Due diligence should grow with the job.

Author:Segal, Philip
Position:Fraud
 
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It is difficult to estimate how many criminals get away with wrongdoing. We know how many paintings get stolen and how many banks are robbed at gunpoint, but, how much undetected corporate fraud has gone on--and is still going on--remains a mystery.

Based on how many red flags some of today's most prominent convicted fraudsters have left behind before being apprehended, the sad truth is probably this: A great deal of fraud is still occurring unseen, right under our noses.

One reason for this is that people let their guard down once they have had a relationship with a potential fraudster lasting several years. We know that fraudsters demonstrate a similar pattern of wrongdoing time after time. They take tiny amounts of money early on to test the system, gradually increasing what they take during the following months and years. If fraudsters take years to build up to stealing the big money it should come as no surprise that the most famous ones have been trusted for many years before being caught.

Doing thorough due diligence of someone you have known for years may sound unworkable because it is counterintuitive: If we wish to invest with or to promote a person based on good performance, why would we distrust the person more now than before?

Take two recent examples of massive corporate fraud: Allen Stanford and Bernard Madoff. They had been in business and celebrated for years, but both came with enough red flags that good due diligence would have prevented a cautious investor from trusting them. The only thing that made them different from many quieter fraudsters operating in our midst today was their fame before being caught.

An instructive example of a typical kind of long-term fraud emerged recently in the Catholic Archdiocese of New York, when an elderly woman named Anita Collins, who worked as an accounts payable clerk, was charged with embezzling funds from the church. She wasn't famous, but she had worked at the Archdiocese for years, just the way Madoff and Stanford worked for years and gained enough trust to be handed billions of dollars to manage.

Had the church run a simple criminal background check on Collins when she was hired, they would have seen her felony conviction for stealing funds from her previous employer as well as a guilty plea to a misdemeanor when charged with criminal forgery and grand larceny. She was still on probation for the felony conviction when she was hired by the Archdiocese, according to published reports.

What allowed Collins to continue operating for years? Her first job with the church was junior enough not to require a background check. She was then promoted from within, but nobody ever thought to do...

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