Why isn’t Fraud Prosecuted?
From a Law Enforcement Perspective
It is estimated that Fraud in the USA exceeds $1 trillion annually or 5% of the total revenues. Do the math. That equates to 2,740 $1 million Frauds every single day. We see a lot of Fraud in the news, but certainly not $1 trillion worth. So, why isn’t more Fraud prosecuted?
I had an opportunity to present a case for Federal prosecution. I was told going in that the Feds required two things: (1) the amount had to be material, and (2) the evidence had to support a 95% probability of conviction.
The case involved a $3 million embezzlement with two primary suspects. I knew there was more money involved and I told the Feds where to look for it. I knew there were other people involved and told the Feds who they were. At the end of my presentation, the head of the U.S. Attorney’s Office said, “We’ll take the case. $3 million meets our level of materiality and this is some of the best evidence I’ve ever seen. We’ll be able to fast-track this one.” And the case was assigned to an Assistant U.S. Attorney who had just transferred from Washington, DC. As we left the room, I asked the Assistant U.S. Attorney how he liked his new home. He said, “I’ve been here one week. This is the 27th case I’ve been assigned.”
Two years later, the two primary suspects reached a plea bargain that included restitution, fines and jail terms. The dollar figure to which they pled guilty was to-the-penny the number that I had given the Feds two years prior. No trial. No one else was charged. No more money was found and, I’m quite sure, that Assistant U.S. Attorney was now handling several multiples of 27 cases.
Here was a case that was handed to law enforcement on the proverbial “silver platter.” The evidence was overwhelming, and the particulars of the case didn’t wiggle. This was a “fast-track” case; nevertheless, it took two years to wind its way through the legal system.
I have the utmost respect for law enforcement. The people I know in law enforcement are highly principled and dedicated to their profession. They do what they do to make the world a better place; however, law enforcement and our legal system are simply overwhelmed. Moreover, Fraud is only a fraction of what they do and, as I’ll discuss in future segments, law enforcement sees only a fraction of the fraud that exists.
I truly believe that our system of law is the best in the world but, quite often, “the system” forces law enforcement to operate with both hands tied behind their back. The bad guys, on the other hand, have no rules and can act with impunity.
From a Business Perspective
In the last segment we noted that Fraud makes up only a fraction of that which law enforcement is involved. In the next two segments I will demonstrate that law enforcement sees only a fraction of the Fraud that exists.
Philip Dormer Stanhope, 4th Earl of Chesterfield (1694 – 1773) was a British statesman, and a man of letters and wit. He phrased it best:
“It is always right to detect a fraud, and to perceive a folly; but it is very often wrong to expose either. A man of business should always have his eyes open but must often seem to have them shut.”
From a business perspective, based on circumstance and interpretation:
Fraud might be tolerated.
Whether we realize it or not, every business decision includes some function of cost-benefit analysis. Generally speaking, we don’t spend $100 to recover $10. Quite often it costs more to investigate and prosecute the Fraud than allowing the Fraud to stand, so we write it off as “a cost of doing business.”
I see this a lot in the insurance industry. There seems to be an accepted notion that a person filing an insurance claim is entitled to something. An insurance company asked me to look at a $200,000 business interruption claim. It took less than six hours to determine that the claim was worth zero and was borderline Fraud. I called the claims adjustor and said, “I’ve got good news and I’ve got bad news. The bad news is that I get paid by the hour and I’m done so I won’t make much on this case. The good news is that the claim is worth zero.”
He responded, “That’s great! We’ve already paid the Insured $20,000 and if I get out for that, I’ll be a hero!”
Sometimes Fraud is condoned.
Everybody else is doing it. We must do it to be competitive.
And sometimes, Fraud is required.
I had a friend in public accounting. One of his clients had a subsidiary in South America which he had to visit as part of the audit. He had a translator. As they were going over the income statement, they came to a line that roughly translated as “Payoffs and Bribes.” My friend was incredulous. “Payoffs and bribes?” With that, the locals produced a schedule that showed who had to be paid and how much had to be paid in order to get their goods loaded or unloaded at the local port.
Another friend was Controller of a large construction company. He told me a story about a $200 million project in a large city. The first day they began to mobilize for the project, they were issued 10 citations for various violations of local ordinances. The person issuing the citations told the project manager that there was a local alderman who could better explain the local ordinances. A company representative went to see the alderman and, after a brief meeting which included a $10,000 donation to the alderman’s favorite charity, the project proceeded without a hitch.
From a Personal Perspective
Sometimes, personal or moral motives prevent victims from seeking prosecution of Fraud.
There might be sympathy for the Fraudster.
It’s hard to imagine that a victim of Fraud would have sympathy for the person who just ripped them off; however, it happens.
I have a lawyer friend who told me he had to let his assistant go. “What?” I replied. “She’s been with you for over 25 years.”
“We knew she and her husband were having financial problems, but we didn’t realize how bad they were until we discovered that she stole $10,000 from the Firm.”
My friend had known and worked with her for over 25 years. He was godfather to one of her children. Is he going to pursue charges against her? I don’t think so.
The victim cannot afford the adverse publicity.
Fraud is embarrassing to a business. It reflects poorly on the system of policies, procedures and controls utilized by the business. It raises questions as to the ability of the business to function in an ongoing and trustworthy manner.
I was speaking at a CPA conference. After the day’s session, I met a friend at a local tavern for a few beers. I brought him up to date on my work in Fraud investigation. He said, “Oh, really? I’ve got somebody you need to meet.” He pointed to a guy who was sitting alone in a corner of the bar. From the looks of him, he had been there a lot longer than us.
It turned out that the guy was the Medical Director for a large hospital associated with a very prestigious university. He had just become aware of a potential Medicare fraud that could stretch into the tens of millions of dollars. There appeared to be some question if it was Fraud or a “difference of opinion”; nevertheless, it involved some world-class medical professionals. The hospital was hesitant to spark a controversy that might damage the reputations of both these doctors, the hospital, and the university.
A potential 8-figure Fraud involving very prominent people, and you never heard of it. The matter was resolved privately.
Restitution is made.
Frequently, an opportunity to be made whole will overcome a Fraud victim’s quest for criminal justice.
I got a call from a friend in Philadelphia. He had a client in Delaware who suspected its CFO had embezzled a significant amount of money and asked if I was available to do some forensic work for them. I said I was available.
I didn’t hear anything for several weeks, so I called my friend to get an update. He told me that the whole matter had been settled. The CFO admitted that he had embezzled $5 million over a period of 10 years. He had invested well, and the nest egg had grown to $8 million. He offered the Company $8 million if they agreed to not pursue charges against him. The Company took it.
Now…does anybody believe that the CFO only stole $5 million?
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