Psychology of a Fraudster: “What The Fraud?” Podcast

THOMAS TARANIUK: This is “What The Fraud?”, a podcast by Sumsub, where digital fraudsters meet their match. I’m Thomas Taraniuk, Head of Partnerships here at Sumsub, the global verification platform helping verify users, businesses, and transactions. In our final episode of the series, we’ll be examining the psychology of a fraudster.

There is a multitude of reasons why a person or a group of people might want to defraud someone. It could be governed by their own personal financial or addiction issues, or it could be that they’re part of a wider criminal network. It could also just be a chancer who wants to make a quick buck. What we do know is that the activities of these fraudsters can result in companies and individuals losing thousands, and sometimes millions of dollars to these scams and every year a major scam will enter the zeitgeist as an example of the kind of Criminality that is occurring right under our noses.

You might remember Elizabeth Holmes and her company Theranos who claimed to have created a groundbreaking piece of blood testing technology. Or Billy McFarland whose Fyre Festival became an internet meme and landed him six years in federal prison. So what is it that drives these individuals and these criminal enterprises to act so unethically?

And how can understanding the mindset of the fraudster better help us protect ourselves from being defrauded? We’ll be answering all these questions and more in today’s episode.

Today’s guest is Sophia Carlton. Sophia is the Fraud Transformation Executive at Accenture and is also a columnist for Fraud Magazine and the creator of the LinkedIn newsletter, Fraud Thoughts. Sophia, thank you so much for joining us on “What the Fraud?”. 

SOPHIA CARLTON: Thank you for having me. I’m excited to be here.

Fighting fraud at Accenture

THOMAS TARANIUK: Very glad to have you here as well. So you’ve got years of experience in the industry, Sophia. Could you talk to us about your role at Accenture and how you fight fraud there? 

SOPHIA CARLTON: Yeah, absolutely. So I’m in our North America fraud practice and I’m a Fraud Transformation Executive, as you said. So what that means is I support clients across industries in whatever their fraud challenge or problem is.

So I’m definitely more on the strategy consulting advisory side, so I support a lot in fraud strategy development and benchmarking assessments, capability assessments, developing fraud training programs and governance structures, policy risk and control reviews. So it really runs the gamut, whatever my client needs me to take a look at, we do.

What motivates a person to commit financial fraud?

THOMAS TARANIUK: Fantastic. And as you well know, as well, fraudsters come in all shapes and sizes. I would love to ask you, what drives someone to commit financial fraud? And how can these motivations vary based on the individual? 

SOPHIA CARLTON: Yeah, I was thinking about this question. And one of the things that came to mind was, there’s a difference, I think, between internal and external fraudsters.

So I kind of want to approach the conversation through that lens, because what we see insiders do is different, and their motivations can be different than when ex like external folks outside of an organization and how they may approach a re-thinking of it. From an internal perspective, one of the like tried and true kind of frameworks that we think about when we ask the question, what drives someone to commit fraud is the fraud triangle.

Where pressure opportunity and rationalization are certainly not like the sexiest thing in the world, but it is tried and true for a reason. One of the things that I like to kind of baseline that with is when we all are kind of driving, right? When you’re driving. You may have got over the speed limit once or twice in your life, like we probably all have.

That’s where the fraud triangle comes to life in our day to day lives, right? Like we have the opportunity, maybe we don’t see a police officer or a camera who can clock our speed. Maybe we have pressure, like we’re running late to a meeting or we need to pick up a child from school and we have that rationalization of well, everyone speeds, right?

So those things can be true in our day to day lives, but they also are true when someone is committing fraud at an organization that they work for. When someone’s committing fraud, those things look a little bit different, right? Like pressure, maybe I have an unexpected medical bill, or I really need this bonus that’s based on my performance, or we need to meet these investor expectations and opportunity can look like weak internal controls or maybe a lack of oversight or gaps in checks and balances that let someone initiate and approve, right, transactions or expenses as an example. And then rationalizations can run the gamut with lots of like, I deserve it, right? I’ve earned it. It’s only a little bit, the company can afford it, or I’ll pay it back.

So the motivations behind that, there’s a lot of different schools of thought, I think, out there. And sometimes those motivations can be quite comprehensive. I usually like to think of them in like three core places. Greed, survival, and revenge. 

THOMAS TARANIUK: And I would love to look at the other side of the coin here. Let’s dig maybe into the environmental factors as well that might influence someone to commit or have fraudulent behavior. So how does the state of the economy impact a person’s behavior? 

How does the state of the economy impact a person’s behavior?

Sophia Carlton: Yeah, the state of the economy has a significant impact on fraudulent behavior. Studies have shown that Economic downturns are directly correlated with upticks or increases in fraudulent behavior, both internal and external fraudsters.

So internally raised studies have also shown that employees post the greatest threat of fraud in a weak economy. And we saw this a lot during probably the most recent event worldwide was the pandemic, right? So in that instance, we did see an uptick in internal fraud. A lot of that was driven by opportunistic fraudsters where maybe pre pandemic in another world, they wouldn’t have committed that fraud, but now they have new pressures.

Like maybe they’re worried about being laid off. Maybe a spouse has been laid off. Maybe they have piling up medical bills. Maybe they just have stressors right in their life and they need some extra cash, whatever that may look like. So that can drive folks to commit that type of fraud against their companies.

And externally, we saw that as well, both opportunistic and more organized crime. So opportunistic from an external perspective, right? We saw a really big uptick in like refund fraud during the pandemic. A lot of that had to do with because more people are shopping online, right? At the time. But that just goes to, I think, show that correlation between when an economy is bad, people want to keep their money.

We also saw more organized fraudsters take advantage of vulnerabilities during that time, right? There was a lot of like charity or fundraising scams. There was a lot more phishing campaigns and people are more vulnerable because they’re sitting at home and they’re scared and they’re worried. The economy directly impacts what we can expect to see in terms of fraudulent behavior and so can lots of other like large, right, issues or socioeconomic factors or disasters.

When there are disasters, for example, like weather events, that can also increase fraudulent behavior. So, to answer your question, a big impact.

The three Bs of fraudulent behavior

THOMAS TARANIUK: Canadian sociologist and psychologist Gwynne Nettler identified the three Bs as drivers of fraudulent behavior. Babes, booze, and bets. In other words, sexual relationships, substance abuse, and risk taking or gambling. 

SOPHIA CARLTON: I think they can be fairly significant. They speak a lot to motivation. We talked about, right, the different motivations of fraudsters being, like, greed, revenge, or survival.

The three B’s really speaks to greed, right? That’s someone who’s living beyond their means and is driven by these factors in order to commit their fraud. I read a quote that I really liked about this, that many people barter their souls for the allure of booze, babes, and bucks. Others think it’ll be a harmless dance.

And I think that is true when we think about the impact of this on fraudsters. I was actually working with a state agency and we were investigating internal fraud. And one of the state employees had been recruited into an international identity crime ring. During her time there, she recruited close to 15 other employees and contractors.

Suggested read: Fraud Rings: A Dangerous Trend Businesses Should Be Aware Of

And the way it was identified was babes, booze and bets. She went and had a multi-million dollar weekend in Vegas, and that rose some red flags. So, seeing it happen, I’ve seen it be a motivation, and I think that really speaks to the greed kind of side of the coin. 

THOMAS TARANIUK: Definitely. And, I mean, people generally don’t think about the long-term consequences, right? I mean, if we’re getting into that as well, how does the fear of getting caught impact a fraudster’s behavior, do you believe? And also the decision-making process for that fraudster.

A fraudster’s decision-making process 

SOPHIA CARLTON: The fear of getting caught can play a large role in deterring fraudulent behavior for insiders and opportunistic fraudsters, right?

That fear of getting caught may not play a role for more organized crime or organized fraudsters, but it can play a major role in these other areas, which I think are big areas, right? Like opportunistic fraud, like we’re seeing individual consumers commit fraud, right? It’s big money right now, and it’s something that deterrents could really help mitigate.

There’s been some interesting studies on like behavioral nudges. One of the things that rose to my attention the last couple years when I was thinking through this was the watch and eye effect, which really resonated with me. There was a study related to bike thefts in a major like metropolitan city, and they stuck little like stickers with an eye on them on certain bike locks and didn’t on others or stuck the stickers on different things around where people were locking up their bikes. And there was a decrease in bicycle theft and an increase of folks actually locking their bikes appropriately. So that’s not necessarily fraud, but it is crime and it showed a really big significant change in behavior.

And then I also worked with an insurance client who sold pet insurance. They had a lot of issues with folks lying on policies in order to get better premiums. And what they did was they included a picture of the person’s pet on every single page of the application. And they noticed that all of a sudden there seemed to be a much less misrepresentations in applications.

So I think those, that’s an example of like a, a nudge, right? It’s a deterrent, but it’s more subtle, but it has been shown to be very effective. When we think about internally, those types of deterrents play a big role and a number of different studies and industry associations have talked to that point.

1. So one example is like having cameras by retail cash registers. So employees know that someone’s watching them and they can’t just take cash out of the cash register.
2. Another good example is like call centers. I worked with a client recently who had some gaps in insider threat controls in their contact or call center. So folks were able to access complete information, social security number, account numbers, address, email, everything that you can imagine that you may have at your bank. And there was no monitoring of what accounts I went into. So people could go into other customers accounts with no monitoring and have access to a full suite of sensitive information. That gives the sense that no one’s watching. And they did have incidents where people abused that access, they checked up on friends, they stole information on the dark web, lots of folks lost their jobs.

Simple change there is systematic controls, right? So that people know they’re being monitored and limiting access to sensitive information.

So those are just a couple of examples that I’ve seen like play out in real time. But the fear of getting caught can make a big difference. And it also gets to proactive action, which is much better, right? Than trying to clean a mess up after it’s happened. 

THOMAS TARANIUK: Definitely. There’s the other side of the spectrum here as well, which is syndicate crime, which I’d love to sort of pick your brain about as well. And this is crime which is committed by groups of fraudsters. So how do criminal syndicates turn their fraud into a source of income? 

How do criminal syndicates turn their fraud into a source of income?

SOPHIA CARLTON: Yeah, easily, right? We’ve seen like ad scale attacks, which are fueled by generative AI. Fraud as a service which has seen a big uptick over the last, you know, 10 or so years.

Sophisticated fraud operation shops whose sole purpose is right to scam vulnerable people across the world. And I think that list of how they make money as a source of income continues. One example that sort of hit headlines here in the US was Amazon refund fraud. There was a refund fraud group organized like a business and offering a service to customers, right, to get refunds.

But the whole thing, right, is fraudulent refunds. It’ll get your refund, but you get to keep the good that you ordered, and we get a cut on that kind of outcome or that profit. So it’s happening all the time. There’s also been some headlines of online fraud shops in Southeast Asia. I just read a piece on this of someone who escaped because they’re, they’re getting people, they’re luring people in with the promise of jobs or virtual working or more opportunity.

And then they’re forced to stay. So it’s forced labor committing scams or schemes across the globe. And it’s big money and it’s hard to get people out of those camps once they’re in. So I would say fraudsters are always evolving in their creativity and their ability to make an income in the frauds that they commit.

THOMAS TARANIUK: Absolutely. And we always talk about this cat and mouse game where the regulators and police, and also people like myself and yourself, are always sort of chasing after these new ingenious, you could even say tactics of these syndicates and these fraud groups.

Difference between the psychology of a group of fraudsters vs the lone fraudster

But I would love to poise this new question to you as well, Sophia. How would you differentiate the psychology of a group of fraudsters versus the lone fraudster who’s going out there and trying to source an income through fraud? 

SOPHIA CARLTON: Yeah, I think there’s a difference in infrastructure. So when we see like organized crime, there is usually a greater infrastructure and a different motivation. Almost like its own corporation, right? So it’s like corporate survival and hitting the numbers that they need to be hitting in order to get the outcomes that they’re looking for, where an individual fraudster is more motivated by personal survival or greed and even sometimes revenge, right, of a particular company or person.

So I think the motivations can be different and the way they go about it is different, although in some cases they’re using the same tools. So individual fraudsters can definitely execute an at scale attack, maybe in a different way using different methods, but it can happen just like we see in organized crime.

So I think really it’s kind of like a small business versus a large corporate, right? Organization that we may see in the world of business. I think it’s similar with the way They’re replicated in the kind of underworld of fraud.

THOMAS TARANIUK: Fraud doesn’t just come from external sources. In fact, 36 percent of frauds are committed by a member of management, whilst 19 percent by an owner or executive as well. And this can have a very devastating impact on the company. Just look at Enron. 21 executives were found guilty of fraud-related offences, and the resulting lawsuit caused the collapse of a company with over 21,000 employees who lost their jobs.

Why does fraud happen within companies that are seemingly extremely successful? Is it all to do with greed? 

Fraud within successful companies

SOPHIA CARLTON: That’s a really good question. I don’t think it is all to do with greed. I think in some aspects, like in, maybe not in Enron’s case, but in some of the other like founder frauds that we’ve seen lately, that’s an example.

Some of that speaks more to a pressure for success or a need for achievement or a fake it till you make it and we’ll get there, which kind of speaks to personal survival, corporate survival, and maybe some flavors of greed, depending on the founder we’re talking about. But I think the motivation and why we see that happen is kind of connected to where we started, right?

It’s one of the reasons why I wanted to think about it from an insider versus external lens, because both are prevalent. Both can have devastating impacts, particularly insiders, right? The higher up they go, the more of an impact it can have on the company. 

Ethical dilemmas of whistleblowers

THOMAS TARANIUK: Definitely. Sophia, what do you believe the ethical dilemmas are, or psychological conflicts even, for whistleblowers that are exposing fraud on companies of this size?

SOPHIA CARLTON: I think whistleblowers face a lot of ethical and psychological dilemmas. I think a question that probably runs through their minds, right, is do the risks of blowing the whistle outweigh the cons? The cons can be severe, right? It can be things like retaliation or forms of it, like social ostracization, job loss, demotion, harassment, isolation.

And we’ve even seen in recent headlines, right, there have been whistle blowers who have taken their own lives. And so, I think the impact can be vast, but whistleblowers are crucial in maintaining integrity, right? Of corporations, of large, like, multinational structures, right? We need them, we rely on them to ensure that we’re all kind of holding the same level of integrity in all that we’re doing. So it’s a brave act, but it certainly comes with a potentially high cost. 

THOMAS TARANIUK: One other thing, Sophia, as well, according to the Australian Institute of Criminology, like other crime, fraud can be explained by three factors. One, a supply of motivated offenders. Two, the availability of suitable targets and the absence of capable guardians as well. So how does understanding the psychology of a fraudster help us create capable guardians to fight against fraud? 

How does understanding the psychology of a fraudster help us fight fraud?

SOPHIA CARLTON: Yeah, I love the term capable guardians. I think it speaks to something we talk about constantly in progress management, which is having right awareness of fraud.

In order to be capable guardians, we need to understand the threats for us, whether we are in an organization, whether we are the public and we’re kind of being targeted right by external fraudsters, wherever we may sit, understanding the threats that we face uniquely and why they’re happening and that they are happening.

I think like when we think of like romance scams, for example, there may be awareness, but there is a lack of kind of grounding and reality that they can happen to you.

Suggested read: Detecting Romance Scams: A Guide for Dating Platforms and Their Users

I think being a capable guardian is a really big part of that, because I think understanding breeds awareness and awareness breeds action. So when we understand the what, the how, and the why, we can mitigate those threats more effectively for ourselves and for the companies that we work for. 

THOMAS TARANIUK: Definitely. And we’re talking about education here primarily, and also what we discussed earlier around sort of the big brother effect. If people feel like doing the right thing is too difficult, making sure that there are people there to watch them or feel like they’re being watched also as well. So, can psychological interventions or training reduce the incidence of fraud in organizations, do you believe, as well?

Can psychological training reduce the incidence of fraud in organizations?

SOPHIA CARLTON: Yeah, absolutely. I think it’s one of the reasons we saw, like, employee support programs pop up, right, to help employees deal with addiction or mental health, because those things play a role in how we show up to work, and they can play a role in the likelihood of someone committing fraud.

So ensuring that employees are supported, ensuring that employees know that the company is watching, and that there is a fraud risk management team, that fraud risk assessments are conducted, that everyone takes the same training, that repercussions for fraud are clear. All of those things can drive down the likelihood and the impact of internal fraud.

You may not eradicate it altogether, but you can reduce the amount that it’s happening and catch it much earlier. So, I think with active education awareness and a broader approach to more end to end fraud risk management for internal fraud in addition to external fraud, you can certainly make an impact.

THOMAS TARANIUK: Most definitely as well. And would love to touch on this a little bit further in terms of organizational fraud, in terms of the fraudsters which are founder led, not the ones which are in the Enron’s of the world, thousands of employees and it’s someone on a day to day task who’s actually found a nuanced way to maybe make a buck on the side. But those who are leading an organization for higher valuations to defraud investors, to defraud other parties and third parties around them. Do you have any sort of detail from your side around that?

Founder fraud

SOPHIA CARLTON: Yeah, I think it’s something we’re seeing quite a bit lately in the news over the last couple of years.

There’s been a number of different founder fraud cases. Founder fraud can have a large and devastating impact on an organization. And I think that’s where we get to, like, the culture of “fake it till you make it”, the pressure to succeed, right, the need for achievement, the need to be right. And I think that’s where we see founders build organizations that have gaps in oversight, because they don’t want to be challenged, right? That have the lack of text and balances because they want to be the source of truth, right? And they want to be the final, the say, have the final word, whatever that looks like. So there’s this, this approach that founders can take and, or even top executives can take in the running of their business that can create a culture that leans towards the unethical side, right, that is lacking in integrity.

And even when employees stand up and raise their hand and say, is this accurate? Is this true? And we’ve seen that in reports across a number of these founder fraud cases. They’re challenged, right? They may be retaliated against. These are almost just the beginnings of potential whistleblowing, right? And they’re squashed.

So I think it’s happening a lot. And these people have a big responsibility to act with integrity for the sake of their employees. And if not, that’s why whistleblowing is so important, so we can uncover these things and always lead with integrity. 

THOMAS TARANIUK: Most definitely. And it’s the fear of a sort of kickback that a lot of the employees, I’m sure, won’t be whistleblowers just because you believe in the founder, you trust what they’re doing. But if they do surround themselves with the unethical types, they are going to lead businesses into disarray.

Top 3 drivers of fraud

So with that, I have one final question, Sophia. What are your top three main factors that drive an individual or a criminal organization and syndicate to commit fraud? 

SOPHIA CARLTON: Mm, that’s a good question.

It’s tough because I think the money is a big reason that people commit the fraud. And I think that’s the big one. It’s the payout, right? I think the motivation for why they need that payout can be different. Like an organized crime group, like we said, it’s like a corporation. They need the money to continue operations.

Individual needs that money to pay a bill, to live lavishly, right? Whatever that may look like, but it all gets down to the payout. And there is not a focus on the consequence or who they may be harming as they look or seek that payout. So I think that is the biggest driving force is the money or even the data, right, that can then lead to a payout. 

THOMAS TARANIUK: Absolutely. And especially now that humans are becoming more detached from fraud. We’re not talking about running over and stealing some someone’s purse and running off with it. We’re talking about very detached, and you don’t see the person impacted and you maybe never will.

So maybe the psychology of a fraudster around that means more detachments, less attribution to your crimes, less guilt, and the more times that they could perhaps do it in the future. 

SOPHIA CARLTON: Yeah, and even sometimes the opposite’s true. We’re seeing like an even more focus on things like romance scams, like pig butchering scams that have a major impact on the person.

And I watched a documentary on this of like someone who committed these types of romance scams from another country and targeted elderly Americans and, one of the things he kept saying was, if they’re stupid enough to fall victim, then that’s not on me. And it was like, what an interesting, like, the attitude, the approach to that is jarring, right?

It’s a jarring thing to hear because it’s something that I think a lot of people can’t wrap their arms around or get their head around. And I think looking at the situation that that individual is living in was impoverished and trying to take care of his family. And this is the only way that he saw that he could do that.

So you start to have some compassion for that person and their circumstances, but not their crime. So I think it’s interesting because we do have much more detached ways of to commit fraud, like ad scale bot attacks, right? Or like you said, account takeover where you don’t know the victim. You don’t see the victim. But we’re also seeing this rise in attack vectors that directly impact and a person is playing a role in that impact.

Suggested read: How to Prevent Account Takeover Fraud: Use Cases

And we’re not seeing a slowdown of that because they’re successful, because people are vulnerable. 

THOMAS TARANIUK: Definitely. And it’s also the perpetrators also will blame the victim across any crime, right? Whether or not it’s physical or online or emotional. But with all of these crimes, there are victims beyond the initial person who has been defrauded, or organization that has been defrauded, because the money will get moved more often than not into, let’s say, criminal flows where it is laundered, it is used for illicit activities, terrorist activities and other means as well and that will have a wider effect on many more victims across the world. Sophia it’s been so great having you. Thank you for coming. 

SOPHIA CARLTON: Thank you.

THOMAS TARANIUK: And that’s a wrap for series one of “What The Fraud?” It’s been incredible talking to all of these fascinating guests that have joined me over the last eight episodes. I’ve learned so much from them, and it’s also given me a great deal of hope in how companies and commercial sectors are working together to try and deal with fraud.

As we always say, fraud can impact every single rung of the company ladder. From the C-suite executives to the customers who buy your services, so it is crucial that we continue to develop our anti-fraud strategies and communicate those strategies with each other. It’s the only way that we can stay ahead of the fraudsters.

And as always, please like, comment, follow and subscribe wherever you’re listening to us now. Any feedback you can give us is incredibly helpful and also makes it easier for other people to find us and if you want to hear more about what we do at Sumsub and how your business can benefit from our verification services, definitely check out our website at sumsub.com and subscribe to our socials.