Lost in the Fraud Triangle

 

Basketball player and coach Bill Cartwright once said “The triangle is the foundation to an offense”. He meant that as a comment on playing basketball but it is also a way to describe how people turn to fraud.

Donald Cressey, a criminologist, wrote about the causes of embezzlement in a 1951 article. His description eventually morphed into something we know as the Fraud Triangle. This term identifies three conditions needed to create the right environment for fraud to occur. The conditions go by different names but I will use these:

Perceived Pressure (of a financial nature)
followed by observing a
Perceived Opportunity (to alleviate the pressure)
and using
Rationalization (to justify acting in an unethical / illegal manner)

Keep in mind that one definition of “perceives” is to interpret or look on someone or something in a particular way (Google dictionary). In some cases, the way is not what society expects.

Here is an example from the Charlotte NC area. An entrepreneur (I will call him Charles Greene) founded his web development company in 1999. It grew and in 2006 he established a 401(k) savings plan for his employees. He named himself as trustee of the plan meaning he was permitted to direct how his employee’s funds were to be invested. As allowed by regulations, the savings plan let employees take loans from their accumulated balances and pay back those loans through payroll deduction.

In 2007 an angel investor bought an ownership interest in Greene’s company. Did the fact that he was no longer the owner, but an employee working for someone else, change how Greene behaved?

In 2008 Greene began to divert some of the 401(k) loan payments into the general bank account of his company rather than return them to the 401(k). Perhaps the company needed some short term cash or perhaps he needed to borrow some funds from the company for personal use with the intention of repaying it. Whatever the initial need, from 2008 into 2010 he diverted more employee loan payments into the company account and then to his own personal use. In 2011 the angel investor brought a lawsuit against Greene accusing him of fraud and breach of fiduciary duty.

The FBI and the Department of Labor were made aware of the issues with the company and investigated. They found that Greene had diverted $95,000 from 21 employees over the 2 year period using the funds for his personal use. He was eventually sentenced to 12 months and one day in prison for embezzlement as well as two years court supervision and was ordered to pay over $116,000 in restitution.

What happened to make an entrepreneur, excited about forming and operating a new company, become someone who stole money from his employees and used it to pay his own bills? Using the Fraud Triangle we can explore some ideas.

First, was he under some form of financial pressure? The fact that he used the stolen funds to pay personal bills makes that likely. Perhaps the company was facing financial pressure which resulted in bringing in an investor to provide needed funds…..but at the cost of Greene losing control of his company. Let’s assume that he was under some “perceived” financial pressure.

Seeking relief from the pressure he “perceives” an opportunity. Using his employee’s loan repayment funds he sees a way to borrow the funds, again planning to return them to the 401(k) once the financial pressure subsided. Maybe the pressure never subsided….or maybe the ease with which he could take someone else’s funds and use them to make his life easier became a way of life.

At some point Greene must have known that what he was doing was wrong. But the mind has an ability to rationalize any deed. In this case he may have rationalized that his actions were only temporary and that soon all the funds would be returned to their rightful place…and maybe he did intend to do that. But time ran out.

If your company has been a victim of fraud let me know if you are willing to discuss it with me. It would be helpful to other entrepreneurs to hear about real life examples of fraud, loss and recovery.

Let me know what you think………

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