Recognizing rationalization

Criminologist Dr. Donald Cressey strongly influenced Dr. Joseph Wells, CFE, CPA, and others who formed the ACFE. Cressey's principles culminated in the formation of the Fraud Triangle, which fraud fighters have used for decades to understand and work cases. Students and aspiring fraud examiners need to understand that the Fraud Triangle isn't just some sociological theory from a textbook but an important application in the field.

The case of "Judy" is an important study in the application of the Fraud Triangle and several other fraud examination tenets. We know the Fraud Triangle by its three sides: pressure, opportunity and rationalization. As you read the case study, think about each category and how it might apply in cases you're working now. (This case is real, but I've changed some of the details, including names.)

'Only the Lonely'

Judy had been a bank teller for a regional financial institution for 14 years — since her senior year in high school. Over time, she became a respected authority in her area, and bank managers and employees saw her as a good person. Her value increased when the bank promoted her to a supervisory position when she was 30. 

Though she was finding success in her job, her husband was spending too much time at his work, and she turned to gambling to ease her loneliness. She soon got into significant debt, but she didn't tell her husband. She also didn't tell her family or seek mental health or financial counseling. Instead, (surprise) Judy chose to steal money from bank customers.

Trap of loneliness: a non-shareable problem

Judy had a problem of physical and emotional isolation — a secret to hide from everyone. She felt inhibited to talk through her situation with anybody and work on solutions. In his classic book, "Other People's Money: A study in the social psychology of embezzlement," (Montclair: Patterson Smith, 1973), Cressey called this a "non-shareable problem." In this case, it was the pressure side of the Fraud Triangle.

Interviewers can ascertain early in an interview process the geographical and emotional closeness of the subject's family and the subject's ability to participate in difficult conversations — important factors in discovering a non-shareable problem. A subject also can use the isolation theme as an effective excuse for blaming others for the subject's psychological mindset that allowed the fraud.

Judy's scheme to embezzle

Judy targeted elderly customers — 13 of whom were between the ages of 79 and 99 at the times of the thefts. In one year, Judy made 40 financial transactions without authorization and stole $178,710.89 from 12 different certificate of deposit (CD) bank accounts, which affected 18 customers.

However, a forensic audit of her books showed that because she knew the intricacies of the banking system, Judy was actually able to steal more than $300,000 between CD accounts without customer authorization to cover for her theft. Judy withdrew multiple cash transactions under $10,000 to avoid U.S. federal government cash withdrawals reporting requirements. She also closed the CD accounts without customers' authorization to avoid detection.

Judy had a problem of physical and emotional isolation — a secret to hide from everyone."

• No one would miss the funds.
• The stolen funds were small portions of the accounts.
• The bank wasn't paying attention.
• The victims could afford these small amounts.
• Insurance would cover the bank and victims.

Excuses, excuses ...

Judy told the court that she'd been diagnosed with problematic gambling, which was triggered by the emotional abandonment, low self-esteem and loneliness she had suffered from the problems in her marriage. Her gambling addiction, in turn, "greatly contributed" to her crime. Judy rationalized — the third side of the Fraud Triangle — she committed her crimes because of family factors she couldn't control that then heightened her gambling problem. Classic rationalizations.

People need to feel good about themselves and justify their actions even when (especially when) they know deep down that they've done something very wrong but can't admit it.

Cressey's study of 133 convicted embezzlers found that people need to "adjust" themselves to their new realities. They believed they were good people. So even though they did something wrong they still needed to live with themselves and, as Cressey puts it, "excuse away" their illegal behavior. Cressey called this rationalization process a "vocabulary of adjustment."

Thesaurus of realignment

Trust violators must repurpose culturally acceptable positions and internalize them to their own situations. Cressey found that most embezzlers have three types of rationalizations: 1) The behavior wasn't criminal (e.g., there was no "intent" to steal). 2) The theft was justified for some reason. 3) The illicit activity was part of a general "irresponsibility" for which the person isn't wholly responsible for. You should try to understand a subject's excuses because you'll probably have to provide information that refutes them.

This is how Judy rationalized her position: She could get a divorce from her allegedly inattentive husband, but others would judge her as a failure. Or she could turn to a slot machine to fill her empty sense of self. She converted gambling into a full-fledged passion — to the tune of several hundred thousand dollars. However, she now was in a huge hole, and she certainly couldn't reach out to her husband. After the bank discovered the thefts, Judy did file for divorce but later opted for counseling and therapy instead.

Cressey, in "Other People's Money," quotes one subject who said his "back was up against a wall," and another who didn't volunteer the extent of his theft to his wife. Judy was certainly the same. When bank investigators initially confronted her about missing funds after they followed a complaint from a victim's family member, Judy signed an admission to embezzling funds from eight customers. Only until after a full investigation was completed — 1½ years later — did records reveal that Judy had, in fact, stolen from nine additional victims' accounts. The bank, acting apparently solely on her confession, allowed her to repay the funds, and (at least according to court records) the bank failed to make a report to law enforcement.

Bank investigators did a poor job; they only discovered the additional victims 18 months after Judy's initial confession. They failed to properly follow-up and conduct an audit of all of Judy's transactions until another individual came forward much later to express concerns about her account.

Living and breathing Fraud Triangle

The Fraud Triangle is alive and well in Judy's case. She incurred a massive debt that, as Cressey wrote, "was contrary to [her] public persona" and became a secret because it was embarrassing. In losing money to gambling, her behavior suggested a general irresponsibility at best, and addiction or poor judgment at worst. In either case, it was likely that if the bank knew the true extent of her gambling debt, it would have fired her.

As Cressey stated, in "Other People's Money," "[an] admission of the loss would amount to an admission of unworthiness." No one likes to admit they're wrong — let alone admit they have no worth — especially after working at a bank for nearly 15 years. The bank investigators could have applied the elements of the Fraud Triangle and might have better protected its depositors and uncovered a scheme that reaped almost $200,000. The principles in the Fraud Triangle are a strong testimony to Cressey and his legacy more than 65 years later.

I highly encourage you to read "Other People's Money," if you can find it. This compelling work helped me to understand the motivations and thought processes of trust violators and embezzlers, so I could develop approaches for interviews and admission-seeking interrogations. Though it's out of print, some college and universities libraries might loan it to you, or you might obtain it via city inter-library loan programs.

Colin May, CFE, is a forensic financial investigator with a government agency (the views in "Starting Out" are his own) in Baltimore, Maryland. (And he's a proud new father.) His email address is: colin.may.cfe@gmail.com.