Decision Vision Episode 85: How do People Decide to Become White Collar Criminals? – An Interview with Vic Hartman, The Hartman Firm, LLC
Former FBI agent and now attorney and CPA Vic Hartman joined host Mike Blake to discuss the “three branches of the fraud tree,” how the motivations for each type of fraud differ, and much more. “Decision Vision” is presented by Brady Ware & Company.
Vic Hartman, Principal, The Hartman Firm, LLC
Victor E. Hartman is the Principal of The Hartman Firm. He specializes in Internal Investigations, Forensic Accounting, and Fraud Mitigation Consulting. His experience as an attorney, CPA, and FBI Special Agent enables him to bring a breadth of knowledge to address clients’ needs. Clients include individuals, companies, governmental entities, and legal counsels. Vic is also an Adjunct Professor at Georgia State University, and Fairfield University, Fairfield Connecticut where he teaches a master’s-level Forensic Accounting course.
He is the author of the book, The Honest Truth About Fraud. Vic wrote this book for an audience that includes corporate managers and forensic practitioners responsible for the prevention, detection, and investigation of fraud. He also uses the book in the classroom and workshops where he speaks.
Prior to founding The Hartman Firm, Vic served as the Chief Division Counsel and Supervisory Special Agent for the FBI in Georgia. He provided advice and counsel to executive management and investigative personnel regarding national security matters, criminal investigations, cyber issues, employment law, civil litigation, and asset forfeiture. As a leader in the FBI’s Houston Division, Vic supervised an FBI financial institution fraud squad, public corruption squad, and the Houston Area Health Care Fraud Task Force.
Highlights of his career with the FBI include playing a leadership role during the initial investigative phases of both the Enron and Worldcom investigations. These and other corporate fraud investigations necessitated the creation of the FBI’s Corporate Fraud Response Team in which Vic served as a member.
Vic is active in the forensic accounting and fraud examination community. He serves on Georgia Southern University’s Forensic Accounting Advisory Board. He is the past two-term President of the Georgia Chapter of the Association of Certified Fraud Examiners (ACFE). Vic provides continuing education presentations to both attorneys and CPAs on the topics of fraud, forensic accounting, and internal investigations.
Vic is a graduate of Emory University’s School of Law. He is a licensed Attorney and CPA in the state of Georgia. He is also a member of the State Bar of Georgia and the American Institute of Certified Public Accountants (AICPA). His credentials include being Certified in Financial Forensics by the AICPA and a Certified Fraud Examiner by the ACFE. He is member of the Society of Former Special Agents of the FBI, and he previously served on the Board of Crime Stoppers Greater Atlanta.
Michael Blake, Brady Ware & Company
Michael Blake is Host of the “Decision Vision” podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
“Decision Vision” is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at email@example.com and make sure to listen to every Thursday to the “Decision Vision” podcast.
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Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.
Mike Blake: [00:00:21] And welcome to Decision Vision, a podcast giving you, the listener, a clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic from the business owner’s or executive’s perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:39] My name is Mike Blake and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full service accounting firm based in Dayton, Ohio, with offices in Dayton, Columbus, Ohio, Richmond, Indiana, and Alpharetta, Georgia. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta for social distancing protocols. If you like this podcast, please subscribe on your favorite podcast aggregator and please consider leaving a review of the podcast as well.
Mike Blake: [00:01:05] So, today’s topic is a little bit different, but it’s an approach that I anticipate we’re going to be doing more of because I find it interesting and I think many of our listeners will as well. And what I mean by that is, we’re going to inject some topics on decisions that are not just at the tactical and strategic level, but at the foundational level. In other words, how do people make decisions in general? A spoiler alert, I’m starting to put together a book on this and I’ve done some mind mapping.
Mike Blake: [00:01:44] And by the way, mind mapping is really cool. I learned how to do this about two months ago. And now, I’m addicted. You might imagine that a mind map would be a blank piece of paper. And that’s not necessarily an unfair prediction. But, anyway, a fun thing to do is just sort of think about a topic and then kind of draw it out. It’s actually quite addictive. But that’s neither here nor there. Maybe we’ll do a topic on mind mapping.
Mike Blake: [00:02:14] But I want to do and I’m becoming fascinated by how do people arrive at their decisions. And people make decisions that make sense to us and people make decisions that, I think to many of us, seem baffling. And the baffling decisions can be very interesting. They can be very insightful. They can be very instructive. And so, you know, as we move forward with recording podcasts, we’re going to talk about different decision making themes and processes and paradigms.
Mike Blake: [00:02:51] And the topic we’re going to discuss today is, how do people decide to become white collar criminals? So, you know, there’s no shortage of kind of content, if you will, on criminal activity. And look, at least as Americans, we love crime stuff. I’m now on the older side of 50, which means I’ve started watching NCIS. And, I mean, we just love the show even though the things from 20 years ago are a little bit dated. You know, Law and Order has, like, five spinoffs and they’re on their 200th season or something like that. You know, even law firms, I mean if you think about it, a lot of people think about law firms – and with all due respect to my attorney friends out there – it’s not the thing you normally think about to say, “Man. I got to get inside a law firm.”
Mike Blake: [00:03:49] But on the other hand, law firm related shows are some of the most popular. So, people are fascinated with the law and people are fascinated with law enforcement and how that, at least, ostensibly works in a dramatized version. I can go on and on. But you just didn’t think about how many shows on TV has something to do with law enforcement? You know, it’s staggering. I’d be willing to bet you one out of every four shows has something to do with law enforcement.
Mike Blake: [00:04:22] And so, I think it’s a natural segue or a natural foothold into the topic we’re going to discuss today, which is, how do people decide to become white collar criminals? And this is an extremely broad topic because as we’re going to learn today, you know, a white collar criminal can mean a broad range of things. There’s no shortage of types of white collar crime that one might commit. But having worked alongside forensic accountants for a number of years – I am not one – but listening to the stories and then also talking with our guest who some fascinating stories of his own, you know, the question I ask all the time when I meet someone who is a forensic accountant is, how do people decide they’re going to become white collar criminals? What leads to that path?
Mike Blake: [00:05:26] And we’re going to get into a little bit of the psychology and the pathology, if you will, of white collar crime. Not because I’m encouraging somebody to make that decision. But rather, if you want to combat white collar crime or just if you want to understand what makes people kind of go down that road, you know, that’s useful intelligence. It can give you some insight in terms of how do you decide that somebody is trustworthy and how much trust can you place in them? And so, I hope you’ll agree that at the end of the day, this is going to be a very interesting and engaging topic and a very interesting and engaging guest.
Mike Blake: [00:06:15] And joining us today is Vic Hartman, who is a retired FBI agent and head of The Hartman Firm, LLC, a law firm and CPA firm here in Atlanta, Georgia, serving individuals, businesses, government entities, and outside counsels. Vic is a licensed attorney and certified public accountant in the State of Georgia and a graduate of the Emory University School of Law. He holds a credential Certified in Financial Forensics by the American Institute of Certified Public Accountants and Certified Fraud Examiner by the Association of Certified Fraud Examiners. And he’s the author of his recent book, The Honest Truth About Fraud: A Former FBI Agent Tells All. I’m sure that book will be woven into our conversation today.
Mike Blake: [00:06:56] Vic addresses his client’s needs in the interrelated disciplines of internal investigations, forensic accounting, and fraud mitigation consulting. Once an adverse event has occurred, Vic will communicate compassionately with the client and develop a positive strategy for moving forward. Prior to founding the firm, Vic was a special agent with the Federal Bureau of Investigation, where he served as a street agent, supervisory special agent, and chief division counsel. These varied experiences with the FBI enabled him to become an experienced investigator, interviewer, interrogator, forensic accountant, attorney, and leader.
Mike Blake: [00:07:31] Vic is also an adjunct professor at Georgia State University and Fairfield University teaching forensic accounting to master degree candidates. Vic hold a Bachelor’s Degree in Accounting from Valdosta State University and the aforementioned law degree from Emory University. And if we have time, we’ve got to get him to tell the moon rock story, and I hope we will. So, I had lunch with him for the first time a couple of years ago. I was transfixed about this because we had a discussion on how do you value a moon rock? So, hopefully we’ll have time. Vic, welcome to the program.
Vic Hartman: [00:08:04] Hey, Mike. Thanks for having me. Glad to be here.
Mike Blake: [00:08:07] So, Vic, you’ve been a long time agent, you’re a professor of financial forensics, and catching white collar bad guys. Is there a typical profile or anatomy of the white collar criminal?
Vic Hartman: [00:08:25] Wow. That’s a fairly simplistic question. It’s amazingly complex to answer, actually. But at a 30,000 foot view, I would break white collar criminals into two categories, predatory fraudsters and situational fraudsters. Predatory fraudsters, we’ve got to know through the ransomware where somebody encrypts your hard drive and extorts a ransom. Or the business email compromise, which is the biggest fraud happening across the world and the U.S. right now. Common frauds, you know, “Congratulation, you won a prize. And you got to pay something for it.” Those are predatory fraudsters. They’re very thought out. They know what they’re doing. And they got into it very intentionally.
Vic Hartman: [00:09:08] The other category is situational fraudsters, which means if a certain group of circumstances during an occupation, a certain pressures, and opportunities, rationalizations, and other things come to fold, then they make a bad choice when the situation arises. So, broadly, we can put those into those two camps. Most of my time has been spent with the situational fraud, however.
Mike Blake: [00:09:35] You know, Vic, as you make that response, I’m reminded of a reading that I’ve done on espionage and, in particular, Soviet, U.S., Cold War espionage. And I would argue that espionage is a kind of white collar crime. It’s simply a crime against the state as opposed to an individual or a company. And the common theme that emerged of American spies for the USSR was that it was that situational transactional scenario. And I’m sure we’ll get into more of this. But somebody who had gambling debts or who is particularly financially vulnerable that was pushed into crime out of an act of desperation. And it sounds like there may be kind of a common thread there.
Mike Blake: [00:10:29] There’s a wide range of white collar criminals, isn’t there? I mean, it’s not just somebody forging checks anymore, is it? I mean, there’s just this broad range now of opportunities and, therefore, types of white collar crime, isn’t there?
Vic Hartman: [00:10:44] Yeah. There’s actually a classification system where we can categorize every fraud known to man in certain categories, which is very helpful for investigators, it’s very helpful for management just trying to develop internal controls to prevent them. It’s formulated by the Association of Certified Fraud Examiners and it’s known as the Occupational Fraud and Abuse Classification System, affectionately known as the Fraud Tree. And we can’t get into all the details on this podcast, but from a high level view, we can break it down into three branches. This is very important because these frauds in these three different branches are dramatically different and the motivations which causes them to commit those crimes are dramatically different.
Vic Hartman: [00:11:32] One, it’s the most easily understood, and that’s misappropriation of assets. Good news and bad news. The good news is, this lower dollar amounts, usually. The bad news, it’s the most popular types of frauds. It includes embezzlements, time and attendance fraud, travel reimbursements, credit card abuse, these types of things we commonly seen as misappropriation of assets. On the other end of the spectrum, there was financial statement fraud. So, good news, bad news there. The good news is, it doesn’t happen that often. The bad news is, the magnitude of it can result in the demise of the organization. And then, the third branch of the fraud tree, and it happens in intermediate degree of frequency and intermediate degree of loss, and that’s corruption and conflicts of interest. And that would be paying bribes or having a conflict that you don’t disclose to your board.
Vic Hartman: [00:12:25] What I find fascinating, though, is these three branches, misappropriation of assets, financial statement fraud, and corruption, the motivations to commit those are radically different. In the case of misappropriation of assets, the most common types of fraud, I call them, status crimes. And that people are trying to keep their status or increase their status. So, to keep their status, it’s fear based. Fear of losing their job, fear of not being able to pay the mortgage, fear of not being able to keep up with their gambling habit. And fear is a tremendous driver of fraud. And then, the other status is greed based. That, “I’m not happy where I am with my lot in life. And my salary doesn’t support my lifestyle, therefore, I will commit fraud.” So, those status crimes are commonly associated with misappropriation of assets.
Vic Hartman: [00:13:16] For financial statement fraud, radically different. And I’ve played leadership roles in Enron and WorldCom and got to know some of the motivations of those executives who are already tremendously wealthy. So, it wasn’t about the money for those. It was other drivers like pride and shame and managing those emotions in the workforce. And then, lastly, corruption, which I find the most fascinating branch of all the trees because it’s the most difficult to investigate. But I call it, the social contract of reciprocity. Actually, a marketing term. But it’s a quid pro quo that if I scratch your back, you’ll scratch mine. If I give you gifts over time, I just slowly corrupt you. And that’s the core motivator that I found for most types of corruption.
Mike Blake: [00:14:07] I want to follow that up, because I think that’s really the answer. Why is it that corruption is, in your view at least, so much harder to investigate than the status and wealth motivators?
Vic Hartman: [00:14:23] So, of the three branches of the fraud tree, with misappropriation of assets and financial statement frauds, they’re somewhat accounting frauds. You can trace the money. There’s money that went from point A to point B and you can follow that with not too much difficulty. With corruption, however, the payments, often cash bribes, paid outside of the organization. And for some reason it happens by passing a cash envelope in the men’s restroom. I’ve just seen that happen that way so many times. But it can happen in all different ways. But if you don’t have an undercover FBI agent or some other undercover type investigating that, doing wiretaps and other complicated investigative techniques, it’s hard to prove corruption because there’s often not an easily traceable money trail.
Mike Blake: [00:15:13] So, that’s interesting. So, the thing we see on TV with the brown envelope full of cash, that actually —
Vic Hartman: [00:15:19] It actually happens more than times that I would have thought. I wouldn’t have believed it if I hadn’t seen it happen so many times.
Mike Blake: [00:15:26] I guess Hollywood has, at least, one good consultant somewhere along the way. Now, in your book, you talked about a construct – I think it was in your book – called the fraud triangle, which I thought is really interesting. I think it’s a widely held construct in your profession. If that’s correct, could you explain what that means?
Vic Hartman: [00:15:49] Sure. Well, it’s a theory that explains most, but not all. There’s a major exception where it does not explain. But a fraud triangle explains why fraud occurs. And it was actually theorized by Dr. Ronald Cressey in the 1950s. And really didn’t get popular until the 1980s and ’90s. But now, it’s in all the literature for CPAs, accountants, the PCAOB. This theory of Dr. Ronald Cressey is now in all the accounting standards. And it’s instructive for auditors and CPAs to consider these three branches or these three vertices of the fraud triangle when doing audits and other techniques. The theory is that if these three vertices the fraud triangle exists, then fraud is highly likely to happen or could occur. And the three vertices are opportunity, pressure, and rationalization. So, if those three come into play – these are often occupational frauds – an employee is more tempted to and may commit fraud.
Vic Hartman: [00:16:57] Opportunities is the easiest to understand. If you can’t have the opportunity to commit fraud, then it just won’t occur. So, internal auditors can develop internal controls around opportunity. But pressure and rationalization, those are a lot more difficult vertices of the fraud triangle to prevent against. And the theory is that, if we knock out one of these three sides of the fraud triangle, then we’ll prevent fraud in our organizations.
Vic Hartman: [00:17:22] And pressure can come from two types, pressure inside the organization, pressure to make the numbers. Those often is incentivized by the HR Department where they put commission structures and such and incentivizes it. So, pressure to make the numbers. And then, there’s pressure outside the organization, and I call them life happens events. Divorce, drugs, gambling, bankruptcy, all these things happen. So, these employees bring that pressure into the workforce and are tempted to commit fraud. Employee assistance programs are very helpful things to try to work with employees. Because if your employer is trying to help you, you’re much less likely to steal from them.
Vic Hartman: [00:18:05] And then, the third vertex of the fraud triangle is rationalization. And that’s a really difficult one to try to mitigate around. But it deals with the culture of the organization. And we have a strong culture. The employees feel like they’re on the same team. Pulling for the same mission statement. That’s ways to mitigate that rationalization.
Vic Hartman: [00:18:25] So, the theory is that if these three components are present, then fraud may occur where some employees will be more tempted to commit fraud. There’s one extreme limitation now on the fraud triangle. And the fraud triangle works when you’re in, what I call, privity of trust or in a trust based relationship. So, that’s why we have rationalization of the fraud triangle, because we have a conscience and we have to rationalize around that to commit fraud. But if we don’t have to rationalize, if we’re not in privity of trust with our victim, the business email compromise, the ransomware, scams that we’re getting via emails, these predators don’t even know their victims. So, for this one category for which the fraud triangle does not apply, I call them, predatory fraudsters because they’re not in privy of trust with their victim.
Mike Blake: [00:19:29] That’s really interesting and I like to explore that. So, you talked about rationalization and that vertex of the fraud triangle, it seems to me that one thing I hear a lot about white collar crimes and criminals is a perception that a crime can be, you know, “victimless.” We both heard the term victimless crime. Is that a frequent perception that drives or enables that rationalization along the line or is that more of a stereotype and myth?
Vic Hartman: [00:20:05] Well, first of all, fraud is a human act. It’s intentional. It’s what one person does. At any time there’s a fraud, it’s a criminal act, it’s an unethical act. The fraudster gains and the victim loses. Not often by equal amounts, but the fraudster gains and the victim loses. So, every crime, by definition, has a victim. However, in writing the book, The Honest Truth About Fraud, there’s three frauds that jumped out for me. And I’ve been doing this for 30 years. But there’s three humongous categories of fraud that struck me as to their magnitude. And then, I asked myself the question, why are these frauds occurring? What is health care fraud? And that actually was not a surprise to me because I was over the Houston Area Health Care Fraud Task Force. So, humongous amounts of fraud and try to quantify how much this fraud was happening across the U.S. But health care fraud is one of those categories.
Vic Hartman: [00:21:02] The second one was tax fraud. It’s amazing how much intentional underpayment of taxes that U.S. Citizens, people, and corporations fail to pay in their taxes. Tax evasion and it’s tax fraud. And in the third category that really struck me is a very large category is theft of intellectual property, which technically is not fraud because it’s theft. And just think China about espionage and theft of intellectual property.
Vic Hartman: [00:21:32] But what these three frauds have in common, health care fraud, tax fraud and theft of intellectual property is that, the victims, yes, it’s U.S. Citizens. We don’t feel victimized by any of these. And yet we pay more for health care, we pay more in taxes, and we pay more for goods and services because intellectual property has been stolen. So, while it appears victimless, we all pay the price. We just don’t feel it. And each of these are about a quarter trillion plus as we have calculated in the book. But these are humongous frauds that’s ripping us all off. And none of us feel it. You know, after this podcast, none of your listeners are going to run their congressman and complain about this. And if it came out of your paycheck, you’d be up in arms if somebody stole $500 out of your paycheck this month. But these frauds are ripping us off daily and we don’t even feel it.
Mike Blake: [00:22:29] That perception certainly sounds like you can rationalize it all you want. Of course, I’m not suggesting there is such a thing as a victimless crime. But you bring up something that gets me thinking and that this relatively new avenue of fraud via cybercrime really provides, I guess, a new channel, if you will. I don’t know if that’s the right term of art. But a new channel for the intentional, malicious, malignant fraudster whose sole desire is to steal money as opposed to an opportunist who kind of emotionally warps and rationalizes their way into a crime. But with cybercrime, 99 times out of 100, you know, more than that out of a million, you don’t know and you don’t even care who the identity of your victim is. It’s really pushing buttons, hacking code, and then taking people’s information, and doing something malignant with them. Is that something that, maybe, makes cybercrime more scary because it’s a natural venue, if you will, for, maybe, even professional criminals? Does that question make any sense to you?
Vic Hartman: [00:23:56] It certainly does. And even with cybercrime, there’s two categories. There’s theft of intellectual property. And, again, think China and they’re doing it as a nation state actor and they’re very intentional. And they don’t consider it fraud by their standards at all. It’s for the greater good of communism that they’re stealing intellectual property from governments and businesses. The FBI director said, every 50 states have ongoing espionage cases. But that’s one category of cyber fraud.
Vic Hartman: [00:24:25] And then, there’s a radically different, so that’s the trying to hack computers, the business email compromise, ransomware. And the profile of that individual is often Eastern country actors, Ukrainians – not to pick on them – but others in foreign countries. And the profile is a white male between 20 and 30 years old. And they’re not necessarily doing it for the money. There’s more excitement, fun. And it often takes a combination of hackers with various skill sets and they come together and then they pull off hacks. And sure, they get a lot of money. But that’s not really their primary motivator, or at least not at first. It’s really about the challenge. And it’s like a new game. You know, when you don’t see your victim, it’s just a game.
Mike Blake: [00:25:13] Really? I would not have guessed that. That’s fascinating. So, what you’re saying is that, for a lot of these cybercrimes, the motivation is as much about vandalism, effectively. And I guess sort of showcasing their skills and just trying to beat somebody else’s security. And the fact is a financial payoff, I guess, just makes it all the more attractive. But that’s not why they get into it.
Vic Hartman: [00:25:41] No. It’s like a pinball game and you just got higher number. More money was the goal, but you weren’t in it for the money. You’re in just to see who could do the most damage.
Mike Blake: [00:25:54] So, let’s talk about the situational fraudsters as opposed to the intentional and professional ones. Because the professional intentional ones, I think, is a fairly straightforward mindset that we may come back to it. But on the opportunistic or situational side, can you talk, are there patterns that have emerged on how people kind of start down that path? Because my impression is, people in that situation – I don’t know what percentage that is of all fraud, if it’s 10 percent or 90, or 52.8 – but they don’t wake up in the morning saying, “Hey, I’m a crook, so it’s time for me to steal something today.” Is it something else that kind of drives that decision and then the subsequent decisions to pursue that criminal path?
Vic Hartman: [00:26:52] Yes. So, first of all, we’ll rule out the predatory fraudsters, which are very intentional. And they do wake up and say, “I’m going to be a crook.” They don’t consider it that way, but it’s more of a game type for them. But the situational fraudster, everyone that I’ve met, they never joined the organization with the intent to commit fraud. They’re otherwise mostly outstanding members of the community. They would be your next door neighbor and then they find themselves in a corporate environment. This is an example of where – think about the fraud triangle – pressure, opportunity, rationalization. And then, they find themselves either on one of the three branches of the fraud tree. They’re either in the finance department responsible for financial statements. Or they’re out doing sales with government officials they might be tempted to bribe them. Or they’ve been given a credit card with no controls.
Vic Hartman: [00:27:50] You know, now in my private practice, since I’ve left the FBI, I would say 80 percent of the frauds that I’m called in to look at, it’s going to involve credit cards. And if you give somebody a credit card with no internal controls around it, a high percentage of people will abuse it. But they find themselves in the situation where (A) they have the opportunity to commit the fraud. Then, there’s some self-perceived pressure and then they rationalize in some way. Like, “I’ve been in this organization all my life. I deserve better.” Or, “I see corporate officials abusing the company.” And so, just that piece of rationalization will get them over the edge. And they find themselves in the circumstances and then they’re committing fraud. They would never have thought of it of themselves. The people around them never would have thought they would have done that. And then, here they are committing fraud.
Mike Blake: [00:28:44] And so, they rationalize. And that’s a fascinating number, by the way – or not number – characterization. If I heard this correctly, if you give most people an effective blank credit card, at some point down the road, they’re going to commit fraud. Which interesting, I would not have necessarily thought that. But my perception and, maybe, I just sort of made this up, do they start with something that’s small that’s kind of in a gray area where you could credibly argue that it’s not fraud. It’s really just a decision on this. Maybe there’s a dual purpose to that charge, which you can argue that did bring value to whoever has the credit card liability. And then, once that slides through, you’re then encouraged to become more aggressive. Or, is that some other kind of emotional pathology that is at work there?
Vic Hartman: [00:29:48] No. It’s a slippery slope concept? You know, I’ve never seen anybody that started at a million dollars and worked their way down. It always goes the other direction. And they do it once and they feel uncomfortable about it. And then, they don’t get caught. There’s no internal controls. And then, they increase it. And then, the next thing you know, they’re into significant frauds.
Vic Hartman: [00:30:08] You know, I’ve seen this slippery slope concept with financial statement fraud where the CFO will call an all hands on deck and said, “It’s the end of the quarter. We’re just a few shy cents of our number meeting Wall Street’s expectation. Can everybody, the finance department, the accounting department, go back and scrub the numbers for mistakes or judgments? And by the way, there’s this thing called Sarbanes-Oxley, and I don’t want you to violate that. And we want to uphold the highest of ethical standards. But do scrub the numbers and look for judgments or mistakes.” And then, a day or two later, somebody comes back and, “Hey, boss. Congratulations. We did this. We found a couple of mistakes and there’s some accounting judgments that we tweaked and we think it’s more in line. And by the way, we made our numbers.” And then, the CFO or the CEO lavishes praise and congratulations.
Vic Hartman: [00:31:01] Then, the next quarter comes up and the same thing, “We’re just shy of Wall Street’s expectations, go back and scrub the numbers. Look for mistakes and judgments issues.” And somebody comes back and saves the day. And then, this happens quarter after quarter. And then, we went from a gray area to the financial statements are just absolutely bogus and fraudulent. And we’re scratching our head, “How did we get here?”
Vic Hartman: [00:31:27] Well, the CFO had a leadership failure by doing two things. One, he asked them to look for the numbers that only helped them. So, he didn’t ask to scrub the numbers and see which would come up the other way because they turned up negative numbers. But he only asked to look for a biased number, which is a positive number. And then, he lavished praise on them for doing that. And you get to an organization where nobody really intended to do this and they went down the slippery slope and now they have bogus financial statements they’re reporting to Wall Street.
Mike Blake: [00:32:06] And what happens is sort of there’s a reinforced behavior, right? So, you talked about the leadership there, and I can’t agree more. What you’re basically doing is you’re training people – maybe without even those people fully understanding it, you’re basically training them to commit fraud. And from my perspective, I love your opinion on this, it’s okay to ask people to go back and scrub the numbers. But then, at a minimum, that number should be looked at, maybe, constructively. I might have one team whose objective is to find numbers that will help us. Another team to find numbers that would hurt us. Or the second team reviews the first one and try to play the role of the auditor, if you will, and try to have some sort of backstop.
Mike Blake: [00:32:58] But you’re right, there’s, at least, that implicit notion that, “Yeah. Don’t violate Sarbanes-Oxley, but don’t necessarily help the auditors either.” And that is a lot of omission as much as it is one of commission.
Vic Hartman: [00:33:14] Right. Right.
Mike Blake: [00:33:15] So, one thing we really haven’t talked about – and it may mean that the question is not relevant. And if it is, that’s great – is personality. You know, we’ve talked about opportunity, and pressure, and rationalization. Are there some personality types or emotional states and, maybe, that goes more to pressure – I’m actually going to take that off the table. Are there personality traits that in your mind seem to make people more susceptible or more receptive or more resistant to the notion of being a perpetrator of fraud?
Vic Hartman: [00:33:58] Yeah. There definitely are. First, just by the numbers. The Association of Certified Fraud Examiners does a biannual report to the nations. And so, they track all these thousands of frauds that they’re looking at. And they’ve come up with some numbers that the average white collar defendants between the ages of 35 and 45, 70 percent are male, they have a tenure of one to five years in their organization, and they’re more likely to work in accounting and finance department. That being said, those are some raw characteristics of the white collar defendant. I don’t like to look at that at all. That’s profiling. And to me, it’s somewhat nothing wrong with profiling in this context, but it’s just not helpful because it really can be anybody in the organization. So, I’ll throw that out there as just some raw data.
Vic Hartman: [00:34:45] But, really, what I look at is frauds happen – think about the fraud tree again, there’s different motivators for those different types of frauds. And there’s different personality traits associated with each of those. So, you know, for the misappropriation of assets, that status of fear, greed based, that’s going to have a certain profile of the individual. The social compact and reciprocity, the concept of corruption and how we’re being influential, a lobbyist type, an outgoing, gregarious personality, and try to influence people. So, that would be a different personality trait.
Vic Hartman: [00:35:32] And then, with financial statement fraud, it’s really how we manage pride and shame. And so, it takes a certain personality to handle those issues. You know, what I really like to think in fraud outside of the fraud tree is – and I know most of my audience, at least my students, people in business – we think we’re very intellectual, analytical people. And so, when we make a decision to whatever we’re making a business decision, we put the analytics, and the pros and the cons, and we have our algorithms. But, actually, we as humans, when we make judgment decisions, we make it with emotions. I learned this through a psychiatrist that I consult with in the behavioral forensics group.
Vic Hartman: [00:36:19] So, what I like to tell people in this field is let’s use emotions as data. And there’s affects or emotions psychologists and psychiatrists would describe as an enjoyment, fear, shame, contempt, anger. But these emotions drive decision making. So, we might tee up a decision with pros and cons for various issues. But it’s actually our personality and our emotions that’s actually going to drive a particular decision.
Mike Blake: [00:36:53] So, I’m curious about one thing – and you may not even want to answer this. And if you don’t, that’s entirely okay. But I’m curious, are there traits that make people more successful as white collar criminals? I’m sure there’s not a 100 percent catch rate. You know, the reality of life is that some people do get away with murder. You know, are there personality traits that make people more likely to be successful or, at least, be able to avoid detection for a longer period of time and, therefore, do more damage than others?
Vic Hartman: [00:37:38] Absolutely. Again, it depends on the individual and what part they’re in the organization as to what traits would make them effective. For example, if you’re in the accounting or finance department, the trait may be – and what we’re looking at is fraud is a violation of trust. So, we’re looking at personality traits that make that person appear to be trustworthy because then you trust them, misplace trust, and you get victimized by fraud. So, the accounting and finance example, that individual may be smart, hardworking stays late, maybe even be a little boring. That’s their personality and it makes them trustworthy. So, that personality trait, if you’re in the finance or accounting department, might be the profile that would gain trust.
Vic Hartman: [00:38:24] Whereas, say, you’re in sales, totally different personality. You have charisma, you relate to people, you’re believable but, again, you’re trustworthy. And then, in the C-suite, the CEOs and CFOs and those types, they have the appearance of success. The hard work in them, the hard driven personalities that build trust. And in this area, which my time with the FBI, I’ve spent more time working with financial statement frauds, even though they occur less frequently. And I’ve learned of this concept of the dark triad of personalities. And these were three very negative personalities can come together. One is psychopathy, it’s where you have no empathy towards your victim. Narcissism, all about yourself, promoting yourself. And Machiavellianism, which means the ends justify the means. And some CEOs who have these combinations of deadly traits known as the dark triad, you don’t know what’s going on in their mind. But they look very successful. But it’s a very dangerous personality to have.
Mike Blake: [00:39:37] So, I’m so delighted that you put it in this way because it justifies the reason for my doing this interview, which is about the decision making in white collar crime is not necessarily what we would consider a purely rational one. And one of the irrational facets about decision making process that I find fascinating – and you even touched upon this in the very start of this conversation – is, do white collar criminals not appreciate the consequences of getting caught? Because the consequences of being caught are often disastrous. I mean, I guess sometimes there are slaps on the wrist. But from where I sit, they’re often disastrous. Do people not perceive that? Is there a rational tradeoff saying, “Yeah. I know I can get caught. And it’s really bad but I’m going to take the risk anyway.” What does that emotional state look like in your mind?
Vic Hartman: [00:40:38] No. They never think they’re going to get caught. In the first instance, they really don’t think what they’re doing is wrong. They’ve rationalized in such a way that they don’t fully appreciate what they’re doing is wrong. And they certainly don’t think they’re going to get caught. Every time we have a major scandal in the U.S. – and I’ve watched this over my 30 years of watching how Congress reacts – they’ll come out with new laws and now we’re up to 20 year offenses for many federal crimes. I’ve never known one white collar defendant that said, “Well, I looked at the statute and it said I could get 20 years. I think I’m not going to do that.” The consequences of their action have no bearing on their decision making.
Vic Hartman: [00:41:18] And I’ve also never seen, for example, a white collar defendant that says, “Yeah. I think there’s a five percent chance of me getting caught, but there’s a $3 million reward. So, I’ll take my odds and I’ll go with the three million.” I’ve never find anybody that works under that calculus. It’s the fraud triangle at work. It’s more of they’re caught up in a situation. They think what they’re doing is not wrong or not too wrong. They’re going to get out of it. They’re going to repay the money. And certainly they’re never going to get caught.
Mike Blake: [00:41:54] And this overlaps nicely with another question – and I think we’re answering it in real time and that’s fine – is that, you know, I agree with you. From what I’ve seen sort of secondhand is that a lot of people who are caught, they’re (A) surprised they got caught and (B) surprised they even committed a crime. Sometimes you have to go to jail for a long time before they finally really get it that they’ve actually done something wrong because they’ve so rationalized it in their mind. And that de-linkage of actions and consequences, I think, is really important and very perceptive, because maybe that’s the pattern that leads to the pressure to commit the fraud in the first place. Right?
Mike Blake: [00:42:46] If you have a drug problem, you have a gambling addiction that puts you outside of something that you can sustain financially that, therefore, creates the pressure that has you seek the opportunity to create the rationalization for fraud. These are not a standalone things. They’re probably linked. Is it the person who is inclined to rationalize fraud that same mental approach is probably what has led to the pressure to commit the fraud in the first place. Does that make any sense at all?
Vic Hartman: [00:43:20] Absolutely. Yes.
Mike Blake: [00:43:25] So, I think there’s a notion out there that, you know, good people become criminals. But it always reminds me of, you know, when we hear of a mass violent crime in the United States, it’s never. “Oh, yeah. That person was outgoing.” Or, “Everybody knew that person was nuts.” It’s always somebody that, you know, kept to themselves, seemed nice enough, nobody really knew them, they’re kind of invisible. And you kind of wonder maybe there’s even a linkage between the emotional state of someone who’s willing to commit a violent crime versus a nonviolent crime, probably a matter of degree.
Vic Hartman: [00:44:11] Right. So, good people commit fraud. Bad people commit fraud as well. But my experience has actually been that there are good people, at some level, they’ve done certain things in their life that are probably very noteworthy and would be your next door neighbor that you wouldn’t mind living next to. The reason why most of the times it’s good people that did a bad thing is because fraud is a violation of trust. And so, you have trust in that individual. And in order for you to have trust in the individual, you must have experienced some level of good that they’ve done in the past or you wouldn’t have that trust. And recidivism rate among white collar defendants is very low. When you have an executive in a company that gets caught with white collar crime, they’re not likely to do it again.
Mike Blake: [00:45:07] That’s interesting, so people do, I guess, sort of snap out of it or they learn the lesson and then try to pick the pieces up. Now, I suspect part of that is also once you have a record that says you’re a fraudster, the opportunities to do so go down. So, that’s got to be part of it as well.
Vic Hartman: [00:45:25] They have a lot more to lose. So, when you fall from the top, the pinnacle company, I mean, you fell a long way. You have a personal embarrassment, which is pride and shame that was lost. You have a financial pitfall. You experienced a heavy penalty other than like some drug dealer on the street who gets arrested. Their loss is nowhere near the loss of one of these white collar defendants.
Mike Blake: [00:45:54] We are speaking with Vic Hartman, who is the author of The Honest Truth About Fraud: A Retired FBI Agent Tells All. And we’re running out of time here, but I do want to get back to what I hinted at the start because I think we have time to work it in. So, you’re telling me that you worked on a case where there is a theft of moon rocks. Meaning, rocks that had actually been recovered from one of the NASA lunar missions. Can you tell us sort of a synopsis or a succinct description of kind of what that case was like?
Vic Hartman: [00:46:34] Sure. You know, I got a call from a German geologist and he said that somebody was selling moon rocks on the internet. And so, when you get that cold call, you’re like, “Who are you? And why are you calling me?” And, certainly, nobody is selling moon rocks on the internet, which is what he thought as well. But he was very credible and an expert in his field. And so, I, certainly, wanted to look into it. And naturally, what I thought was that this was some scam. That somebody is going to sell rocks from the Earth and they’re going to sell it for a lot of money to this German geologist. So, we put an undercover in the scenario and started developing an online relationship and then a personal relationship of the sellers of these moon rocks. And it turns out they were some Brigham Young interns that were purportedly selling these rocks.
Vic Hartman: [00:47:35] So, with the undercover staying, it happened, it went through. They sold them. And sure enough, they were moon rocks. They were actually interns at NASA. And NASA had put the rocks in safes, but the safes had wheels on them so they could roll them around the different floors of NASA. And these brilliant students decided they would take the safe, roll it down the freight elevator, load it onto a van, and drive off with them, which is exactly what they did, and then sold them.
Vic Hartman: [00:48:04] The fascinating piece about this, Mike – because I know your expertise is valuation – and the reason why this became relevant when a defendant gets sentenced at trial, one of the factors that a judge considers is what’s the loss to the victim. In this case, it’s theft of government property and it belongs to the United States Government. So, what are the value of these moon rocks? Now, I think, the question that I posed to you –
Mike Blake: [00:48:34] You did. I mean, I go back to that question a lot, actually, because it is one of the more fascinating valuation problems I’ve discussed. Do you want to do the big reveal or should I?
Vic Hartman: [00:48:46] And I’m not an expert in valuation, but I learned a little bit about valuation because I was working a savings and loan fraud case and the issue pivoted on what’s the value of a skyscraper in Houston. And they overvalued the building in order to get a humongous loan and commit fraud against the bank. So then, I schooled myself up on valuation issues. And there’s three approach to valuations as I understand it. What would be the fair market value? So, what does a product sell, or a house, or whatever good between two parties A and B? So, the fair market value. Of course, in moon rocks, there’s no fair market value. They don’t trade so that’s not available.
Vic Hartman: [00:49:36] Another is an income stream. So, what’s the income stream of this skyscraper in Houston I was trying to value? If it threw off rents and revenues and you discounted it for 20 years, it threw up X million dollars and you just got current present value. That might be the value of that. But that wouldn’t work for moon rocks either.
Vic Hartman: [00:49:58] And so, what the government actually did in this case was the cost approach today. So, if you had to go back to the moon and get these rocks, what would it cost? And we looked at the Apollo 11 or one of the Apollos that got these rocks, the cost of that mission to the moon and then brought it forward to present value of how much it would be to get those moon rocks. And it turned out to be in the billions of dollars, which was off the sentencing guidelines. I mean, once you exceed, I think, $100 million or some number, it really becomes irrelevant. So, these defendants just maxed out on the value of what they had stolen.
Mike Blake: [00:50:39] And I agree with that. They aren’t traded. I don’t know what the disposition of moon rocks are. Certainly, the U.S. Government has them. I imagine a few academic institutions hold them as well. But I would imagine they’re probably not allowed to sell them. Like, if a donor came on and said, “Hey, I’ll give you $100 million dollars because I would like some moon rocks.” The university were tempted to accept that offer they probably would not be allowed to. Because I think they’d be considered sort of a property of humanity, not of an individual.
Mike Blake: [00:51:16] And I think you’re right, it’s pulled into more focus now as we have and the Artemis Program that we think we’re going to be returning to crude lunar missions sometime this decade. I mean, that’s the only two ways to get a moon rock legally. One is, you go back to the moon and get them. Or two, you hope that something really big hits the moon, create some meteorites, and pieces of the moon hit in your backyard. And that’s a pretty tough, very [inaudible] to wait for. And the interesting thing, as you mentioned that’s safe, it’s the opportunity. Right?
Mike Blake: [00:51:51] The amazing thing is that there is an opportunity for interns who are probably being paid less than minimum wage to somehow – not only was the safe itself mobile, but there is a way to get that safe out of NASA without a security stopping them and asks, like, “What are you doing with the safe?” You know, clearly there is an issue on the opportunity. And NASA, I’m sure, has tightened up ever since.
Vic Hartman: [00:52:19] Vic, this has been a great conversation. I’m already holding you longer than I had promised. And I know you have more bad guys you’ve got to go out there and catch. If people want to contact you to learn more about kind of this topic and how you might be able to help them with fraud matters in general, what’s the best way for them to contact you?
Vic Hartman: [00:52:40] You know, I have a big internet presence. If you type my name. Vic Hartman, into Google, you’ll quickly find hartmanfirm.com. So, I would love to reach out to your audience if I could help them in some way. And we only scratched the surface on the topics that I covered in my book, The Honest Truth About Fraud. And I will offer your listeners this, if you’ll go to my website and purchase the book, at checkout, if you type in the coupon Hartman, H-A-R-T-M-A-N, you’ll get 25 percent off. So, I’d love for your readers to read the book and contact me and give me some feedback what they think.
Mike Blake: [00:53:17] All right. That’s a good deal. So, not only good information, but you get a coupon as well, which I think is a first on the Decision Vision program. So, thank you for that. That’s going to wrap it up for today’s program. And I’d like to thank Vic Hartman so much for joining us and sharing his expertise with us.
Mike Blake: [00:53:32] We’ll be exploring a new topic each week. So, please tune in so that when you’re faced with your next executive decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. It helps people find us that — once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision Podcast.