The term fraud has already been mentioned, but what does it mean? The Association of Certified Fraud Examiners (ACFE) in the United States defines fraud as “any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means” (ACFE 2014a).5 Focusing on occupational fraud and abuse, the ACFE distinguishes between corruption (conflicts of interest, bribery,6 illegal gratuities, and fraudulent statements), asset misappropriation (cash, inventory, and all other assets), and fraudulent statements (financial and nonfinancial). In Canada, Section 380(1) of the Criminal Code of Canada provides a general definition for fraud: “Everyone who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretense within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service.” The Fraud Act (2006, c35) of England and Wales and Northern Ireland, which came into effect in 2007, defines three categories of fraud—fraud by false representation, fraud by failing to disclose information, and fraud by abuse of position. Finally, Australian criminology researchers Duffield and Grabosky (2001, 1) define fraud to mean “obtaining something of value or avoiding an obligation by means of deception.”
While definitions of fraud vary across jurisdictions and attempts to precisely define it are indeed problematic (Croall 2010), the essential element of fraud is deception. Deception, of course, underpins a broad variety of fraudulent activities in society, including insurance fraud, politicians misleading the electorate, and advertisements that intentionally dupe consumers. This book focuses on fraud as the legal concept used to investigate and prosecute fraudsters. Fraud, like corruption, is an example of an economic crime, which is a category of white-collar crime. According to the ACFE, “fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.”7 An example would be occupational fraud whereby an accountant in collusion with a client steals money from the company employing him/her. The term economic crime covers illegal acts perpetrated by a person or a group of persons to obtain a financial or professional advantage. In such offenses (e.g., Internet fraud and tax evasion) the offender’s main motive is economic gain.8 It can be seen that the terms white-collar crime, economic crime, fraud, and corruption overlap.
Producing a precise definition of white-collar crime has proven difficult for criminologists (see Croall 2010, for detailed discussion). The American sociologist-criminologist Edwin Sutherland originally defined the term as “a crime committed by a person of respectability and high social status in the course of his occupation” (1947, 9). The following are examples of white- collar crime: tax evasion, money laundering, fraud, embezzlement, insider trading, bribing (which is an example of corruption), cybercrime, identity theft, Ponzi schemes, copyright infringement, selling kangaroo meat for beef, and running unsafe factories. Sutherland’s definition has been criticized for emphasizing the social status of the offender, thus excluding offenders of lower socioeconomic status who also commit white-collar offenses. An important category of white-collar crime is corporate crime. American criminologists Clinard and Quinney defined corporate fraud as “ ... offences committed by corporate officials for the corporation and the offences of the corporation itself” and individual crime as “ ... offences committed by individuals for themselves in the course of their occupations and the offences of employees against their employers” (1973, 188). In the context of the present book, the distinction introduced by Clinard and Quinney is useful in terms of fraud prevention.
Duffield and Grabosky (2001, 1) distinguished four broad categories of fraud and gave the following examples of each:
- 1. Fraud committed by a high-ranking entrepreneurial or corrupt insider against, for example, shareholders or creditors
- 2. Fraud such as embezzlement, insurance fraud, tax evasion, or other types of fraud against a government, or committed against a private organization by an insider or by an outsider, such as a client
- 3. Fraud in face-to-face interactions, for example, by sales staff, unethical investment advisers who victimize clients and/or customers, or plumbers of questionable integrity who prey on consumers
- 4. Fraud against a number of prospective victims through indirect means such as newspapers, magazines, or the Internet (e.g., Nigerian advance fee frauds, share market manipulation, deceptive advertising, and investment solicitation)
As Duffield and Grabosky (2001, 1) reminded their readers, the four fraud categories are neither definitive nor mutually exclusive but “provide a useful point for explanation.” Further, as the world is celebrating the twenty-fifth anniversary of the Internet at the time of writing, there is no doubt that the Internet makes electronic frauds one of the most threatening forms of economic crime and transcends Duffield and Grabosky’s four categories.
Large-scale fraud by individuals against financial institutions and by the institutions themselves can be catastrophic because such fraud can cause organizations to fail, putting the national economy as well as shareholders’ and other stakeholders’ interests in jeopardy. Although a corrupt public sector and politicians in many countries worldwide deprive large numbers of people of a better standard of living, some types of fraud are perceived as morally ambiguous. This perception explains survey findings that taxation fraud is less of a concern to the public than credit card fraud that affects them directly (Smith et al. 2011, 62). Also, compared to other crimes, fraud has drawn insufficient attention from the authorities through the decades, despite it being a serious problem in society (Smith et al. 2011, 62). Most people are more concerned about conventional street crimes such as robbery, rape by a stranger,9 and burglary, which are visible and featured a great deal in the mass media. In fact, “[the] media regularly report cases of business or professional people caught out in serious offences, sometimes for behaviour that they did not expect to be treated as criminal, ...” (Nelken 2012, 623). However, this does not mean that white-collar crime causes less harm to individuals and society at large as shown by the well-known cases described here. When talking about fraud we need to distinguish between fraud committed by an individual working for a corporation and fraud committed by a corporation.
The failures of Enron, WorldCom, BCCI, Polly Peck, and the Barings Bank, which were preceded by systematic fraud, prompt the question of how it was possible. In the case of Enron, a huge debt was left because of systematic accounting malpractice (Smith et al. 2011, 56). This section draws on the discussion by Smith et al. (2011) of corporate fraud theories. Smith et al. mentioned Coleman’s (1994) argument that the structure of a corporation is more important than an individual’s morality for understanding why corporate fraud occurs. Braithwaite (1985) attributed corporate fraud to “organizations that are ‘criminogenic’ by the way they exercise ‘concerted ignorance’ where senior management demand results, whatever the means” (Smith et al. 2011, 57). Box (1983) drew on economic theory to argue that corporate fraud is a response to uncertainties and legal, financial, and economic pressures. Not surprisingly, therefore, fraud increases in times of recession. Taylor (1999) argued that the deregulation of the markets in the 1980s and 1990s encouraged a culture of continuous competition, growth, and greed that was conducive to individual irresponsibility. Finally, Messerschmidt (1986) proposed that the struggle for business success and profits has largely been the work of male corporate executives. Thus, gender is useful in understanding corporate fraud (see Chapter 3).