AML COMPLIANCE
CHALLENGES
they will be less likely to cross what I refer
to as “the line of integrity” and commit
fraud. Conversely, if a person possesses lim-
ited integrity and is afforded a great deal of
opportunity, they will more likely cross “the
line of integrity” and commit fraud. In many
instances, the integrity and opportunity
continuum falls between the two extremes
and will be driven by a combination of the
other three factors: incentive, rationaliza-
tion and capability. Fraudsters who think about the potential consequences of their illicit activity, particu-
larly the ones who believe that consequences do not apply to them, will likely have an
exit strategy. They recognize that their fraud scheme will have a useful life that will
expire. These fraudsters tend to be more arrogant and lack empathy. For the most part,
they are focused on identifying the warning signs that their fraud is about to collapse. If
they are not overcome by greed—which happens in many cases and causes them to lose
focus and get caught—they will attempt to execute their exit strategy, escape and pro-
tect their illicit proceeds.
Opportunity, incentive and rationalization
are referred to as the fraud triangle. They
were introduced in 1953 by criminologist
Donald R. Cressey. The fraud triangle
became widely recognized in the mid-1970s.
The combination of the three factors was
believed to be the drivers that led individu-
als to commit fraud. Opportunity represents
the chance to commit fraud. Incentive or
pressure represents the motivation and is
usually caused by financial demands. Ratio-
nalization or attitude is the self-justification
making the fraudulent act acceptable. Fraudsters understand how to use financial
institutions to facilitate their illicit activity
Subsequently, in 2004, David T. Wolfe, a
certified public accountant and forensic
accountant, and Dr. Dana R. Hermanson, a
college accounting professor, published a
paper, which added capability to the fraud
triangle, creating the fraud diamond. They
believed that unless an individual pos-
sessed the right capabilities, they would
not succeed in committing fraud. Capabili-
ties are the personal traits and skillsets nec-
essary to exploit opportunity, incentive and
rationalization.
Opportunity is the most important factor
because it influences integrity and capabil-
ity. If there are strong control mechanisms
and a perception of detection, there is lim-
ited opportunity. Limited opportunity
would then be more likely to deter an indi-
vidual from crossing “the line of integrity.”
Likewise, regardless of the proficiency of
skillsets, the prospect of detection would
likely serve as a deterrent.
When an individual succumbs to the temp-
tation of committing fraud and crosses “the
line of integrity,” what do they think about?
They think about executing their fraud
scheme without being detected. They think
about establishing and maintaining their
illicit funding stream. They think about pro-
tecting their illicit funding stream and per-
sonally benefiting from it.
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Understanding the attributes of a fraudster
Looking back at the mindset of a fraudster, their attributes will be shaped, in part, by the
combination of the fraud diamond and the specific fraud in which they engage. Once they
exploit the opportunity, plan their illicit activity and cross “the line of integrity,” their actions
will be driven by the level of incentive required, in most instances, a financial incentive. As
the opportunity and incentive come into focus, they will rationalize and justify their behav-
ior. They will typically ensure they possess or acquire the necessary skillsets (capabilities)
to achieve their illicit objective.
With the five fraud elements in place (integrity, opportunity, incentive, rationalization and
capabilities), the attributes required to succeed manifest themselves. The fraudster must be
motivated. They will be driven, manipulative and endeavor to develop and exploit trust rela-
tionships. They will need to be an effective communicator and effective self-promoter. They
will usually start out focused; however, their focus could become blurred by a sense of greed
and arrogance. Greed and arrogance can be a fraudster’s ally or biggest adversary by evolv-
ing into a critical vulnerability.
In many situations, fraudsters will lack empathy toward their victims. This lack of empathy
is one reason why fraudsters may be inclined not to consider the consequences of their
actions. Fraudsters will endeavor to avoid detection and maintain focus. Maintaining focus
will enable them to execute their exit strategy. However, their greed and arrogance can also
cause them to lose focus and not recognize the warning signs of their demise. The lack of
empathy and focus caused by greed and arrogance will frequently be the lynchpins to a
fraudster’s undoing.
Understanding the fraud crime problem
Fraud is deception. Fraud knows no boundaries. Fraud schemes range from simple to com-
plex. Fraudsters are adept at exploiting systemic vulnerabilities, such as the anonymity
afforded by the internet. Troublingly, fraudsters understand how to use financial institutions
to facilitate their illicit activity. There has been an upward trend in civil litigation cases
where victims and/or groups of victims of fraud schemes