Ignoring cyber risks may put firms in deep trouble; here’s how professional fraud grows with time

April 28, 2020 4:07 PM

There has been a paradigm shift in the motivation and triggers that cause people to commit white-collar crimes.

cybercrime, cyberfraud, white collar fraud, computer fraud, share market fraudWhite-collar crime is defined as a nonviolent crime committed for financial gain.

Deepak Bhawnani

An increasing slew of financial crimes is being reported in the headlines in India. Many are usually attributed to people of elite status. Each of these seems to be bigger than the last, which forces one to ask – why do they do it, given that they are already wealthy? Why engage in such self-destructive behaviour?

What are the white-collar crimes? White-collar crime is defined as a nonviolent crime committed for financial gain. According to the US-FBI, these crimes are characterized by deceit, concealment, or violation of trust. The motivation for these crimes is to obtain or avoid losing money, property, or services, or to secure a personal or business advantage.

Examples of white-collar crimes include share fraud (insider trading), embezzlement of company funds, corporate fraud (malfeasance with loans from Banks), money laundering (sending funds abroad) along with tax evasion.

Classic white-collar crimes have usually been associated with the educated and the affluent. Persons with a senior or sensitive position in a listed corporation, having access to price-sensitive/non-public information, may take advantage of such information to reap financial benefits.

White-collar crime in India came into public notice in the late 1980s and 1990s with a securities fraud committed by stockbroker Harshad Mehta where he misappropriated borrowings to manipulate stock prices for his gain. His scam led to one of India’s worst stock market crashes that wiped out millions of shareholder value. The 1990s witnessed another such fraud committed by stockbroker Ketan Parekh.

Over the past three decades, the incidence of white-collar crimes has only increased. The first half of the new millennium witnessed one of India’s biggest corporate accounting frauds committed by Ramalinga Raju, promoter of Satyam Computers. Mr Raju was accused and later convicted of manipulating the company’s books by overstating assets and understating liabilities.

Recently, certain industrialists & businessmen have been sullied with embezzlement, money laundering and fraudulently acquiring loans from banks to siphon them to offshore accounts abroad, where they now live as fugitives.

With the advent of global net connectivity and technological advances, digital data is on track to becoming the most valuable currency, so the scope of white-collar crimes has widened to include phishing, spoofing, identity theft and other cyber-crimes. With financial records, access to bank accounts, credit cards and other financial products being available online or on apps, it has become hunting grounds for hackers to take advantage of their skills to commit financial crimes. Stealing of credit card data, 419 scams extorting on the pretext of lottery wins, spoofing attacks by call centres, stealing of bank information while purporting to require this information to pay for purchasing via C2C app services, and digital identity thefts to avail loans fraudulently are all white-collar crimes of today.

E-commerce platform scams are apt examples of online marketplace frauds that are becoming increasingly common. These show how quick and easy it is to commit crimes using the digital world as criminals exploit loopholes to commit crimes in areas where people assume safety and authenticity. The need for stricter buyer-seller verifications, more secure e-payment validation modes and punitive actions on those who commit digital crimes is critical to mitigating the frequency.

The reasons why people commit these crimes have also undergone a change. There has been a paradigm shift in the motivation and triggers that cause people to commit such crimes. These have gone from being purely financial gains, to pressure to achieve overly aggressive sales targets linked to bonuses and promotions built-in as incentives for employees.

Individuals have various degrees of tolerance toward conscientious and ethical behaviour. Studies indicate that white-collar crimes occur due to the perceived ambiguity in the work environment e.g. good or bad behaviour of senior management. Some individuals do succumb to temptation and compromise their ethical values in this grey area. Multinational Companies, Investment Banks and Professional Services Firms have been party to such incidents because of reasons like poorly designed job incentives, management nonchalance towards ethics, perceiving unethical behaviour as harmless, aggressive goals without goalposts, disregard for the law and a false belief that everyone misbehaves, and other such moral hazards.

The reaping of financial benefits creates a feeling of hubris that leads to a feeling of invincibility which magnifies the ability to take wrong and unethical decisions. One starts to think that laws do not apply to one’s self leading to dubious behaviour. These attitudes foster tolerance towards breaking rules.

Deliberately failing to acknowledge unethical behaviour are reasons promoting these crimes. Accounting firms retained and paid by multinational companies for their audits overlook transgressions to secure their billable hours. Credit Rating agencies who list companies and financial instruments (e.g. bonds) as a paid service also have an incentive to bias their ratings favourably to retain the client. Entities that take a lenient stance towards those who provide advertisement revenue or fees may also be responsible for unethical behaviour, especially in such quid pro quo arrangements.

White-collar crimes are not victimless as they deprive citizens of India basic economic freedom. The FBI estimates of costs of white-collar crimes in the USA range between US$300-US$500 billion.

White-collar criminals are usually aloof from their victims but the damage to society can be massive. Such perpetrators are smart, in a position of power, and figure out and manage the system to know how to avoid getting caught. They are driven by greed, invincibility and a desire to win at all costs.

How many have the wherewithal to maintain their integrity and dignity if the opportunity for a personally profitable fraud comes up, especially if the expected probability of getting caught is minimal? In 1734 it was first asked, ‘does every person have a price,’ and almost 300 years later, it remains a pertinent question!

Deepak Bhawnani is Founder & CEO at Alea Consulting. Views expressed are the author’s personal. 

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