Deception--Proof Fraud

Usually deception and fraud are assumed to be, if not synonymous, at least in a relationship of implying each other. This is a well justified view since deception is misrepresentation, distortion of truth, and hiding the truth while fraud is gaining something one is not entitled of or preventing illegally and/or immorally other persons to make a gain and causing them suffer a loss as a consequence of deception. To put it in brief, deception is the first step (a preparatory stage) and fraud is the second one—the fulfillment (No doubt, temporally both steps could coincide, but logically they are distinguishable).

 

There is, however, a vast area of emerging fraud aerobatics where deception cannot be identified but fraud, nevertheless, is present. This possibility is due to the connection between deception and truth and, on the other hand, between fraud and unauthorized gain/loss. It is perfectly possible that truth is not to be distorted (no evidence for deception) but fraud is still committed. In most cases, a statement is perceived to be false when it does not correspond to the matter of fact. This allows envisaging a situation where reality is defined and constructed way of statements expressing vested interests to correspond to it. The goal of such correspondence would be to ensure an unauthorized gain or cause an unjustified loss to another party, that is, fraud. This could be exemplified by mass privatization in a volatile situation. In such a case, there is no guarantee that the privatization companies, which have collected the privatization stocks, will be in a position of paying any dividends and even of existing on the market in foreseeable future. Therefore, no deception can be claimed where they stop (or even do not start) paying dividends or disappear from the stock markets. Which means that the losses of hundreds of thousand or even millions participants in a mass privatization are fraud free. The same holds true about situations of hyper inflation.

 

Another way to view truth would be to compare a statement to a set of initial principles. If the given statement corresponds to that principle set, it is true and if not, it is false. In this case too, the principles could be manipulated in such a manner as to secure the correspondence of the needed statements and to avoid any hint of deception. For instance, an industry can be suggested being in bridge of the principles of doing a sustainable business. No surprise, this industry will be under the constant threat of eminent bankruptcy and no deception could be argued of when the bankruptcy really happens. Neither the losses of industry’s shareholders nor the gain of those who profited from the bankruptcy could be considered as fraudulent.

 

Finally, truth could be described as what is beneficial for a community or for the society as a whole. Any assertion and action which does not contradict this definition would be true. The money acquired from some activities could be spent highly beneficially on a certain community (but be disastrous for the rest of society) and in this sense not constituting deception; for this reason the above money producing activities will not be classified as a fraud neither the subsequent fund investment as a money laundering.

 

In all above cases, there is no deception. Nevertheless, fraud is present. What is the criterion for a fraudulent activity? Being illegal? But any statement and following action that is deception-free and does not rely on violence will comply with the letter of the law. To extend the scope of the law a judiciary is needed ready to identify something as a fraud on the ground of acquiring unjust gain and/or causing unjust harm no matter whether any deception is detected or not.

By Assoc. Prof. Alexander Gungov,Ph.D.,Senior Consultant

 

To get the full analysis, please contact office@risksolution.org
Votes: 0
E-mail me when people leave their comments –

You need to be a member of Global Risk Community to add comments!

Join Global Risk Community

Comments

  • Martin,

    I really enjoyed reading your comments—they encouraged me to develop my position further on.

    Martin Davies: I suppose in some respects especially in developed countries with relatively well run exchanges, the due diligence process and cost of listing itself makes this type of fraud prohibitive at conception. The issue I see with fraud in this arena is that a person or entities intentions at the beginning of a transaction may be wholesome however during the course of deal (usually several months down the track) the firm runs into trouble and then has to prioritize which contracts it honors.

    No doubt, this is true if a single company is under scrutiny. However, if it turns out that this is a common practice in an entire branch of an industry (let’s say in 80%-90% of all cases), then it will be crystal clear that the real business here is declaring bankruptcy.

    Martin Davies: In collections for example - A first skip or missing the very first repayment of a loan is classified as an indicator of fraud. Missing payment 25 out 50 contingent obligations would be a credit default not fraud. If one thinks about it, why make any payment on a loan if you intended to abscond with the principal?

    Response: The reason could be in order to take some time to adjust the legal and court system. Another possibility along the same lines: a bank turns a blind eye to huge overdue threatening to take this bank out of business (on some reasons the collateral is not utilized to cover the loss). Why? It might be more profitable to invest the overdue together with the debtor in another business than to run this financial institution.

    This comment tweaks me :-) Alexander Gungov: Exactly this is the trick: they are NOT criminals although they HAVE committed fraud! . . .

    Response: This is not just a rhetorical maneuver on my side; this is exactly what I meant by fraud aerobatics.

    Martin Davies: So while ones position or the entire system in the western world may be protection from being prosecuted for skirting but not breaking the law, if that same person were to be in Nigeria for example; there is a punishment for this - "People who owe billions of dollars to troubled Nigerian banks have been told they have five days to pay the money, or face arrest"http://news.bbc.co.uk/2/hi/8208932.stm


    Response: This is a very substantial and delicate matter. Using a loophole in a law does not necessarily constitute a fraud. In a broader perspective, what are the criteria a law not to turn into a sieve of loopholes when it is designed and later on applied? Common or Roman Law Tradition, common sense, rational consistency and coherency, the divine orders, the interests of majority, or the predominant moral norms? Usually, all or most of them. My suggestion is that this criterion ought to be the interpretation given by the judiciary according to a notion of justice that differentiates deception from fraud.
  • Alexander,

    Great comment : "Alexander Gungov: That is correct: neither de-listing nor not paying dividends is a fraud per se. However, how about a company that is created on purpose not to pay dividends and to be de-listed in order to get profit out of this procedure?"

    Response : I suppose in some respects especially in developed countries with relatively well run exchanges, the due diligence process and cost of listing itself makes this type of fraud prohibitive at conception. The issue I see with fraud in this arena is that a person or entities intentions at the beginning of a transaction may be wholesome however during the course of deal (usually several months down the track) the firm runs into trouble and then has to prioritize which contracts it honors.

    In collections for example - A first skip or missing the very first repayment of a loan is classified as an indicator of fraud. Missing payment 25 out 50 contingent obligations would be a credit default not fraud. If one thinks about it, why make any payment on a loan if you intended to abscond with the principal?

    This comment tweaks me :-) Alexander Gungov: Exactly this is the trick: they are NOT criminals although they HAVE committed fraud! . . .

    So while ones position or the entire system in the western world may be protection from being prosecuted for skirting but not breaking the law, if that same person were to be in Nigeria for example; there is a punishment for this - "People who owe billions of dollars to troubled Nigerian banks have been told they have five days to pay the money, or face arrest" http://news.bbc.co.uk/2/hi/8208932.stm
  • I find very stimulating Martin Davies’ comments and reply to them inside his text:

    Martin Davies: This is interesting way of looking at fraud and I enjoyed the article very much however I don't perceive this statement to be fraud: "This could be exemplified by mass privatization in a volatile situation. In such a case, there is no guarantee that the privatization companies, which have collected the privatization stocks, will be in a position of paying any dividends and even of existing on the market in foreseeable future" It is a sign that firm is suffering some kind of difficulty but de-listing to avoid stringent reporting requirements is not an act of fraud. Not paying dividends is not an act of fraud either, a firm can retain profits for internal investment.

    Alexander Gungov: That is correct: neither de-listing nor not paying dividends is a fraud per se. However, how about a company that is created on purpose not to pay dividends and to be de-listed in order to get profit out of this procedure? How should we categorize a corporation that has established a couple of dozens of companies with a sole purpose to collect mass privatization stock, not pay dividends, and finally be de-listed while the property has been transferred to other companies?

    Martin Davies: When it comes to markets there are a whole swag of specific events which while not harmonious with investors aren't directly illegal. There is difference between immoral and illegal in many cases. On money laundering I agree with you, I fair money laundering and fraud have very close relationships because they tend to use similar channels for inception, layering and transference. Money Laundering certainly has deception, not at a transactional level but in an aggregated structure. On this point then "truth could be described as what is beneficial for a community or for the society as a whole" ... We can definitely ascribe most western governments as institutionally corrupt then.

    Alexander Gungov: . . . and at least in some cases we might not be wrong . . .

    Martin Davies: And to close ... "acquiring unjust gain and/or causing unjust harm" So to extend on from this then, the bankers that were responsible or accountable for collapsing the financial system in 2008, received bonuses and are still in office are criminals then?

    Alexander Gungov: Exactly this is the trick: they are NOT criminals although they HAVE committed fraud! . . .
  • This is interesting way of looking at fraud and I enjoyed the article very much however I don't perceive this statement to be fraud:

    "This could be exemplified by mass privatization in a volatile situation. In such a case, there is no guarantee that the privatization companies, which have collected the privatization stocks, will be in a position of paying any dividends and even of existing on the market in foreseeable future"

    It is a sign that firm is suffering some kind of difficulty but de-listing to avoid stringent reporting requirements is not an act of fraud. Not paying dividends is not an act of fraud either, a firm can retain profits for internal investment.

    When it comes to markets there are a whole swag of specific events which while not harmonious with investors aren't directly illegal. There is difference between immoral and illegal in many cases.

    On money laundering I agree with you, I fair money laundering and fraud have very close relationships because they tend to use similar channels for inception, layering and transference. Money Laundering certainly has deception, not at a transactional level but in an aggregated structure.

    On this point then "truth could be described as what is beneficial for a community or for the society as a whole" ... We can definitely ascribe most western governments as institutionally corrupt then.

    And to close ... "acquiring unjust gain and/or causing unjust harm" So to extend on from this then, the bankers that were responsible or accountable for collapsing the financial system in 2008, received bonuses and are still in office are criminals then?
  • A very interesting view of fraud.
This reply was deleted.

    About Us

    The GlobalRisk Community is a thriving community of risk managers and associated service providers. Our purpose is to foster business, networking and educational explorations among members. Our goal is to be the worlds premier Risk forum and contribute to better understanding of the complex world of risk.

    Business Partners

    For companies wanting to create a greater visibility for their products and services among their prospects in the Risk market: Send your business partnership request by filling in the form here!