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Sunday, 4 March 2012

Sunday, March 04, 2012 Posted by Jake 1 comment Labels: , , , ,
Posted by Jake on Sunday, March 04, 2012 with 1 comment | Categories: , , , ,

The “Fraud Triangle” is an established method for sniffing out fraudulent activity, particularly in companies. The three sides of the triangle are:

  • Opportunity
  • Incentive/Motive
  • Rationalisation. 



According to the KPMG report “Profile of a fraudster 2007

"Opportunity generally occurs through weaknesses in the internal controls and creates an atmosphere where fraudsters believe they are likely to be successful and undetected.. .. Trust, however, though important in business often becomes the door opener for fraudsters.

Motive often develops from financial pressure resulting from a fraudster’s excessive life style  …. or the superiority complexes of the individual or basic greed.

Rationalization is the fraudster’s internal dialogue that provides the self justification for his actions. The fraudster convinces himself/ herself that he/she is owed this remuneration by the employer."

The report also states:

“Greed and opportunity (when taken together account for 73 percent of profiles) are indicated to be the overriding motivations for fraud.”

“Members of senior management (including board members) represent 60 percent of all fraudsters. An additional 26 percent of profiles involve management level persons bringing the total to 86 percent of profiles involving management.”

With the management of companies being the core cadre of fraudsters, our own Rip-Off Triangle demonstrates why companies rip off their customers. 


After all, why would a senior manager rip off his employer and risk the shame of sacking and jail, when he can rip off his employer’s clients and look forward to a bigger bonus and promotion?

The three sides of the Rip-Off Triangle are constructed thus:


1) The base is built by people, for people, and with people who are all highly incentivised by money. Exorbitant bonuses in banking, energy, transport and other industries have seen a proliferation of rip-offs. A big enough bonus will salve the conscience of any bonus-driven executive as they perpetrate their sharp practices:

  • Bank customers tricked into poverty due to mis-selling, excessive charges and other scams.
  • Pensioners exposed to the risk and the reality of freezing to death in the winter due to gouging electricity and gas bills.
  • Rail travellers condemned to delays, over-crowding, and fatal accidents due to cost cutting on maintenance and staffing.
  • Customers of phone, cable/satellite television and other services ambushed as they get surprise stonking bills hidden by complex charging.

2) The right side of the triangle is provided by cowardly and complicit British consumer protection law, and equally cowardly and complicit regulators. As we saw in an earlier post, consumer protection law only requires companies not to bamboozle and swindle the ‘average’ customer. 
  • A commercial practice is unfair if…..it materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product. 
  • A commercial practice is a misleading action if…. it causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise. 
  • A commercial practice is a misleading omission if, in its factual context…. it causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise. 
Mathematically speaking, half the population is "less than average", and so is fair game. (Before mathematical pedants get picky, we assume a Normal Distribution here).
    3) The left side of the triangle is tragically made up of us Ripped-off Britons. The 2011 Skills for Life report reveals that nearly half of adults in England have the numeracy level of junior school children, between 5 and 11 years of age.
    National           Approximate School
    Standard          Level Equivalent
    Entry 1             Key stage 1 (ability expected of a student age 5-7)
    Entry 2             Key stage 2 (ability expected of a student age 7-9)
    Entry 3             Key stage 2 (ability expected of a student age 9-11)
    Level 1             GCSE D-G (ability expected of a student age 11-14)
    Level 2             GCSE A*-C (ability expected of a student age 14-16)


    Of the three sides of the rip-off triangle, the hardest one to break is innumeracy. This is a battle that will take generations to win. Make no mistake, companies will fight back to ensure that as numeracy increases, the complexity of their deals will also increase to maintain the bamboozle margin. But it is a battle well worth fighting.


    Organisations like "National Numeracy", which launched in March 2012, demonstrated a rare insight by recognising the difference between school maths and functional numeracy. Many Britons made to suffer at school by constructing isosceles triangles and rotating a parallelogram 90 degrees anticlockwise about the origin, maths that is useless even to most professional mathematicians, develop an aversion to all numbers. Associating academic maths with personal nightmares, they shy away from the really important functional maths, as described by the National Numeracy guys:

    • being able to critically assess statistics used by advertisers or politicians
    • being able to manage family budgets – credit cards, offers at supermarkets and so on
    • being able to estimate – in all kinds of situations, e.g. journey speed, time and distance, roughly how much a bill will be or your expected bank balance at the end of the month...


    While numeracy is a problem for the long term, the other two sides of the Rip-Off Triangle, excessive pay and weak regulation, can be broken by the stroke of the legislative pen:


    Excessive pay              
    Nobody deserves multimillion pound salaries for their work. Don't leave the overpaid bastards enough of their excessive gains to make it worth selling their souls. Companies have already shown they are unwilling to bring down pay. Solution: tax them.

    Weak regulation
    The law currently protects the 'average' consumer, but doesn't define what that average is. Strengthen the law to protect people with the numeracy of an eleven year old. If a contract cannot be understood by an average junior school child then it should be un-enforceable. This is an extremely easy, quick, and low cost test - just send the contract to a junior school and see what the students make of it. Also, strengthen enforcement. Don’t let the perpetrators walk away “neither admitting nor denying wrongdoing”. Make the punishment hurt the perpetrator – community service or jail time - as a fine simply makes no difference.

    We currently have the ridiculous situation where functional numeracy in the form of financial education of children is left to the banks, who have well funded programmes sending their staff into classrooms! Rather like giving the Big Bad Wolf the contract to build houses for the little pigs.

    Wolf:                “Wolves in general are fine. It’s the Big Bad ones that you have to watch out for”

    Little Pig:          “How do we know if a wolf is a Big Bad wolf?”

    Wolf:                “You’ll know when he has you by the throat, snatching your savings, extorting ridiculous interest from your borrowings, and pillaging your pensions with high charges.”

    Little Pig:          “When would we know that?”

    Wolf:                “Well, you will know about five years after you come to our branch and sign on the dotted line.”

    1 comment:

    1. To see that excessive pay, and the resulting drive to rip-off, is the core of the problem let's consider whether this could be controlled by more regulation.

      In his speech of August 2012, Andy Haldane (one of the more entertaining and insightful senior staff of the Bank of England) stated:

      "In the UK up until the late-1970s, bank supervision was performed by the Bank of England on an informal basis, with a team of around 30 employees. Even when the Bank was given statutory responsibility in 1979, fewer than 80 people were engaged in the supervision of financial firms.

      In the period since, the number of UK financial supervisors has increased dramatically, rising almost forty-fold (Chart 1). In response to the current crisis, regulatory numbers are set to rise further. Over the same period, the number of people employed in the UK financial services sector has risen fractionally. In 1980, there was one UK regulator for roughly every 11,000 people employed in the UK financial sector. By 2011, there was one regulator for every 300 people employed in finance. "
      http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf

      Evidence that the key to reduce ripping-off by the financial services industry is not more regulations and regulators. Regulators will always be trumped by the cunning or the studied stupidity of scoundrels. The key is have fewer scoundrels - scoundrels who are attracted in by excessive pay.

      ReplyDelete

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