For fraud to be successful, you need two co-operating parties, the fraudster and the willing victim. This was brought to my attention recently when we were called regarding money stolen from an investment group. The amount lost was quite substantial, even though the amount to be invested was small. It may appear to be impossible to lose a lot of money with conservative investments; it is not necessarily the case.

The manager of the investment said he was outraged at the loss, and insisted that he would oversee recovering the missing funds. Not a very good idea considering that it is inappropriate to have someone who might reasonably be suspected of causing the loss to be allowed to conduct the investigation. If the potential suspect is a bad guy it gives him a better chance of covering his tracks and getting away with it. If he is innocent and the money is not recovered, it unnecessarily leaves a suspicion that he might have been involved.

Like Caesar’s wife, those investigating a possible criminal matter should be above reproach, which is why, I recommend that new managers taking over a new department where there was a suspicion of fraud turn the investigation over to some from outside, unaffiliated, entity or professional. In our case, the manager hired an investigator to help with his investigation, who never the less still reported to the division manager.  To make matters worse, the firm hired had a newspaper article alleging participation in widespread financial fraud in many countries. These allegations might or might not be true, as I cannot confirm at this point never the less the issues questions the creditability of the investigation process. From this we can arrive the following 4 possibilities;

1. The worst-case possibility is that the manager is a fraudster and that the agent hired to help is a co-conspirator. In this case the investors can kiss their money good-bye.

2. The manager is honest and the investigator is crooked. In this case the recovery agent will make recovery difficult or impossible.

3. The manager is crooked and the recovery agent is honest. In this case the manager will make recovery difficult or impossible.

4. The final possibility is that the manager has bad judgment but is honest, and that the investigator is honest. Here we are left with the appearance of impropriety, but no direct and active hindrance from the combined (manager/investigator) recovery team to the determination of whether the funds had been lost or misappropriated, or to the possible subsequent recovery of funds.

No matter what scenario turns out to be the reality, we do know, beyond the shadow of a doubt, is that when sums of money equivalent to the Gross National Product of a small country have disappeared, the appearance of correctness is vitally important especially if the money is never recovered. Why then would senior management or executives allow, this seems sufficiently obvious that one must ask why a group of investors able to collectively cough up this large an amount of money would let someone who should be considered a suspect manage the recovery of their missing funds?

The best explanation for this irregular behavior turns out to be Cognitive Dissonance Theory developed Leon Festinor, which says that when there is a conflict between your beliefs and your actions it is easier to change your beliefs than your actions. This theory is very prevalent with regards to dealing with spousal abuse. It is appears to be easier for the abused spouse to say the abuse is ok because they love the abuser They must love them, why else would they put up with the abuse? Than it is for them to admit that they might be victims, and make the appropriate changes to their behavior.

In the case of the missing investment money, it is psychologically easier for the investors to say the manager’s conducting the investigation is ok because they trust the manager. They must trust him why else would they put up with the obvious impropriety? Than it is for them to admit that they might be victims, and make the appropriate changes to their behavior. Obviously, in any group there will be some people who will want to eliminate all doubt, and ensure that not only the reality but also the appearance of propriety is maintained. Whether or not an actual fraud has been committed, those who have become exemplars of cognitive dissonance theory in action typically outnumber this group, and the voices of the rational minority will be swiftly and firmly quashed.

The result is that, in cases of actual fraud, through manipulation of the majority to take advantage of their cognitive dissonance Who among us wants to admit we were fooled? the fraudster is likely to escape unscathed, and with profits intact.

Gamal Newry is the President of Preventative Measures, a Loss Prevention and Asset Protection Training and Consulting Company, specializing in Policy and Procedure Development, Business Security Reviews and Audits, & Emergency and Crisis Management. Comments can be sent to P.O. Box N-3154 Nassau, Bahamas or, email gnewry@gmail.com or visit us at www.preventativemeasures.net