Concealment is the cornerstone of fraud. Fraud can be defined as “any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means.” The principal types of fraud are the misrepresentation of material facts of the concealment of material facts.
Fraud can be divided into two types:
- Off-book Fraud. Does not require any cover-up. An example would be working a side job, getting paid in cash and then spending the cash to fund an extra-marital affair or gambling.
- On-book Fraud. Requires falsification of records or lying to conceal deception. The money has already been accounted for, usually through a bank deposit or brokerage activity. An example of on-book fraud might be to transfer money from a joint account, open an individual account and spend it down without knowledge of the spouse.
How, then, do we examine for family or spousal fraud? Is this an accidental fraud or is this the work of a predator who is actively seeking to exploit others?
The answers to this type of fraudulent behavior come from tracing the documents through the business and/or household to determine all the possible sources where money is coming into the accounts. Then a review can be conducted of all the expenses/savings to verify the use of those funds.
A variety of methods are utilized to investigate fraud. The Net Worth Method can be used from one year to the next to look for large, overall discrepancies and/or spending patterns. This can be a red flag for catching someone draining accounts and moving the funds elsewhere. Employing the Expenditures Method when analyzing expenses can easily catch a “shopaholic.” One of the most powerful methods is the Bank Statement Method. Analyzing deposits, wire trnsfer and checks (front and back) give clues as to the movement of funds as they move in and out of various banks and accounts.
Consistency and transparency are the keys to sounds financial planning. If there are any discrepancies they must be logically explained. An example of this might be looking at the Withdrawal/Distribution section of a brokerage account. Every transaction should be accounted for and assigned a legitimate reason for withdrawal. Unknown movement of money is a primary red flag that other accounts or assets may exits. Money manipulation can occur with the most sterling and respected of clients.
Bank statements, credit cards, loan applications, estate planning/legal documents, brokerage accounts, life insurance policies and tax returns are favorite and valued sources of information.
When investigating a business, sources of evidence would include the general ledger and accompanying financial statements, tax returns, incorporation/partnership paperwork, suppliers, vendors and employee records. Fraud examiners will often search through thousands of pages to put together all the evidence for trial.
Evidence gathering also includes electronic data/information. An attorney can subpoena computer hard drives and hand-held devices, both at home and at the place of work. Cell phones, GPS systems and tollbooth automatic lanes can now give a daily picture of where someone as been. ATM withdrawal locations are also recorded. This identification work swell when a spouse is suspected of gambling and the well-labeled ATM is on casino property!
A unique feature of fraud cases is that the perpetrator’s identity is usually known. Usually the fraudster is often a spouse or family member, but could also be n outsider brought in for hire, such as a nanny, housekeeper or elder caregiver.
Dr. Donald Cressey, a professor at Indiana University in the 1940s is credited with designing the Fraud Triangle. His theory states that any trusted person could become a rust violator. All three must be present for a violation to occur:
- Perceived opportunity
- Motive (non-shareable need)
- Excessive personal debt/financial issues
- Mid-life crisis
- Drug/alcohol dependency
- Peer pressure
- “We can afford it”
- “Money will not be missed”
- “I need to fund my bad behavior”
- “I make the money and deserve to spend it any way I want”
- “I don’t want my spouse/family to get their fair share”
Red Flags of Fraud
There are many “red flags” that can signal that fraud is occurring. Is your spouse supposedly working more hours? Have their grooming habits changed? Do they have a new hobby and you’re not included? Some changes are obvious, and others can be more subtle. You will sense a shift in behavior, which can’t be ignored. Are certain family members being avoided? Has the computer usage risen? Are distractions being employed to deflect away from their guilty behavior?
Changes can also occur in the level of secrecy and confidentiality. Do you no longer talk about your day? Do you no longer have access to the family financial records? Is mail being rerouted to a post office box instead of your home? Are there unknown return addressed on mail?
Changes can also occur in income and assets, either positive or negative. If someone has less spending money than before, it may signify an addiction or taking time off work. If some has more money, it could mean they have gambling winnings or have stolen someone else’s assets or income.
The more autonomy we give others over our assets, the more opportunity they have to overstep their moral boundaries. If someone believes they will not be caught, they are much more likely to commit the indiscretion. Deterrence is the number one protector of assets being squandered or moved.
Howe often does one spouse just “sign” the tax return without reading it? Or perhaps sign the papers that are put in front of them without reading what they are signing? Are families sitting down and having an annual meeting beyond what is given to them in an annual financial planning review? Is anyone “auditing” the checkbooks and credit cards for unusual transactions? Are they double-checking the bank accounts if a third party has access to it? Willful blindness can be a powerful denier.
Or are we delighted to be relieved of our financial responsibilities that we easily give up control over this part of our lives and trust that it will all work out? We need to take our blinders off. Greed and selfishness are all round us and may be lurking in our own households or those of our clients. Willful blindness can be a powerful denier. It is our gut instinct and those of others than can counteract this desire not to recognize the signs of family fraud and open their eyes to the reality of the situation.
Source = Peggy Tracy / Priority Planning