Fraudsters may not be motivated by personal gain alone, say Julian Parker and Ed Wilding. Can offender profiling help to spot them?

In the shadows of the seemingly impregnable edifice of the banking giant Société Générale, undetected and working alone (or so his former employer claims), the rogue trader Jérôme Kerviel bypassed all controls to place perilous bets – unhedged – to the order of a massive €50bn on the European futures markets, a figure that greatly exceeded SocGen’s total market capitalisation. After a frantic period of unwinding, the bank conceded a loss of €4.9bn, equivalent to two years’ pre-tax profit for SocGen’s investment banking division.

It was the greatest single fraudulent loss by an employee in banking history, a reputational disaster, and a quintessential tale of risk management gone wrong.

The case of Jérôme Kerviel has been the subject of much soul searching on the part of risk management professionals in banking and finance. How could a junior arbitrage trader, whose activities bore ‘very little market risk’ and who appeared to his colleagues to be of no great consequence, succeed in betting the farm? Regardless of the technical and procedural control failures that are now evident, and the very real possibility that his illicit activities were tacitly condoned by management, why, they ask, was Kerviel not detected through behavioural analysis or psychological profiling?

The groundbreaking work of the FBI’s Behavioural Sciences Unit will be familiar to many readers of StrategicRISK. Offender profiling is regularly applied in the investigation of serial murder, rape and sexual violence, extortion and other serious crimes. Offender profiling is used to understand and assess why and how an offender commits crime and assists in the detection and apprehension of potential offenders.

Does offender profiling have any role in preventing and detecting the fraudster? While there is a vast amount written on the subject of detecting fraud using data mining, electronic surveillance, computer forensics, accounting technology and so on, relatively little has been published about the root motivational causes of fraud. Could such research have identified Kerviel before he struck with such devastating effect?

In seeking to understand the underlying causes of fraud and thereby the sort of person who might commit fraud, it is helpful to reflect briefly on what the academics have to say.

Personal aspiration

Criminologists and sociologists have long since identified personal aspiration as a key element in fraud. In today’s society, this desire for upward mobility can go unchecked, due to a decline in moral values, the breakdown of the family and its authority, and the failure of those other institutions that traditionally imposed discipline and standards over the individual:

n ‘The changes in wider society, such as the decline in religion, belonging to social groups and a sense of community, isolate the individual. The outcome of this is that a belief in conventional order and the value of social responsibility is diminished’ (Boutellier 2000).

n ‘This lack of human trust means that individuals strive to meet their personal goals, and therefore the need to conform to societies’ rules lacks legitimacy. Compliance thus becomes based on a rational calculation of self interest’ (Elster 1989).

“For some people fraud is fun – offering wealth, intellectual challenge and masquerade.

Many fraudsters are indeed aspirational, but it is important to understand that it is not always money or possessions to which they aspire. Kerviel, for example, sought to outshine his colleagues on the Delta One trading desk – engaged as they were in simple and undemanding ‘vanilla trades’ – and appears from the outset to have been intent on joining the ranks of the bank’s more elite trading teams, where real glory and respect could be attained. It has been pointed out that Kerviel’s so called fraud was flawed, in that there was no channel by which funds could be misappropriated. Some have speculated that his activities were bonus driven, but it is equally likely that his real motivators were recognition and status. Kerviel was genuinely intent on maximising the bank’s profitability, but in attempting to do so he went berserk.

It is necessary, therefore, to appreciate that the people who may cause severe damage to a business may not do so intentionally, but may in delusion believe they are acting in the interests of the business. There is little evidence that the rogue traders Jérôme Kerviel, Nick Leeson (Barings) or John Rusnak (AIB AllFirst) deliberately intended to inflict damage on their employers; they acted instead to mitigate their losses, albeit with disastrous consequences.

In orthodox security management, we talk about ‘black hats’ (the baddies), and ‘white hats’ (the goodies), but in reality we should always account for a third category of people – the grey hats. The grey hats are neither actively for nor against control efforts, but will seek to undermine them, circumvent them or simply ignore them if they are perceived as too onerous, or as interfering with the achievement of other goals. Seasoned risk professionals will observe that the grey hats actually comprise the overwhelming majority of the workforce. We ignore them and the damage they can inflict at our peril.

Other factors

At a recent briefing on the Kerviel debacle, Brandon Davies, who heads European operations at the Global Association of Risk Professionals, quipped that ‘all traders are rogues’, and in doing so he touched upon the testosterone driven ruthlessness of the modern investment banking environment. Sharp practice in business has been cited by many criminologists as causative to fraud. ‘This breeds individuals who become calculated, heartless, and increasingly prepared to adopt business deviance for personal gain. When this occurs it is not surprising that individual morality is tested’ (Punch 1996). A key question in Kerviel’s case, so far unanswered, is whether the heartlessness and deviance was his alone, or extended to his line managers and beyond.

Another factor commonly cited is the ‘unshareable problem’, first identified by the US criminologist Cressy in 1953. ‘In all cases of trust violation encountered, the violator considered that a financial problem which confronted him could not be shared with persons, who from a more objective point of view, probably could have aided in the solution.’

The latest orthodoxy has amended Cressy’s hypothesis so that the ‘unshareable problem’ comprises a range of stress inducing events or situations that tip the balance from 'grey hat’ to ‘black hat’. ‘People in situations of social strain feel frustrated and those feelings motivate them to act in deviant ways’ (Cullen 1984).

In Kerviel’s case, his father died in 2006 and he and his wife separated. Family friend Yvette Lepine speculated that these combined traumas contributed to the ensuing calamity. ‘The two things happening at the same time must have been why everything went wrong,’ she said.

Society has also changed. At a recent strategy meeting hosted by the Royal Bank of Scotland to which several counter-fraud practitioners were invited, a senior officer from the City of London police provided a PowerPoint slide depicting powerful social changes that have caused a sea-change in popular attitudes (see fig 1)

Modern society is less structured, disciplined, respectful, reverential or orderly than it was in the past. This lack of restraint causes confusion and a moral vacuum in which the fraudster can justify his or her actions. ‘There is a legitimacy issue between business ethics and individual self-control as people struggle to balance their lives, interpret societies’ new rules and define their behaviour accordingly’ (McLaughlin and Murji 1999). Additionally, a growing and sinister portion of the population has no sense of personal shame, even when the most atrocious crimes are committed, and is disdainful and contemptuous of the law. This combined with the erroneous but widely held belief that fraud is a victimless crime has produced a toxic environment.

“It is not always money or possessions to which fraudsters aspire.

Fraud triangle

There is a traditional view of policing – not without its merits – that chooses to dispense with all this sociology, criminology and psychology. People commit fraud for a variety of reasons, and it is difficult, if not impossible, to predict who will do so or why. Psychological profiling, according to this school of thought, is neither possible nor profitable. What is generally agreed is that the classic ‘fraud triangle’ still pertains – employees who commit fraud generally do so because there is opportunity, pressure, and a rationalisation. The rationalisation often arises through perceived grievance. ‘The danger exists when an individual feels resentful while in a position of trust, without the required supervision, but with the required opportunity’ (Mars 2006).

In the author’s experience, debt, alcohol and drug addiction are high on the list of factors causative to fraud, or symptomatic of it. A classic example was Kim David Faithfull, a manager at the Commonwealth Bank of Australia, who gambled a staggering AUS$19m on internet betting, all of which was plundered from the bank. A compulsive gambler, he stole to feed an addiction, not to gather wealth. Experienced investigators cite a litany of violent and abusive relationships and a trail of squalid human sadness where fraud presents itself.

We should also remember that for some people fraud is fun – offering wealth, intellectual challenge and masquerade. In the book Other Peoples’ Money, Elliot Castro, a working-class kid with no qualifications or money describes how at the age of sixteen he achieved his twin ambitions of world travel and profligate consumerism through credit card fraud. From London to New York, Ibiza to Beverley Hills, Castro lived a fantasy life, blowing a fortune on designer clothes, Rolexes and champagne. His verdict: ‘The crime of fraud, when conducted well, is a fascinating and rewarding pursuit. It’s a test of intellect, determination and stamina...’

The joy of it was attested to by convicted fraudster Joyti De-Laurey. The disgraced former secretary at Goldman Sachs plundered £4.3m. Her justification: ‘I’ve got an illness only diamonds can cure.’ Was it an addiction? ‘I just wanted to spend. I’m not going to lie and say spending that amount wasn’t fun, because it was, OK? I’m human.’

Should we adopt behavioural profiling to spot the incipient fraudsters in our midst? Unlike the extremely dysfunctional to whom this analysis genuinely applies, avarice and deceit are commonplace, if not universal. I suspect, instead, that our efforts would be better concentrated elsewhere.

The Lord’s Prayer says, ‘And lead us not into temptation, but deliver us from evil’. Fraud often arises when people are tempted. An old adage says that one person in five is inherently honest and will never steal or lie, three are opportunist and will do wrong if they believe their actions will go undetected, and one will always submit to temptation.

This is a useful rule of thumb when devising controls. Every control weakness that we eradicate may be considered as a temptation removed. The less temptation there is, the better it is for everyone.