychology has its role. In this book, we outline current,

cutting-edge research and its application to investigating and

prosecuting offences among white-collar workers. We begin

by explaining the nature of fraud. Examine the distinction

between fraud and employee misdemeanor. Take a detailed

look at the limitations of internal controls. Identify the three

variables of opportunities, motivation and rationalization for

fraud. Explain the psychological profile of man and woman.

Devote a substantial portion of the book to the interviewing

techniques that need to be applied to obtain the truth

notwithstanding the gender bias in rationalization in

committing fraud. Throughout history, one of the great

problems we have faced has been the development of a

system by which truth may be made known. Solutions to this

problem have ranged from such extremes as the torture

chambers of the middle ages to the unhesitating acceptance

of the word of a gentleman in the eighteenth century.

Neither extreme meets the requirements of today's

complicated world. We respect human dignity too much to

permit physical and psychological abuse of an individual in

the search for truth. Yet we recognize that fraud perpetrators

will lie without hesitation, even under oath, if this will further

their aims. The truth can be determined only after the

evidence has been collected and analyzed. The public should

not be misled into thinking that this is an automatic process.

Investigative interviewers should use psychology only as the

best means available on behalf of society to collect and

preserve evidence.

The tactics in this book to encourage the cooperation of

interviewees are ethical. A primary objective in this book is

intended to counteract the often illegal coercive tactics of

the past and to promote perceptive interviewing. The maxim

to remember when interviewing someone is that : Things can

go so wrong when the approach is wrong.

CONTENTS

WHAT IS FRAUD

What is the distinction between fraud and Employee

misdemeanor

What would qualify as a fraudulent activity

What is Employee Misconduct

WHEN WILL FRAUD HAPPEN

What factors cause these otherwise normal, law-abiding

persons, to commit fraud

Conflict of Interest, is it fraud

THE LIMITATIONS OF INTERNAL CONTROLS

Why we must not blame the Internal Auditor for every fraud

Why so some management thinks that Sanctions Don't Deter

Fraud Internal control myths and facts

Why we must not blame the Internal Auditor for every fraud

THE PSYCHOLOGY OF FRAUD FOR MAN AND WOMAN

Motivation and Rationalization in fraud is Gender bias.

Understanding bias and psychosynthesis

Psychological Differences between Men and Women

Identifying and understanding the characters of fraudsters

INTRODUCTION TO INTERVIEWING TECHNIQUES

Interviewing Techniques

Finding the truth ethically

How to strategically investigate “he said/she said” allegations

where there are no eyewitnesses

WARNING SIGNS FOR FRAUD

Red Flags for fraud and Misconduct

Specific method to interview witnesses.

The Interviewer – Knowing Thyself

Interview Techniques Fundamental

The Traits of a Good Interviewer

Interview vis-à-vis Interrogation

More RED Flags of that employees may have committed

fraud

The Interviewing Process using the “P.E.A.C.C.E” model

5 Steps in Integrating Interviewing Techniques into Fact-

Finding Enquiries

Psychological Elements for the Interviewing Process

Practical Tips on Handling Interviewees

Effective Negotiation Techniques

How to Detect, Manage and Mitigate Deceptions by Asking

Different Types of Question

Practical Techniques to Verify Information Provided

NOTE TAKING DURING INTERVIEW

Other techniques and questioning strategies you can use to

determine whether a witness is lying

Is it lawful to use social media in your investigation?

THE 4 STEPS IN ANY INVESTIGATION

What is Fraud

There will always be fraud. If I remember correctly it was

Singapore Minister Mentor Lee Kuan Yew, the then Prime

Minister of Singapore who once said with words to the effect

that “If we were to spend a hundred dollars and ninety nine

reaches the ground, I will be a happy man.” This man is a

realist. He must be commended for his willingness to come

to term with the reality that even as he builds a clean

government, he is fully conscious that there is no such thing

as a completely clean civil service. Subsequent fraud

scandals in the public sectors proved that he is absolutely

right about the need for a clean government. The thing about

fraud is that if you cannot prove it in court it did not

happened. It is totally irrelevant who we suspect or what we

know. Knowledge about something does not make it a fact in

court. In the court of law, it is all about proving that the

alleged event did in fact took place.

Fraud is the intentional deception with intent to make a gain

or to cause a loss, or to expose another to the risk of loss. It

can be perpetrated for the benefit of or the detriment to the

employer, and can be committed by persons outside as well

as inside organization. In practice, all allegations of fraud are

initially looked into by an Investigation team, irrespective of

where the allegation has come from. This does not mean that

all allegations are investigated. Allegations can sometimes be

malicious or the information being alleged is already

declared. There should be a referral process that will identify

the cases that merit an investigation. It is important to

remember that a person is innocent until proven guilty and

the fact that someone maybe being investigated does not

make them guilty. There are many reasons why someone

decides to report an allegation of fraud and it is important

that people continue to do so. Although all allegations

should be treated with the strictest confidence and can also

be made anonymously, keeping things under wrap might

prove to be difficult in practice. Making an allegation can for

some be a very difficult thing to do. Fraud is destructive in

nature, In the private sector, the stakeholders and the

employees are the one that suffers. It is important to

remember that even in the public sector, this is not a

complainantless crime, in a lot of cases it is theft from the

public purse. Money pilferage from the government coffers

could far better be spent on public services.

Fraud is generally defined as:

• A knowing misrepresentation of the truth or concealment

of a material fact to induce another to act to his or her

detriment.

• A misrepresentation made recklessly without belief in its

truth to induce another person to act.

• A tort arising from a knowing misrepresentation,

concealment of a material fact, or reckless

misrepresentation made to induce another to act to his or

her detriment.

• Unconscionable dealing; especially contract law, and the

unfair use of the power arising out of the parties’ relative

positions and resulting in an unconscionable bargain.

What is Employee Misconduct?

Most employees perform their jobs competently and

meticulously. Others who do not possess the same drive and

expertise, still manage to perform satisfactorily. However,

there are a few employees whose consistent misconduct set

them apart from their peers and require a large amount of

management time. These employees can be said to be guilty

of employee misconduct. Simply put, employee misconduct

can be defined as a breach of duty or discipline which is

inconsistent with the express or implied conditions of an

employee's contract of service or employment bargain.

Examples of misconduct are theft or dishonesty, disorderly or

immoral conduct at work, willful insubordination etc.

The employment bargain is an agreement between an

employer and an employee whereby the employer agrees to

employ the employee for a specific job and pay the employee

a predetermined salary. Acceptance of the terms of

employment by the employee signifies that the employee

has agreed to work regularly and with reasonable skill under

the directions of the employer.

There are two types of employee misconduct; culpable

conduct and non-culpable conduct.

Culpable conduct is blameworthy conduct which can be

legally corrected with progressive discipline. Examples of

culpable conduct are theft and assault.

Non-culpable conduct is non-blameworthy conduct that

cannot be legally corrected with discipline. This refers to

cases whereby the employee cannot be blamed for his or her

poor performance. For example, cases whereby the

employee is excessively absent from work due to chronic

medical problems. Other examples include failure to perform

due to disability or lack of aptitude.

Although it is possible for both culpable conduct and non-

culpable conduct to exist in the same case, it is essential to

distinguish the two as they are very different and have to be

treated separately.

Elements of Proof

The term "elements of proof" is defined by Black's Law

Dictionary as: Those constituent parts of an action that would

tend to prove it occurred and the perpetrator was the

individual that did it.

There are several kinds elements of proof when it comes to

employee misconduct. Examples consist of: proof that a

violation occurred, proof that the employee performed an

act that violates the law, proof that the employee performed

an act in violation of policy or procedure, proof that the

employee avoided performing a particular act in agreement

of his or her job description, and last but not least, proof that

the employee behaved with irresponsible disregard for

policy, procedure and or common sense.

In the United States, Actual Fraud is defined as:

• A concealment or false representation through a statement

or conduct that injures another who relies on it in acting.

It also comprises three elements:

• Fraud in fact

• Positive fraud

• Moral fraud

In the case of an “actual fraud,” you want to be able to prove

these three elements and to have policies, procedures, and

processes in place to provide controls that will show that it

was in fact an actual fraud that an employee, supplier,

customer, or others committed and it was their intent to do

so.

It is also vitally important that the person committing the

actual fraud did so

• Knowing what the corporation’s policies, procedures, and

processes were; and that the fraudster

• Knew that those policies, procedures, and processes were

to be followed at all times, ideally by so attesting to this

knowledge in writing

— which is a key process in your anti-fraud program.

This consideration is important because in the U.S. judicial

system today, it generally must be shown that the person

perpetrating the fraud against the corporation, especially an

employee or someone who has a business working

relationship with the corporation, was aware of the policies,

procedures, and processes that were violated and/or knew

that such actions were against corporate policy, procedures,

or civil or criminal laws.

In the United States, an investigator, fraud examiner, or

security professional cannot rely on the expression

“ignorance of the law is no excuse” to help “make the case”

against the defrauder. In fact, there are some indications that

the alleged defrauder must also be told in advance when

making them aware of anti-fraud policies and procedures to

follow the consequences of his or her actions of not following

the “rules”. It is especially important in these days of “It’s not

my fault!” where personal responsibility seems to have taken

an extended holiday.

Remember that unless you are a lawyer and feel confident in

defining a fraud and how to go about identifying the

elements of proof, you should coordinate with the corporate

legal staff and get their input when such legal issues arise. It

will not only save you time and possible embarrassment but

will help ensure that your actions do not cause a lawsuit

against the corporation, which may have not otherwise been

contemplated by the “offended party.”

It may also to help ensure that your employment is not

terminated over such matters. Also remember that “anyone

can sue anyone over anything.”

However, with the proper anti-fraud program elements in

place, you have a better chance of ensuring that the fraud

miscreant does not successfully win his or her lawsuit.

Even though the preceding and succeeding definitions apply

to the United States and possibly some other countries, most

modern countries have similar laws that basically require the

same elements of proof.

However, a global corporation must know the specific fraud-

related statutes in each country and take these statutes into

consideration when developing and managing an anti-fraud

program for a global business.

How is Fraud different from Employee Misconduct

In the earlier chapter, fraud has already been defined as the

intentional deception with intent to make a gain or to cause

a loss, or to expose another to the risk of loss. It can be

perpetrated for the benefit of or the detriment to the

employer, and can be committed by persons outside as well

as inside organization. This definition draws a distinct line

between fraud and employee misconduct as employee

misconduct merely refers to a breach in the basic obligations

of the company. Employee misconduct does not involve any

intentional deception by the employee with an intent to

make a gain or cause a loss, employee misconduct involves

employees who do not abide by the rules of the company

and/or the terms of their employment bargain.

On another note, employees tend to misbehave when they

are cynical about the ethical culture of the corporation in

question. This means that employee misconduct can be

linked to the ethical nature of the corporation in question.

Fraud on the other hand, is due to the malicious nature of

the perpetrator and is not linked to the nature of any

corporation in particular.

Finally, the most obvious distinction between fraud and

employee misconduct would have to be that fraud can be

committed by persons outside the organization whereas only

employees of the organization can be guilty of employee

misconduct.

When will fraud happen IN your organization. The good

news is that most people who commit fraud are not career

criminals. The vast majority are trusted employees who have

no criminal history and who do not consider themselves to

be lawbreakers. So the question is, what factors cause these

otherwise normal, law-abiding persons, to commit fraud?

The best and most widely accepted model for explaining why

"good people" commit fraud is the fraud triangle. This is a

model developed by Dr. Donald Cressey, a criminologist

whose research focused on embezzlers, people he called

"trust violators."

According to Cressey, there are three factors that must be

present in order for an ordinary person to commit fraud. All

three of these factors must be present at the same time in

order for fraud to occur. The three factors are now referred

to as:

Pressure (also known as Motivation)

Opportunity

Rationalization

PRESSURE

The first leg of the fraud triangle represents pressure, or

what Cressey called a perceived non- sharable financial need.

This is what motivates the crime in the first place. The

fraudster has some financial problem that he is unable to

solve through legitimate means, so he begins to consider

committing an illegal act such as stealing cash or falsifying a

financial statement as a way to solve his problem. The

financial problem can be personal (too deep in personal

debt) or professional (the person's job or business is in

jeopardy). Examples of pressures that commonly lead to

fraud include:

Inability to pay one's bills

Drug or gambling addiction

Need to meet earnings to sustain investor confidence

Need to meet productivity targets at work

Desire for status symbols such as a bigger house,

nicer car, etc.

Non-shareable problems and the importance of

status

Notice that Cressey did not say fraud is motivated by

financial pressure, but instead by a non-shareable financial

pressure. This is a very important distinction. Everybody has

financial pressures, but not everybody commits fraud. What

constitutes a non-shareable need is completely in the eye of

the beholder. One person could lose his rent money

gambling and will be motivated by this problem to write a

company check to cover his rent. Another person might

suffer the same loss and not feel compelled to commit an

illegal act. Non-shareable problems all involve some sort of

embarrassment, shame, or disgrace. More importantly, they

all threaten the fraudster's status as a person who is trusted

by others. In almost every fraud case, the fraudster's

financial problem relates to status-seeking or status-

maintaining. So you see, it has a lot to do with what he thinks

what others will think of him.

Consider the following sanitized cases that occurred in

Singapore :

Financial Statement Fraud

A CEO develops a new business plan. Unfortunately, the plan

fails miserably, and sales plummet. Having just suffered

through two previous bad quarters, the CEO is afraid that this

latest disaster will cost him his job. Unable to face the

shareholders and the board of directors and tell them the

bad news, the CEO persuades the CFO to help him create

fictitious sales to mask the losses. The CEO is convinced that

they can increase sales and correct the books next quarter.

Misappropriation of Assets

A high-ranking financial officer experiences heavy losses in

her personal investments. She feels unable to admit to her

personal financial failures because this would hurt her status

as a highly trusted person who is in charge of her company's

finances. Therefore, she tries to resolve her personal

financial problem in secret by writing company checks to a

shell company she controls.

Corruption

A bank Relationship Manager desires prestige symbols such

as a nicer car, better clothes, jewellery, etc., but she cannot

afford them on her salary. Because she cannot legitimately

obtain these items, and because she is unwilling to "settle"

for less expensive counterparts, she begins to get kickbacks

or grease money from the banks suppliers to purchase these

status symbols.

OPPORTUNITY

The second leg of the fraud triangle is opportunity,

sometimes referred to as perceived opportunity, which

defines the method by which the crime can be committed.

The person must see some way she can use (abuse) her

position of trust to solve her financial problem with a low

perceived risk of getting caught. It is also critical that the

fraudster be able to solve her problem in secret. Remember

that fraudsters are motivated by concerns over status. If a

perpetrator is caught embezzling or falsifying financial

information, this will hurt her status at least as much as the

underlying problem she was trying to conceal. So the

fraudster not only has to be able to steal funds, she has to be

able to do it in such a way that she will likely not be caught

and the crime itself will not be detected. For example, if an

employee has access to blank checks she may see an

opportunity to forge a company check payable to herself. But

that check might well be spotted during the reconciliation of

the bank statement and she would be caught. In this case,

even though there is an opportunity to steal the funds, there

is no opportunity to steal them in secret. But suppose the

same employee also reconciles the company's bank

statement. Now, she can write a check payable to herself and

then when the bank statement arrives she can destroy the

fraudulent check and force the balance on the reconciliation.

Now the person has a perceived opportunity to commit

fraud.

Rationalization

The third leg of the fraud triangle is rationalization. As we

stated already, the vast majority of fraudsters are first-time

offenders with no criminal past. They do not view themselves

as criminals. They see themselves as ordinary, honest people

who are caught in a bad set of circumstances. Because the

fraudster does not see himself as a criminal, he must justify

the crime to himself in a way that makes it an acceptable or

justifiable act. This is known as rationalization.

Common rationalizations include the following:

I was only borrowing the money

I was entitled to the money

I had to steal to provide for my family

I was underpaid/my employer had cheated me

My employer is dishonest and deserved to be fleeced

While the perpetrator must rationalize the crime to himself

before he commits the crime, after the act has taken place

the rationalization will often be abandoned.

CONFLICT OF INTEREST

A conflict of interest (COI) occurs when an individual or

organization is involved in multiple interests, one of which

could possibly corrupt the motivation for an act in another.

The presence of a conflict of interest is independent from the

execution of impropriety. It is important to understand that

not every conflict of interest is a fraudulent act. The corrupt

intent must be proven in order to establish a criminal act.

Therefore, a conflict of interest can be discovered and

voluntarily defused before any corruption occurs. A widely

used definition is: "A conflict of interest is a set of

circumstances that creates a risk that professional judgement

or actions regarding a primary interest will be unduly

influenced by a secondary interest." Primary interest refers

to the principal goals of the profession or activity, such as the

protection of clients, the health of patients, the integrity of

research, and the duties of public office. Secondary interest

includes not only financial gain but also such motives as the

desire for professional advancement and the wish to do

favours for family and friends, but conflict of interest rules

usually focus on financial relationships because they are

relatively more objective, fungible, and quantifiable. The

secondary interests are not treated as wrong in themselves,

but become objectionable when they are believed to have

greater weight than the primary interests. The conflict in a

conflict of interest exists whether or not a particular

individual is actually influenced by the secondary interest. It

exists if the circumstances are reasonably believed (on the

basis of past experience and objective evidence) to create a

risk that decisions may be unduly influenced by secondary

interests.

A most celebrated case in Singapore to illustrate this point

was exemplified when Former Central Narcotics Bureau

(CNB) director Ng Boon Gay was acquitted Thursday of all

four charges against him in the sex-for-contracts case that

gripped Singapore over the course of the trial that began

2012.

Reading out a 32-page oral judgment to a packed courtroom,

District Judge Siva Shanmugam impeached the testimony of

prosecution witness and former IT sales executive Cecilia

Sue, while accepting the evidence and explanations given by

Ng where his testimony was questioned.

Pointing out that prosecution lawyers had not disputed Sue's

dishonesty in court about her sexual relationship with Ng, he

said he found Sue's explanations for her discrepancies in

evidence "inadequate".

In her testimony last year, Sue denied she had a sexual

relationship with Ng. She painted the picture of a man who

became increasingly desperate to obtain sexual gratification

in the form of oral sex, though she repeatedly rejected him.

"Her claims that she was tired, stressed and frightened, even

if true, would not satisfactorily account for the wide

divergence in her evidence," he said.

If Sue's statements after 12 January last year were to be

believed, it meant the accused forced her to perform oral sex

on him on 2 December 2011, the judge cited.

However, the judge noted that three days later after the

incident, Sue messaged "M u", which meant "miss you" and

when the accused did not respond, Sue messaged "u ignore

me" followed by "W her? Where's family day?"

Six days after the last occasion of alleged forced fellatio, Sue

sent the accused a sexually suggestive message "Did u DIY"

with "DIY" understood by the accused as referring to

masturbation.

"It would be surprising to see such conduct from someone

who had been the subject of forced oral sex," the judge

noted.

Overall, the judge said he found Sue's explanation for the

numerous material discrepancies unconvincing.

"The discrepancies went towards the crux of the charges," he

said. "After weighing her oral testimony with the evidence in

its entirety, I found that her credit had indeed been

successfully impeached."

The judge said he was satisfied that Ng and Sue were in a

consensual sexual relationship and that the acts as detailed

in the charges took place in that context.

Even though the prosecution had tried to explain Sue's denial

of her relationship with Ng, the judge felt that "this in itself is

indicative of a disturbing propensity on Ms Sue's part to be

untruthful when her own interests are called into question".

"Ms Sue had provided CPIB with two contrasting versions of

facts in her statements. As these versions are widely

divergent, one of them had to contain untruths. Effectively

she has been untruthful to both the court and the law

enforcement agency," said Shanmugam. "In the

circumstances I was of the view that it would be unsafe to

accept any part of Ms Sue's oral testimony on any

contentious matter which testimony was not independently

corroborated by some other evidence."

Ng's testimony 'largely consistent' with evidence

The judge then elaborated on his assessment of Ng's

testimony in court and performance as a witness, declaring

that he found that Ng's credit as a witness was not

impeached.

He said that Ng had given his evidence in a "forthright

manner", where he candidly admitted that he had known of

Sue's involvement with his agency after she told him about

the deals she closed that involved CNB indirectly, through

NCS.

Noting the need for Ng's statements in court to be

considered in context, Shanmugam said the issue of whether

engaging in sexual acts on an "on and off" basis equates to

being a "regular sex partner" is a subjective matter, and that

Ng was entitled to decide what was regular or not. Whether

or not Sue enjoyed the trysts was also subjective, said the

judge, since Ng would not have been in a position to state

what was on her mind.

"Contrary to the prosecution's assertions, I found that the

accused (Ng)'s statements, when viewed in context, were

largely consistent with his claim that he was in an intimate

relationship with Ms Sue," he said. He added further that

Ng's explanations for all the prosecution's alleged

discrepancies apart from his knowledge of Sue's involvement

with CNB were "credible and consistent", and that this

inconsistency, in turn, was "not particularly material" in the

circumstances, and did not go to the crux of the charges

against Ng.

He also noted that the process for procurement was driven

by CNB's IT department and that the accused did not take

part in that process or influence the work of the evaluation

committee that reviewed the agency's potential vendors.

Despite acknowledging that there was indeed a conflict of

interest, Shanmugam stated that the presence of conflict

does not automatically imply that there was corruption. He

said he was satisfied that there was neither corrupt element

or guilty knowledge on Ng's part in relation to his charges,

adding that in his view, throughout the time where the two

IT contracts were approved and processed, Ng possessed "no

ulterior motive, let alone a corrupt intent".

Shanmugam also noted that even though only Ng's intentions

behind the four instances of fellatio were relevant to the

trial, he found that both him and Sue had "innocuous"

motivations in giving and receiving oral sex.

"On this count alone I found that (Ng) had not only

successfully rebutted the presumption (of corrupt intent) but

had raised a reasonable doubt in the case against him, which

would warrant an acquittal on all four charges," he said,

which triggered a wave of relief across the courtroom, in

particular Ng's relatives, some of whom tear and hugged one

another.

Speaking to reporters after the verdict, defence counsel Tan

Chee Meng said it was "vindication of Ng Boon Gay, the fact

that he's not corrupt and his innocence has been proven".

What is the object lesson here? It is pretty obvious that once

again we must be reminded that what might be considered

as immoral by society does not make it illegal.

When Does the Fraud Triangle Not Apply?

The fraud triangle applies to most embezzlers and

occupational fraudsters, but it does not apply to the

"predatory employee"—the person who takes a job with the

intent of stealing from his employer. Also, as we stated

earlier, while a rationalization is necessary for most people to

begin committing fraud, the rationalization will often be

abandoned after the initial act has taken place. Most frauds

are not one-time events. They usually start as small thefts or

misstatements and they gradually increase in size and

frequency. As the perpetrator repeats the act, it becomes

easier to justify until no justification is needed at all.

THE LIMITATIONS OF INTERNAL CONTROLS

What Does the Fraud Triangle Tell Us? Perhaps the most

important lesson to be learned from the fraud triangle is the

inherent limitations of Internal Controls and the impotency

of the internal auditor.

Normally all three factors must be present for fraud to occur.

If any one of the three elements is missing, fraud will

normally not occur. Cressey's model also tells us that

concerns over status, not greed, is the primary motivator for

occupational fraud. That being the case, we must relook at

the function and purpose of the internal audit profession.

The Institute of Internal Auditors ("IIA") offers the following

description:

"Internal auditing is an independent, objective assurance and

consulting activity designed to add value and improve an

organisation's operations. It helps an organisation

accomplish its objectives by bringing a systematic, disciplined

approach to evaluate and improve the effectiveness of risk

management, control, and governance processes."

Major roles and responsibilities of internal audit function are

summarised as below:

evaluates and provides reasonable assurance that

risk management, control, and governance systems

are functioning as intended and will enable the

organisation's objectives and goals to be met

reports risk management issues and internal controls

deficiencies identified directly to the audit

committee and provides recommendations for

improving the organisation's operations, in terms of

both efficient and effective performance

evaluates information security and associated risk

exposures

evaluates regulatory compliance program with

consultation from legal counsel

evaluates the organisation's readiness in case of

business interruption

maintains open communication with management

and the audit committee

teams with other internal and external resources as

appropriate

engages in continuous education and staff

development

provides support to the company's anti-fraud

programs.

There is no such thing as a perfect control system. Staff size

limitations may obstruct efforts to properly segregate duties,

which requires the implementation of compensating controls

to ensure that objectives are achieved. A limited inherent in

any system is the element of human error,

misunderstandings, fatigue and stress. Employees are to be

encouraged to take earned vacation time in order to improve

operations through cross training while enabling employees

to overcome or avoid stress and fatigue.

The cost of implementing a specific control should not

exceed the expected benefit of the control. Sometimes there

is no out-of-pocket costs to establish an adequate control. A

realignment of duty assignments may be all that is necessary

to accomplish the objective. In analysing the pertinent costs

and benefits, managers also need to consider the possible

ramifications for the organization at large and attempt to

identify and weigh the intangible as well as the tangible

consequences.

Internal controls should reduce the risks associated with

undetected errors or irregularities, but designing and

establishing effective internal controls is not always a simple

task and cannot always be accomplished through a short set

of quick fixes. However, we hope this chapter has helped to

explain the basic internal control concepts and given you

some ideas for improving your department's controls. The

conclusion of the of the whole matter is that there is no such

thing as a perfect system of internal control because of its

inherent limitations :

Errors may arise from misunderstandings of

instructions, mistakes of judgment, fatigue, etc.

Controls that depend on the segregation of duties

may be circumvented by collusion

Management may override the structure

Compliance may deteriorate over time

Why we must not blame the Internal Auditor for every

fraud

Corporate internal auditors (those who are employees of the

corporation and are paid directly by the corporation) are

hired to internally audit corporate departments for

compliance with corporate and government policies, laws,

regulations, and the like.

Although some may argue that there may be a few

exceptions out there in the corporate world, auditors

basically look for compliance and if it looks good on paper,

they are usually satisfied if one plus one equals two.

Remember that “corporate fraud” means the frauds

perpetrated against a corporation or other business-related

entity by individuals within and/or external to a corporation.

It does not mean frauds perpetrated exclusively by

“corporations.”

Fraud is a “people business.”

The accountants and/or auditors (who often have an

accountancy background and experience) can provide a good

supporting role in combating corporate fraud. However,

although they have been receiving some training and gaining

some experience in dealing with frauds over the years, they

approach it from an auditor’s viewpoint and not as part of

leading an assets protection program that includes a

proactive anti-fraud program.

No offense is intended to auditors or others, for they are just

doing what they have been trained to do in the manner in

which they were trained. Frauds are perpetrated by people,

and therefore, one’s anti-fraud training, education, and

experience should focus in part on understanding people in

general, as well as defrauders and their motivations. This

aspect is not emphasized to auditors in their auditing and

accounting education.

In addition, most people do not like confrontation, nor do

they like dealing with hostile people. Even security and law

enforcement professionals do not like hostile encounters.

However, the training and experiences of security and law

enforcement professionals place them in a better position to

successfully deal with people in confrontational situations.

One of the key question that needs to be addressed is :

Should the manager of the audit department also be the

leader of a corporate anti-fraud program? The answer is no,

for several reasons, including those stated earlier. For

example, this would include compliance with the corporate

anti-fraud program, as well as the audit staff writing the

antifraud program and its policies, and perhaps also many of

its processes, procedures, and such.

This would represent a conflict of interests in as much as they

themselves approve what they have written and

implemented; they also serve as the auditors to determine

whether what they did was the correct thing to do and

supports compliance with other corporate policies,

government oversight laws, regulations, and so on.

Why do some management thinks that Sanctions Don't

Deter Fraud

We can also deduce from the fraud triangle that simply

punishing people who are caught committing fraud is not an

effective way to deter fraud. There are several reasons why

this is so:

Fraudsters only commit their crimes when there is a

perceived opportunity to solve their problems in

secret. In other words, fraudsters do not anticipate

getting caught.

The threat of sanctions does not carry significant

weight with a fraudster because he never expects to

face them.

Fraudsters rationalize their conduct so that it seems

legal or justified. Thus, they do not see their actions

as something that is or should be sanctioned.

Because fraudsters are primarily motivated by status,

the greatest threat they face is that their crime will

be detected.

Detection will result in loss of status. Any sanctions

that follow are only a secondary consideration.

Given the above observations, how does one go about

addressing the primary motivational need? The solution

seem to be more psychological than physiological. This is

where applied psychology comes in handy for the fraud

examiner. The fraud examiner need to understand the

psychological profiles of both sexes in their motivational

needs.

Motivation and Rationalization in fraud is Gender bias.

Financial exploitation, and particularly thefts and scams, are

increasing at an alarming rate. In this book, we (a)

determined the national prevalence of older adults who

report having been a victim of fraud, (b) created a

population-based model for the prediction of fraud, and (c)

examined how fraud is experienced by the most

psychologically vulnerable adults. Financial satisfaction and

social-needs fulfillment were significantly related to fraud.

Using depression and social-needs fulfillment to determine

the most psychologically vulnerable adults, we found that

fraud prevalence was three times higher among those with

the highest depression and the lowest social-needs fulfilment

than among the rest of the people.Fraud Examiners and

other professionals in the field need to be aware of their

psychologically vulnerable clients' heightened exposure to

financial fraud.

Man and woman do not rationalise the same way when it

concerns fraud.

Before entering upon the specific subject, let us – for the

sake of those who are not yet acquainted with bias and

psychosynthesis – touch upon the theme in a general way.

Bias is an inclination to hold a skewed or prejudiced opinion

of something or someone — objects, individuals, or groups.

Bias can be positive or negative. If you are positively biased

towards somebody, chances are that anything they do will

seem good to you even if that’s not really the case. They

enjoy a certain ‘privilege’ in your eyes. And if you are

negatively biased towards somebody, even if they do their

best to please you, you will still be able to find fault with

them.

When you were young, haven’t you found it unfair that the

teacher’s pet in class gets away with everything? Talking in

class, not submitting homework etc., while a student the

teacher doesn’t like much seems to be getting into trouble

always? This is a very simple example but when we talk

about biases that exist in society, it become a lot more

complicated.

This is because societies consist of people who have multiple

identities — of sex, gender, sexuality, religion, race, caste,

class, community and so on, and one person can suffer a bias

or enjoy a privilege at many levels.

Gender bias is one of the many forms of biases that exist in

society. Believing a certain gender to be superior to another

and discriminating on the basis of this belief can be called

gender bias.

Why is there a need for fraud examiners to understand

psychosynthesis

Because all of us have within ourselves different and

contrasting psychological elements which alternate and

collide. They often reach such a degree of forcefulness as to

form separate personalities or sub-personalities which

struggle for supremacy within us.

This results in a number of contradictions, conflicts, turmoil

and upheavals, which may produce serious nervous

difficulties, and often gives the individual a painful and

growing sensation of dissatisfaction, instability and

disharmony.

But this “human condition” is by no means fatal and

inevitable; we can change and remedy it if we are willing to

examine ourselves thoroughly and if we apply the methods

that are necessary in order to combine the dissociated and

contrasting elements and transform them into a rich and

harmonious synthesis.

Synthesis is an organizing and unifying principle which acts in

all the kingdoms of nature. We find manifestations of it in

inorganic matter in the form of chemical combinations. It

acts in a more evident and complicated way in organic life as

the power of self-regulation of living bodies, as the delicate

and admirable balance between the wear and tear and the

rebuilding of tissues.

In the psychological life, the principle of synthesis finds its

application in different ways : by unifying opposite vital

interests and activities in regard to the outer as well as the

inner world of the individual (extraversion and introversion);

by synthesizing thought and feeling and other psychological

elements around a unifying centre in the psychosynthesis of

the personality.

Then there is the problem of spiritual psychosynthesis, that

between the personality and the Self or soul that some

defines as the seat of the man, which constitutes the high

aim and aspiration of all individuals who cannot be satisfied

with terrestrial values only.

Another aspect of synthesis is that which unites and

individual in numerous relations of integration with other

individuals. There is, first of all, the psychosynthesis of the

human couple, the eternal problem of the relation between

the sexes, about which we shall have more to say further on.

Then comes the synthesis of the family group, of social

groups, national groups and, at the very last – as the final

ideal - the psychosynthesis of all mankind. This very lengthy

explanation essentially means, as fraud examiners we must

understand that different people have different makeup.

That being the case, we must treat them as individuals and

understand that each have a very different psychological

profile.

Psychological Differences between Men and Women

The first question which calls for our consideration in this

context concerns the functions and duties which a woman

can and must discharge, the particular types of

psychosynthesis which she can bring about in accordance

with her particular psychological constitution, and the many

problems which arise from woman’s own psyche or and her

relation with man.

Situations and problems of this nature arise in every

woman’s life and it is necessary that she face them in a way

that is most satisfying to herself and to the other people

concerned.

The most natural thing and frequent role for woman is that

of being man’s companion, his wife. An Italian author, Lucio

d’Ambra, wrote two novels entitled respectively The

Occupation of the Husband and The Profession of the Wife.

In these different designations albeit outdated, an important

psychological truth is alluded to, namely that while man’s

principal functions are his activities outside the family and

are of a social character, woman’s most important activity,

her “profession”, is generally in and with the family. A

simpler way to understand this is that woman in general

tend to live for others and that is something that comes quite

naturally.

To use a less modern but gentle and apt expression: woman

is, or should be, “the queen of the home”.

Unfortunately, this kingdom of the home is often troubled by

silent or noisy disharmonies and conflicts which sometimes

shake it to its very foundations and can even dismember it.

If we search for the causes of these discords, we discover

that there are mainly two: selfishness and lack of

understanding.

The corresponding remedies can, therefore, be reduced to

two principal ones:

The first one is goodness and a spirit of sacrifice. These are

hard to develop, but are high qualities which everybody

should cultivate because their fruits are most rewarding.

The second remedy consists of an intelligent, intuitive, willing

psychological and spiritual understanding. This

understanding is not easy to acquire because the

psychological constitutions of man and woman are deeply

different, much more so than we generally realize. One could

almost say that they belong to two different species. It

therefore seems useful to pause and examine somewhat the

differing characteristics of male and female psychology. In

speaking frankly, I may at times seem rude to both sexes.

Typically, although by no means universally, there exists

between a husband and his wife polarities of psychological

functions. The man tends to excel in certain vital operations

while the woman manifests others. For example, in dealing

with the physical world, man has active, manipulative and

creative functions while woman, as wife and mother is

primarily concerned with maintaining and preserving the life

and resources of the family. On the other hand, in the sphere

of the emotions and of the imagination, it is the woman who

is usually the better developed, more positive and productive

of the two. In this area, the husband is apt to be relatively

naive and easily confused. So there is an apparent inversion

of dominance functions that man and woman need to

appreciate, and therefore collaborate with each other in

order to form an effective team. When that actually happens,

we call it the “optimum” point. In practice this is usually

achieved at the moment when two individuals decide to get

married. But the “optimum” point in itself is an abstract

concept. It is not static. Reality shows that expectation

between man and woman change with time. Most woman

marry a man to change it into her own image of what should

be the perfect man. Man in general and in most instances

does not know what they are doing.

Furthermore, there is a similar inverted polarity between

man and woman in the intellectual sphere.

Man tends to be the more rational, logical, and active. He is

consciously oriented toward facts, their relationships and

their implications. By contrast woman’s mental functions are

less developed, but balanced by her superiority in another

sphere, that of the intuition. This is the capacity for attaining

understanding in non-rational and unconscious ways which

are fully as valid as man’s thoughtful rationality.

These different polarities define some important qualitative

distinctions between man and woman. These differences can

explain many psychological conflicts and disorders.

Speaking of man in general, the average so-called normal

man develops qualities and functions such as aggressiveness,

mental activity, and efficiency. These he manifests to a

marked degree, whereas qualities of a feminine type such as

sensitivity, feeling, imagination, and intuition remain in an

undeveloped and, at times, almost atrophied conditions.

Because these latter functions do not keep pace with the rest

of his growth, it therefore often happens that the average

man remains relatively primitive and sometimes even

barbaric. His imagination, generally repressed in the

unconscious, is disordered when it does rise to the surface,

and often expresses itself in fancies of which he himself is

ashamed. His feeling nature tends to remain primitive; he has

neither delicacy nor plasticity. He can pass from outbursts of

almost savage passion to hardness and insensitivity, and vice

versa, or he can pass from insensibility to almost childish

weakness and sentimentality. His intuition is generally

rudimentary, almost non-existent. He endeavours to solve all

problems, whether practical or abstract, through mental

processes only, and because he does not take into

consideration the more subtle and imponderable elements,

he is often mistaken as being insensitive. In the various

events of life, his cleverly formulated plans and programs

often come to naught, and instead of finding the faults that

lie within himself and his own shortcomings, he blames other

people and events for his failures.

The Editor

ACFE Regent Emeritus

Tommy Seah, Certified Fraud Examiner

He is the elected Vice Chairman (2005/07) of The Association

of Certified Fraud Examiners Board of Regents based in

Texas, USA. CFE is a post graduate professional qualification

recognized by the FBI and USA Central Intelligence Agency in

it’s recruitment of auditors for combating fraud. His services

in providing technical training is much sought after by

numerous banks in the region, including Germany, Singapore,

Malaysia, China, Indonesia, Philippines and Taiwan. Tommy's

previous experience includes systems based auditing in an

American International Bank, where he was the Senior

Regional Auditor responsible for the Bank's audit in the Asia

Pacific region. He has also held the top executive position of

Chief of Internal Audit in a prime offshore bank where his

audit duties cover the Singapore and Hong Kong operations

of the bank. He covers all areas of the bank's audit of

operations and IT systems. He also has practical working

experience in the Operations Department of a foreign bank.

Tommy Seah is the author of seven banking books including

the F.I.G. Program. The FIG is the authoritative and definitive

text on Financial Instruments designed to be used in the

world wide banking industry for product training. This

publication has received excellent review and first class

commendation from some of the most authoritative

professional certification body and top rated banks in the

world. The other six authoritative texts used in his training

are The Audit Foreign Exchange in Banks, The Control of

Money Market Activities in Banks, Financial Management,

MCA for Banks, SWAPS in Investment Banking and Anti-

Money Laundering 101. His latest publication is

Understanding and Auditing BASEL II, Operational Risk

Management.

For the past thirty years, Tommy Seah has trained some of

the top banks and financial institutions in the region. In

particular, his expertise in SOX 404, AML and Basel II systems

implementation is much sought after by financial institutions

and banks in Germany, Brunei, China, Indonesia, Malaysia,

Philippines, Singapore, Taiwan and Thailand.

His prolific training career has seen him trained over many

Chief Financial Officers, Compliance Officers, Auditors, Risk

Managers, fraud investigators, financial analysts, forex

managers, IT Professional, legal counsels, private bankers

and accountants.

Today, he is still a very much a hands on practitioner doing

Independent Third Party work for audit practice assurance,

compliance review and fraud investigation in the Asia Pacific

Region. He is also a Certified SOX Professional and appointed

as Professor of Economics of the CHINA Institute of Directors.

Some of the world’s leading banks and financial institutions

staff trained by Tommy :

• The Government Investment Corporation of Singapore

• The Stock Exchange of Singapore

• Deutsche Bank (participants from 40 countries)

• Westpac Banking Corp

• Monetary Authority of Singapore (Central Bank)

• United Overseas Bank (UOB)

• BNP Paribas

• Bank of China (China-wide)

• Hong Kong and Shanghai Bank

• Overseas Chinese Banking Corporation Ltd

• Bank Negara (Malaysia Central Bank)

• May Bank

REVIEW

By

JOSEPH R. DERVAES, CFE, ACFE Fellow, CIA

AUDIT MANAGER FOR SPECIAL INVESTIGATIONS

WASHINGTON STATE AUDITOR'S OFFICE

U.S.A.

Tommy Seah is a gentle giant whose writings continue to

demonstrate why he is a recognized authority in the banking

industry. This latest handbook provides valuable knowledge,

tools, and best practices to practitioners that will help

prevent, detect, and even discourage future money

laundering activities from occurring. The membership of the

Association of Certified Fraud Examiners has also recognized

the author's leadership in this field and elected him to the

Board of Regents of the Association, one of the highest

positions any CFE may hold in the profession. I know that

this handbook will be destined to become a welcome

addition to the personal library of both CFEs and banking

professionals worldwide.