“Oh, what a tangled web we weave . . .”
Fraud and the Mind
Grand Rounds, Winter, 2014
Elgin State Hospital
Daven Morrison MD
Asst. Clinical Professor of Psychiatry
Chicago Medical School
Financial Fraud
Organizational Psychiatry
Certified Fraud Examiners
White Collar Crime
Psychiatry and Fraud
Have you ever been deceived?
EXHIBIT 9.1
The Multi-Disciplinary Team for Managing Fraud
Criminology
Psychology/Psychiatry
Accounting
Fraud prevention requires
these three cogs to turn together
Fraud Defined
A generic term, embracing all multifarious means which human
ingenuity can devise, and which are resorted to by one individual
to get advantage over another by false suggestions or by
suppression of truth, and includes all surprise, trick, cunning,
dissembling, and any unfair way by which another is cheated. . . .
Elements of a cause of action for “fraud” include false
representation of a present or past fact made by defendant, action
in reliance thereupon by plaintiff, and damage resulting to plaintiff
from such misrepresentation.
Black’s Law Dictionary
White Collar Crime
 Those classes of nonviolent illegal activities which principally
involve traditional notions of deceit, deception, concealment,
manipulation, breach of trust, subterfuge or illegal
circumvention.”
 Caveat Emptor
Fraud Background:
Focus on Private Industry
 Morrison Associates, Ltd.
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


Arthur Andersen
Continental Bank
Conseco Insurance
Food Lion
 Daven Morrison




Psychiatric Resident and Chief Resident (1996)
Morrison Associates since 1996
Consultation to Leadership Teams
Fraud
 Institute of Fraud Prevention
 Tomkins Institute of Fraud Prevention
 Senior Editor and Author: The A.B.C.s of Behavioral Forensics
EXHIBIT 6.1
THE FRAUD TRIANGLE
Opportunity: Find a hole in accounting process
FRAUD
Pressure/Incentives:
Rationalize: Justify
Knowingly commit fraud for a
perceived need
theft to self
Recent Cases of Fraud in the News
 NY Times: Fraud in Army
Recruiting Bonus Program
May Cost Nearly $100
Million
 Chicago Tribune:
Republican Party wing
creates 18 fake websites for
Democrats
 WSJ: Ex-SAC Trader Found
Guilty
Rita Crundwell
Jesse Jackson
LIBOR
Raj Rajaraptnam
SAC Capital
Chicago Drivers
Dixon Illinois
The Best Reason Ever to have Professional Management
Questions for Today
Advances are made by answering questions.
Discoveries are made by questioning answers.
Bernard Haisch; Director, Calphysics Institute
Alan Greenspan:
I've always considered myself more of a mathematician than a
psychologist. It all fell apart, in the sense that not a single
major forecaster of note or institution caught it.
The Federal Reserve has got the most elaborate econometric
model, which incorporates all the newfangled models of
how the world works—and it missed it completely.
“What Went Wrong”
Alexandra Wolfe
WSJ, Oct 18, 2013
Brief Test
Answers to Question
1. Profile the Fraudster
2. Greed is the motivator
Fraud: Ideas from “ABC” Text:
Highlights of Bringing Freud to Fraud
New Perspective
Building on What’s Known
 Challenging old theories
 Known Cases
on motivation – beyond
greed
 Designed to get financial
mind sets to see the human
element
 Two new ways of thinking
about the crime of fraud
 Science of the Brain

ABCs of Behavioral Forensics: Using
Psychology to Prevent, Deter, and Detect Fraud
 Models of Deception
 Experience with Senior
Executives
 Assessment of Senior
Executives
Fraud: Ideas from “ABC” Text:
Highlights of Bringing Freud to Fraud
IS
IS NOT
 A Human Act
 Mental Illness
 Driven by emotions
 One size fits all
 Natural
 Not a “shameless” act
 Expensive
 Easily profiled
 Likely reflects a “change of
 A “solo” act
mind”

ABCs of Behavioral Forensics: Using
Psychology to Prevent, Deter, and Detect Fraud
Fraud: Ideas from “ABC” Text:
Two New Models: Bringing Freud to Fraud
The Bad Apple?
Predatory vs Accidental
 Who is he?
 What is in the Headlines?
 What about the victim?
 What is most common?
 Is there a Bad Bushel or
 What do you need to know
Crop?

ABCs of Behavioral Forensics: Using
Psychology to Prevent, Deter, and Detect Fraud
about each of them?
Fraud Fundamentals
Fraud Triangle
The Crime
A Shared Daily Fraud Experience
Questioning Answer #1
The answer to halting fraud is a: Profile
What is Happening in the Mind?
Predatory Fraud is a Dance
 Predator
 Prey
 Nigerian Prince
 Grandma
 Spider
 Fly
 Madoff
 Madoff’s friends
IMPORTANT TOPICS AND NEGATIVE AFFECT
Trivial
Important
IMPORTANT
IMPORTANT
TOPICS: IMPORTANT
IMPORTANT
IMPORTANT
Important
Trivial
INNATE AFFECTS
From Tomkins
Positive
1. Interest—excitement
2. Enjoyment—joy
Neutral
3. Surprise—startle
Negative
4. Fear—terror
5. Distress—anguish
6. Anger—rage
7. Shame—humiliation
8. Contempt (Dissmell)
9. Disgust
Context
Our biology
Our biology
H
F
C
A
Affects
A
D
are
G
E
Data
E
B
The Progression, Examples I and II:
We (I) Need Money 419
 Excitement
 Enjoyment
 Fear
 Shame
 Distress
 Excitement
Predatory Dynamic
Richard D. Lane and
David A. S. Garfield,
“Becoming Aware of Feelings:
Integration of Cognitive-Developmental,
Neuroscientific, and Psychoanalytic Perspectives,”
Neuropsychoanalysis 7, no. 1 (2005): 5–30
Affects as Data and the Brain
Higher CPUs:
Blends of emotion (Paralimbic)
Action tendencies (Diencephalon)
Richard D. Lane and David A. S. Garfield,
“Becoming Aware of Feelings: Integration of Cognitive-Developmental, Neuroscientific,
and Psychoanalytic Perspectives,” Neuropsychoanalysis 7, no. 1 (2005): 5–30
Searching for the profile
Summary of the first of two wrong questions
The Seduction of the Profile
 Self Reflect:
 Can you use emotions as
data?
 Can the critical people on
your team?
 what can con you?
 When there is a need for
primary prevention, the
profile is a waste of time
 May even be causative of
fraud.
 Predatory fraudsters adapt
to what you give them.
Professional Competence
Professor Harry Kraemer, MBA
Having the Answer vs Getting the Answer
100%
Interpersonal
Knowledge
Knowledge
Percentage
Technical
Knowledge
0%
Day One
TIME on the JOB
First Year
Questioning Answer #2:
Greed is the motivation
What is Happening in the Mind?
Accidental Fraud is a Wall Flower
 Rita Crundwell
 Diann Cattani
EXHIBIT 6.2
The Values of the 8 Motivational States
Serious
Achievement
Conforming
Mastery
Fitting In
Self
Control
Individualism
Collectivism
Caring
Freedom
Sympathy
Enjoyment
Playful
Playful
38
Other
Rebellious
Sources of Motivation are Limited
Helps those who are listening for Risk Factors to be focused on a
finite list of options
EXHIBIT 6.3
THE FRAUD TRIANGLE IN MOTION
Step One: Opportunity
Find a hole in accounting/oversight
process
The “unofficial”legal line
FRAUD
Step Two: Pressure
Knowingly commit fraud for a
perceived need
Step Three:
Rationalize
Fraud is expensive over time
$$$
$$$$$
EXHIBIT 6.3
How Honesty Reverses
STARTING Motivation:
Follow the rules
The “unofficial” legal line
FINAL Motivation:
Fraud
?
!
Question: Do I
keep the money?
The Reversal
Answer: Yes
Disobey the rules
Fraud
Perpetration
requires
repetition
Sustaining Large Scale Fraud is
Sustaining the Reversal
START: Rules Matter
EXHIBIT 6.4
Motivations to sustain fraud
(rationalizations)
•Self: They don’t care ‘bout me
•Other: I need $ for our medical bills
•Play: who can catch me?
Fraud
•Mastery: Now they will know who’s boss!
•4 More possible motivations
Reversal
Over time the fraudster’s believes:
“the rules are not for me”
$$
$$$$$
Time remains the enemy . . .
because the cost grows
EXHIBIT 6.5
Sustaining large frauds requires getting
others to Reverse Motivation
Motivations to recruit others
(rationalizations)
START: Rules Matter
•Self: They don’t care ‘bout you!
•Other: You need $ for our medical bills
•Play: who can catch us?
Fraud
Reversal
•Mastery: Now they will know we ‘re in
charge!
•4 More possible motivations
Over time the fraudster’s TEAM believes:
“the rules are not for us”
$$
$$$$$
Time AND Title is the enemy . . .
As the cost grows
Bad Bushels and Beyond:
Leadership Tone
 The Role of Narcissism
 The Role of Psychopathy
 The role of the Charismatic Leader
 The Challenge of the Entrepreneur
 The critical answer to question
Cases:
 On Making * The Numbers
 Powerful CFO
 Bank President
 Video: From $200K to several million dollars
Fraud Overlap:
Psychiatry and Forensic Accounting
AKA “Shrinks and Spread Sheets”
Financial Services
Mental Health
 Expensive
 Expensive
 Harms trust
 Harms trust
 Affiliation Scam
 “malingerer”
 Insider Training
 “Crock”, Drug seeker
 Regulatory environment
 Regulatory Environment
 COSO
 HIPPA
 Sarbanne-Oxley
 Conflict of Interest Disclosure
Leadership
 What is the tone of the leadership?
 Do the leaders understand their presence?
 How well do they understand emotions?
 Are they competent?
 Are they creating a sense of belonging or alienation?
 Interpersonal Misfits are a breeding ground for risk/fraud
 How competitive are they?
 Are there Charismatic-Leader Follower Dynamics?
 Do they understand their impact on culture?
Clients
 Corporate
 What are they sharing?
 Individuals
 Are they at risk of being victim
 What is the tone of their
of an email scam?
leadership?
 How self-reflective are they?
 How do they make you feel?
 Is there Narcissism in leaders?
 How charismatic are they?
 Distress?
 Do the leaders understand and
manage their executive presence?
 Excitement?
 Pride? Narcissism?
 What of the family
 What is their tone?
 Is there potential for fraud in the
family?
 When does the Northern say
“no” to a client?
Employees
Avoid “Accidentals”
 When do they get the message
to “do the right thing” vs ask
if it’s legal?
 Do they have a reason to feel
taken advantage of by the
bank and want something in
return?
Innoculate against
“Predators”
 Are they emotionally
competent?
 Can they be seduced by a
predator?
 How would a fraudster turn
the culture to his advantage?
 What are the subcultures that
put the bank at risk?
Summary
Two new ways of thinking means questioning
answers:
 Blaming “Greed” will limit your seeing
the larger ecology/environment of fraud
 Profiling Employees will make more
anxiety and distance than you want and
will provide a road map for those
fraudsters motivated to read from the play
book!
Final Thoughts:
Use Affects as Data for Fraud
Prevention
Only two ways to tell a malingerer
GOOD LUCK!