How people rationalize fraud - Kelly Richmond Pope

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If you ask people whether they think stealing is wrong, most of them would answer yes. And yet, in 2013, organizations all over the world lost an estimated total of $3.7 trillion to fraud. Kelly Richmond Pope explains how the fraud triangle, (developed by criminologist Donald Cressey) can help us understand how seemingly good people can make unethical decisions in their daily lives.

Lesson by Kelly Richmond Pope, animation by TED-Ed.

If you ask people whether
they think stealing is wrong,

most of them would answer, "Yes."

And yet, in 2013, organizations
all over the world

lost an estimated total
of 3.7 trillion dollars to fraud,

which includes crimes like embezzlement,

pyramid schemes,

and false insurance claims.

This wasn't just the work
of a few bad apples.

The truth is that many people
are susceptible

not only to the temptation
to commit fraud

but to convincing themselves
that they've done nothing wrong.

So why does fraud happen?

While individual motivations
may differ from case to case,

the fraud triangle,

a model developed
by criminologist Donald Cressey,

shows three conditions
that make fraud likely:

pressure, opportunity,
and rationalization.

Pressure is often what motivates someone
to engage in fraud to begin with.

It could be a personal debt,

an addiction,

an earnings quota,

a sudden job loss,

or an illness in the family.

As for opportunity, many people
in both public and private sectors

have access to tools that enable them
to commit and conceal fraud:

corporate credit cards,

internal company data,

or control over the budget.

The combination of pressure

and being exposed to such opportunities
on a daily basis

can create a strong temptation.

But even with these two elements,

most fraud still requires rationalization.

Many fraudsters are first time offenders,

so in order to commit an act
most would regard as wrong,

they need to justify it to themselves.

Some feel entitled to the money
because they are underpaid and overworked

and others believe
their fraud is victimless,

perhaps even planning to return
the money once their crisis is resolved.

Some of the most common types of fraud

don't even register as such
to the perpetrator.

Examples include employees
fudging time sheets or expense reports,

taxpayers failing to report cash earnings,

or service providers overbilling
insurance companies.

Though these may seem small,

and can sometimes
only involve hundreds of dollars,

they all contribute to the big picture.

And then there's fraud on a massive scale.

In 2003, Italian dairy food giant
Parmalat went bankrupt

after it was found to have fabricated
a 4 billion dollar bank account

and falsified financial statements

to hide the fact that its subsidiaries
had been losing money.

Because it was family controlled,

corporate governance
and regulator supervision were difficult,

and the company likely hoped
that the losses could be recouped

before anyone found out.

And it's not just corporate greed.

Governments and non-profits
are also susceptible to fraud.

During her time as City Comptroller
for Dixon, Illinois,

Rita Crundwell embezzled
over 53 million dollars.

Rita was one of the country's leading
quarter horse breeders

and winner of 52 world championships.

But the cost of maintaining the herd
ran to 200,000 dollars per month.

Because her position gave her complete
control over city finances,

she was easily able to divert money

to an account she used
for private expenses,

and the scheme went
unnoticed for 20 years.

It is believed that Crundwell
felt entitled to a lavish lifestyle

based on her position,

and the notoriety
her winnings brought to the city.

It's tempting to think of fraud
as a victimless crime

because corporations
and civic institutions aren't people.

But fraud harms real people
in virtually every case:

the employees of Parmalat
who lost their jobs,

the citizens of Dixon whose taxes
subsidized horse breeding,

the customers of companies
which raise their prices to offset losses.

Sometimes the effects are obvious
and devestating,

like when Bernie Madoff caused thousands
of people to lose their life savings.

But often they're subtle
and not easy to untangle.

Yet someone,
somewhere is left holding the bill.