Fraud is a more serious crime than most people realise. It can be defined as the use of deception with the intention of “obtaining an advantage” or as “causing loss to another party”.
The term encompasses a wide variety of corrupt, deceptive or unethical behaviours.
As the definition underlines, the most important element of fraud is “intention”. Proving intent in either the civil or criminal context is inherently difficult.
However, in Malaysia, there is no such crime called fraud.
The Penal Code does not define the word “fraud” but only provides for the following “fraudulent” offences which require “dishonesty” as an essential element in cheating, criminal breach of trust, criminal misappropriation and theft.
The word “dishonesty” is defined in Section 24 of the Penal Code as an “intention of causing wrongful gain or wrongful loss to the other party” whereas Section 25 says, in respect of “fraudulently”, that “a person is said to do a thing fraudulently if he does that thing with intent to defraud, but not otherwise”.
Fraud carries a huge financial cost to the economy.
A recent report by the Association of Certified Fraud Examiners (ACFE) indicates that the total loss caused by fraud cases exceeded US$6.3 billion
According to the 2018 ACFE Report to Nations — a global analysis of the costs and effects of occupational fraud — an organisation typically loses about five per cent of its annual revenue to fraud each year.
Malaysia lost RM47 billion in gross domestic product value to corruption last year alone. The Global Economic Crime and Fraud Survey 2018: Malaysia Report reveals that 41 per cent of Malaysian companies reported experiencing economic crime in the last two years, up from 28 per cent in 2016.
Last year, the police reported that organised crime and financial crime together cost Malaysia up to RM25 billion a year.
In 2018, a total of 25,584 commercial crime cases were reported nationwide, with losses at a whopping RM24 billion.
TRIANGLE AND DIAMOND
American criminologist Donald Cressey developed a theory known as the Fraud Triangle, which is a framework designed to explain the reasoning behind fraud.
The three components having an effect on the individual can be summarised as:
Pressure — the need to commit fraud;
Opportunity — the situation that enables fraud to occur; and,
Rationalisation— the mindset of the fraudster that justifies committing fraud.
But there is a newer approach in fraud studies, which is the “Fraud Diamond” theory, a new dimension which adds the element of “capability”.
In this theory, capability is also a factor in some large cases involving money.
But the perpetrator must have the necessary traits and abilities to be the right person to pull it off, and such an approach can be considered to be a more successful one.
When organisations understand how the Fraud Diamond theory works, they can combat criminal behaviour.
The 3 + 1 factors that make up the updated fraud triangle are:
PRESSURE
The need to commit fraud i.e. pressure is felt by potential fraudsters.
It may stem from the political, spouse, financial stress, alcohol, drug addiction, blackmail, living beyond means, and these become motives for committing fraud.
OPPORTUNITY
An opportunity to commit the act is present when the fraudster takes advantage of weaknesses in the system which include lack of a monitoring system in order to illegally obtain personal gain.
RATIONALISATION
The final component of the fraud triangle is rationalisation.
These “techniques of neutralisation” have to do with justifying the fraud.
It is an internal dialogue that comforts fraudsters and lets them know it is all right to do the act.
CAPABILITY
The fraudster needs to have the necessary traits to be the right person to pull it off.
The fraudster’s position and knowledge within the organisation may furnish the ability to create an opportunity for fraud not available to others.
The fraudster can coerce others to commit fraud due to the ability to influence and lie effectively.
In fraud, a temporary situation arises where there is an opportunity to commit the act without a high chance of being caught.
People holding high positions in an organisation would have the authority as they are normally very experienced and highly educated.
The chief executive officer may influence decision-making on behalf of the company.
He would have the opportunity to choose any parties to deal with. The opportunity would be available if the internal control of the company is weak.
The key to dealing with fraud is to focus on prevention.
It is more effective to prevent fraud from happening than to try to detect the crime.
Any component of the fraud theory can be tackled to prevent fraud as all the elements need to be present to make fraud happen.
Applying the fraud theory in order to address the gaps on societal corruption and the elements of opportunity may help us understand the wrongdoers’ mind as they commit fraud.
However, these elements should be lessons to people not to commit fraud.
Whether or not the number of cases will be reduced, the onus goes back to the accountability of those with trusted positions in organisations and the responsibility to be people of integrity.
The writer holds a Professorial Chair for Crime and Criminology at the Institute of Crime and Criminology, HELP University