Who's more susceptible to fraud?

We know how the Fraud Triangle helps explain the conditions that lead people to commit fraud. But what about the factors that could cause some to be predisposed to fraud? Here are some practical principles to consider when you’re working with fraud victims.

In the mid-’90s, when I was working for a global high-tech firm, I received a call from a fast-talking stockbroker with an unmistakable Brooklyn accent representing a company I never heard of — Stratton Oakmont. “Are you looking for a unique investment opportunity?” he asked. I told him I already had a financial advisor, but he was persistent to the point of being irritating. He schmoozed me with questions that led me down a path where I found myself agreeing with his assertions.

He called back every day for almost a week and left messages on my office phone, such as, “Someone in your position probably has a couple hundred thousand dollars just waiting for the right investment.” I laughed out loud because I had nowhere near that kind of nest egg, so I finally told him not to contact me further because I had no interest in his penny-stock opportunities.

Two years later, the feds broke up Stratton Oakmont, a Long Island-based boiler-room trading operation. A rep from the firm was the pest who kept calling me. Its founder, Jordan Belfort, was later indicted on money laundering and securities fraud charges. His high-pressure operation led to investor losses of nearly $200 million. The Leonardo DiCaprio movie, “The Wolf of Wall Street,” was based on Belfort’s outrageous escapades and others who worked at Stratton Oakmont. (See 10 Exciting Details from Wall Street’s Next Huge Film: The Wolf of Wall Street, by Julia La Roche and Linette Lopez, Business Insider, April 23, 2012.)

Was it Jordan Belfort who called me from the firm? Likely not, but every time I recall the incident, I breathe a sigh of relief that I wasn’t talked into parting with even a fraction of our investment capital. I thought I was too smart for that kind of scam.

‘What? Not me!’

In a recent interview with Regent Emeritus Tiffany Couch, CFE, Acuity Forensics’ CEO and author of “The Thief in Your Company” (Lioncrest Publishing, January 2017), she described to me a case from her book of “Gary,” whose longtime CFO and close friend defrauded Gary’s company to the tune of $2 million.

When she broke the news to Gary, she told me he replied, in shock and disbelief, “You don’t understand! We play racquetball together. We go to church together. You don’t understand. What you’re telling me can’t be true!”

Of course, if you don’t think you’re at risk of becoming a fraud victim, then you’re likely at risk of becoming a fraud victim.

“The person who can financially ‘harm’ the most is the one who is trusted the most. The one who is trusted the most is often the one most liked,” said Don Rabon, CFE, in a recent interview. Rabon is coauthor with Tanya Chapman of the 2016 book, “Persuasive Interviewing: A Forensic Case Analysis” (Second Edition, Carolina Academic Press).

Everyone, at certain times of life, can be prone to scams. We don’t have definitive reasons why we succumb to a fraudster’s siren song. But we can examine some behaviors and situations (divorce, bankruptcy, job loss), environments (peer pressure and influence, lack of workplace ethics policy), and even neuro-psychological susceptibilities (dyslexia, memory impairment and addictions) that might raise flags.

Oxytocin: The ‘love hormone’ with a bad side

Many fraudsters know that our brains wrestle constantly between emotional and rational thinking. So, they try to ply their craft to influence would-be victims’ emotions during vulnerable life situations. Emotional susceptibility is related to the neuropeptide oxytocin. This hormone (called the “love hormone”) and neurotransmitter enables complex social bonding, well-being and “approach behavior” — for example, feelings of empathy — as well as “avoidance behavior” — feelings of apathy. (See ‘Love hormone’ is two-faced … Science Daily, from Northwestern University, July 22, 2013.)

Fraudsters preying on individuals work hard to be likeable and communicate a sense of familiarity and empathy. Such actions stimulate the release of oxytocin in the brains of potential victims, which makes them even more susceptible. (See Low oxytocin may lead to low empathy, study finds, by Ana Sandoiu in Medical News Today, Nov. 7, 2016.) Empathy can open the gates wider to trust (people are by nature trustworthy as a byproduct of evolutionary survival), which then can easily lead them to comply with fraudsters’ requests. (See Empathy - Trust and Openness by Terry Schmitz, September 30, 2016.)

The Northwestern University research in Science Daily indicates that oxytocin can cause emotional pain, fear and anxiety because the hormone strengthens social memory in the brain. This finding might explain why the emotional and psychological hurt from being defrauded reverberates for many years.

Hijacking the amygdala: ‘What were they thinking?’

Related to the oxytocin boost is the “amygdala hijack,” a term coined by Daniel Goleman in his book, “Emotional Intelligence: Why it can matter more than IQ.” (Bantam Books, 1995) The term describes a condition where any strong positive or negative emotion increases blood and oxygen to the almond-shaped amygdala in the brain, which impairs the rationality function of the brain’s pre-frontal cortex.

Critical thinking, discernment and problem-solving skills are also impaired, which play into the fraudster’s hands. Such a weakened state suggests invoking what my high-school debate coach called the “four-second rule” (breathe deeply and exhale for four seconds) before responding to arguments or situations that pull you into irrational, illogical detours. (Some former presidents and other politicians, athletes, movie stars and public figures might have avoided costly and embarrassing situations if they’d applied the four-second rule.)

Life situations trigger emotional, neurological and psychological factors that make fraud victims susceptible because the mind thrives on a good story.

Most fraudsters probably don’t know the neuroscience behind boosting oxytocin levels or hijacking amygdala, but they do know how to induce the effects in those who are in vulnerable situations, environments or positions. For example, “romance scams” defraud thousands of women and men in various types of phony romantic relationships. (See Psychology of scams: the emotional traps to watch out for, by Suli Malet-Warden, IDCARE, Australian Broadcasting Company, Feb. 26, 2017.)

Many romance scam victims retain email messages and photographs from fraudsters long after the end of a scam, which suggests the elevated remnant oxytocin levels and strong amygdala activity remains associated with the event. (See Hacking the heart: the psychology of scams, by Monica Whitty, New Statesman America, Feb. 23, 2017.)

The emotional and psychological devastation fraudsters leave in their wake can manifest in victims as insomnia, persistent feelings of anxiety, embarrassment and shame, loss of appetite, ongoing anger and resentment, depression and suicidal thoughts, which explains in many cases a reluctance to report the scams.

Elders — a special subset of potential victims — often find themselves in vulnerable situations. The National Center on Elder Abuse estimates that 90 percent of perpetrators are family members, caretakers, friends or neighbors — those the victims know.

Two high-profile, elder-abuse cases involve former astronaut Buzz Aldrin and his children (see US astronaut Buzz Aldrin sues his children for ‘misuse of finances,’ BBC News, June 26, 2018) and the late Marvel Comics® legend Stan Lee and a memorabilia collector trying to gain control of Lee’s $50 million estate. (See Stan Lee Claims Elder Abuse, Seeks Restraining Order Against Biz Manager As LAPD Investigates, by Dominic Patten, June 13, 2018, Deadline.)

Are fraud victims just too gullible?

We have a natural propensity to trust and cooperate with others. But without a filter that allows us to calibrate, evaluate, trust or reject incoming communication (what’s called “epistemic vigilance” in academic circles — “BS detector” everywhere else), fraudsters have the advantage when they wield these weapons of deceit:

• Their authority to appeal to victims’ trust.
• Visceral, emotive triggers to override rational evaluation of frauds.
• “Personalized scarcity cues” to create the impression that the offer is unique to the recipient, which induces compliance and commitment.
• Asking victims to make initial small-step commitments.
• Disproportionate gap between victims’ small investments and alleged big rewards.

(See The psychology of scams: Provoking and committing errors of judgement, Office of Fair Trading, ^©Crown copyright May 2009.)

“Fraudsters and burglars are a lot alike; they just can’t stop what they do,” Rabon said. “If one building is tightly secured, the burglar will find a more vulnerable target. Identify an operational vulnerability, patch it and the fraudster will find another vulnerability.”

Social networks: protective or exploitive environment?

A social network consists of the relationships and interactions within a group of individuals. Social networks are mediums for spreading information, ideas and influence among its members. Economic sociologists emphasize that social networks provide a beneficial and protective role for members because they provide more “information symmetry” between buyers and a potential seller. In other words, buyers and a seller know all relevant information in a possible transaction.

Conversely, white-collar criminologists stress social networks’ possible harmful and exploitative roles, in which social ties facilitate information asymmetry — the seller knows more than buyers — leading to successful economic crimes. (See Social networks and loss of capital by Wayne E. Baker et. al., “Social Networks,” Volume 26, Issue 2, May 2004.)

Social network diffusion

The power of social networks to distribute information is well-documented. (See The Role of Social Networks in Information Diffusion by Eytan Bakshy et. al.) “Social network diffusion” is the extent to which people are likely to be affected by their friends’ and colleagues’ decisions. For example, an investor’s social network would include direct or indirect social ties to a seller or other investors, and influence through word-of-mouth promotion, advertising and marketing campaigns.

According to the “Social networks and loss of capital” study, investors without direct ties to principals and who did not conduct due diligence on potential investments lost more capital than investors with pre-existing ties to principals and who did conduct due diligence on those investments (79 percent versus 14 percent). This former approach worked well for Charles Ponzi. And Dennis Cope.

Case of Claudia Nelson: fraud victim turned fraud gumshoe

It’s clear from visiting Claudia Nelson’s website that she’s endured more than her fair share of tragedy. She lost her father to an auto accident while she was on her honeymoon, her mother and sister were murdered in their mountain cabin, she survived a battle with cancer, and in 2000, Dennis Cope, a teacher in a seminary of the Mormon Church, wiped out her and her husband’s $100,000 life savings.

A 2012 PBS “MoneyTrack” episode chronicled Nelson’s story. Harold Davis, an FBI special agent, said in the program that “Dennis Cope represented to investors that their money would be placed in various high-yield bank trading programs and represented they would be making returns up to 120 percent a year. … The investments would be low risk, high return, and that their money would be placed in banks as collateral to be traded.”

Cope held small secret meetings with potential investors to make them feel special, Nelson said, and made them sign non-disclosure agreements. Nelson repeatedly tried to find out how her account was doing, but Cope wouldn’t respond. So, she asked for her money back. Cope had promised from the beginning that he’d refund any investor money.

When all she heard from Cope was crickets, she contacted the other investors in their small group — all of whom had religious backgrounds. She organized group prayer meetings for Cope, whom they believed at first was struggling with personal issues. But then someone in that group forwarded Cope’s entire email contact list to her. After she received emails from those on the list, Nelson assembled the puzzle pieces. Cope was actually operating a classic Ponzi scheme. Nelson immediately initiated the formal legal complaint process and spent several years examining records to assemble a credible case against Cope.

In 2005, Cope was indicted on 32 counts, and in 2009, pleaded guilty to conspiracy and securities fraud that bilked hundreds of investors out of an estimated $18.5 million. In 2009, he was sentenced to seven years in prison. Cope’s co-conspirator, Edgar Bias, was sentenced to eight years in prison in 2008 after pleading guilty to mail fraud, wire fraud and conspiracy. Bias was ordered to pay $8,484,733 in restitution. (See Promoter of High-Yield Investment Scheme Sentenced to Federal Prison, FBI release.)

Nelson cautions others in the PBS video. “If you find someone excessively charming, excessively generous — particularly if they are part of your religious … or ethnic background — maybe you ought to look just a little bit deeper.” Nelson later wrote a book to help victims recover from adversity. (See “Rising from the Ashes,” by Claudia Nelson, Morgan James Publishing, 2012.)

Cope’s case shows how those who belong to social networks can succumb to affinity fraud even if they aren’t in vulnerable situations, environments or positions.

Fraud susceptibility index

In my article on diamond fraud in the May/June 2018 issue of Fraud Magazine, I describe the “fraud susceptibility index,” a basic equation I devised consisting of three variables: 1) paradox of value, also known as the “diamond-water paradox” 2) information asymmetry and 3) social network diffusion.

This simple equation doesn’t address all types of fraud (romance fraud, for example), but it’s a back-of-the-cocktail-napkin effort to determine fraud susceptibility for high-stakes investors and collectors of rarities.

The three variables do represent major categories that describe many attitudes and behaviors that fraud victims exhibit. Perhaps more than one fraud susceptibility index exists —one that would have as variables: 1) degree of trust, 2) strength of narrative, and 3) present life situation/environment.

The Financial Fraud and Fraud Susceptibility in the United States Research Report from a 2012 National Survey states that “self-reported victims of investment fraud weren’t found to have any differentiating personality traits from non-victims of investment fraud.” However, respondents who participated in potentially fraudulent investments had higher extraversion ratings (outgoing personality), conscientiousness ratings (thorough carefulness) and open-to-experience ratings (willing to consider new opportunities). The survey found that those who lost large sums of money in a potentially fraudulent investment had higher openness ratings (in this use, blind acceptance) than those who hadn’t invested.

Susceptibility can lead to bruised souls

Life situations trigger emotional, neurological and psychological factors that make fraud victims susceptible because the mind thrives on a good story. The smooth-talking fraudster conjures up narratives that play into our desires and dreams. A compelling, well-woven narrative can lower our guard while the protective nature of “epistemic vigilance” (literally “knowledge caution”) surrenders to unconstrained emotions, beliefs and acceptance.

When the stories of our lives seem to us disjointed or incomplete — or appear broken because of life circumstances — the fraudster provides the missing themes that, through our own volition, propels us toward compliance and our undoing.

Victims often carry scars that transcend loss of funds. Fraudsters can permanently bruise vulnerable souls with their deceptions and deceit. “For fraud victims, it’s not about the money,” Tiffany Couch said. “The crime of breached trust is more injurious than the missing funds.”

Donn LeVie Jr., CFE, a Fraud Magazine staff writer, has been a presenter and career and business engagement/positioning strategist at ACFE global fraud conferences since 2010. He speaks on what he calls Presence-Driven Leadership™ / Persuasive and Influential Intelligence™ through conference and corporate programs. LeVie is the author of several award-winning professional advancement strategy books. Visit his website at donnleviejrstrategies.com. Contact him at donn@donnleviejrstrategies.com.