Betrayal of trust

Psychopath Trust is fundamental to society, without trust, society could not function. In companies there has to be trust all round, employees trust their bosses and management trust their employees.

This is a given fact and the process in business of promoting staff to take on more responsibilities is in fact an expression of trust. Where fraud occurs in a company there is always a betrayal of this trust. Brian Warrington examines what the true cost of occupational fraud is.

What does trust really mean? The Oxford dictionary defines trust as follows; 'Firm belief in the reliability, truth ability or strength of someone, the acceptance of truth of a statement without evidence or investigation, and the state of being responsible'. Similarly, the verb trust is defined as having the confidence to allow someone to have, use or look after.

Occupational fraud, stealing from one's employer, is dramatically increasing in the UK. According to FraudTrack3, the BDO Stoy Hayward annual survey, reported cases had more than doubled between 2003 and 2004 and increased again by eighty percent to £942m in 2005.

KPMG's annual fraud barometer states, there were 222 cases in 2005 up from 172 in 2004. The fraud barometer however, only measures cases from UK courts amounting to more than £100,000. The increase in reported fraud in the UK continued to grow in the first half of 2006, KPMG report a figure of £653m, more than in the whole of most recent years.

According to the fraud barometer, the main perpetrators in the UK are managers and professional criminals, accounting for 90 per cent of the total in 2005. KPMG, also state that corporate fraud in total was estimated for 2005 to be £72b.

Less than 10 per cent of cases are reported to the authorities in listed companies even though there is a legal requirement to report. Bad publicity and the feeling the management has failed are both factors that would appear to influence the decision not to call in the authorities; the amount stolen is also partially an influential factor.

Research has indicated that, in the small to medium sector of UK companies, anti fraud policies are not in place. Such companies argue, quite rightly, that instituting such policies is by default, saying to their employees that they are not trusted.

This is seen as counter productive particularly in small and family controlled companies employing less than 200 staff. Some companies go out of business because of the resultant cash flow problems. These companies typify the ones that do not get reported.

In many cases the events of discovery and the subsequent investigation by forensic auditors adds to the insult. Betrayal of trust and the subsequent feelings of failure on the part of owners and management would appear to add to the emotional and psychological damage caused by occupational fraud.

In the 'Price of Trust' (1) 'Walter's bullying was not always physical: to a large extent he used verbal abuse with staff members to underline his power and position'. Bullying of this nature is common in many of the companies interviewed by the author, because of this bullying there are staff casualties along the way. Some are more serious than others.

The price of trust can, therefore, be high. In many cases the hurt is not only the money but the betrayal of trust. In most cases the perpetrators are employees who have risen through the ranks to senior positions and are totally trusted, not only with the companies' money, they are trusted to a large extent because of their position of responsibility.

Research has shown in all companies investigated there have been many but varied early warning signs. This opinion is endorsed by conversations with several accountants who have experienced occupational fraud with some of their clients.

Signs have not been purposely ignored, they have not been recognised for what they are. Some examples include: arriving early and leaving late, working weekends when there is no apparent need and not taking holidays other than the odd days.

All of these signs are typically seen as being traits of a keen employee. They are also frequently signs, according to audit companies, of possible operational fraudsters.

Two more obvious company signs, not always recognised by management as early warning signs, are unexplained margin erosion and unexplained cash flow problems.

In most of the companies interviewed there would appear to be a high incidence of personality traits shared by many of the perpetrators. These personality traits could indicate the presence of sever personality disorders. 

Is it possible, therefore, for companies to identify potential occupational fraudsters? Professor Robert Hare believes that there is a chance if his modified, PCL-R (Psychopathy Check List- Revised), is answered honestly.

It must be pointed out that accurate diagnosis of industrial psychopaths and other personality disorders can only be achieved by qualified psychologists.

Hare's modified check list, detailed below, can however be a strong indicator.

Corporate psychopath check list                    

Is your boss a psychopath?

Answer the following questions honestly:

  1. Glib, superficially charming;
  2. Grandiose sense of self-worth;
  3. Pathological liar;
  4. Con artist or manipulator;
  5. Lacks remorse or guilt;
  6. Shallow effect, cold and detached;
  7. Callous, lacks empathy;
  8. Does not accept responsibility for own actions.

Score: 2 For Yes, 1 for somewhat, or maybe 0 For No.

Results: 1-4      Be frustrated 
              5-7      Be very frustrated
              8-12    Be afraid
             13-16   Be very afraid

Examination of some of the more obscure early warning signs could facilitate a better understanding of the personalities that might typify the perpetrator of occupational fraud.

Signs identified by industrial psychologists, such as Dr Paul Balbiak, an industrial psychologist working in New York, include the corporate bully, the employee that is a pathological or compulsive liar, the angry employee (short fuse), and the employee that is manipulative and is always sucking up to directors and management in a smooth talking but convincing manner.

Abrupt changes in character is also another warning sign, companies interviewed by the author, often describe the perpetrator as being a Jekyll and Hyde character. Comments are made such as 'it is like someone turned a switch, one minute he /she was normal, the next an obnoxious bully, shouting and swearing'.

Such perpetrators are often suffering from severe personality disorders. Disorders include; the psychopath (sociopath) referred to as industrial psychopaths by Dr Paul Balbiak, co- author of 'Snakes in Suits'.(2)

Professor Robert Hare, Balbiak's co-author, is recognised as a leading authority on psychopaths and his PCL-R method of testing for psychopaths is used worldwide by psychologists to identify and diagnose such people.

Narcissistic personality disorder (NPD) is another personality disorder that is often found in perpetrators of corporate fraud. The psychology student will learn that both these personality traits share many attributes that are common and therefore the line of differentiation is blurred.

These personality defects share some common traits and indeed the term narcissistic psychopath is used in some papers on the subject. Sam Vaknin, himself an NPD, is the author of 'Malignant Self Love-Narcissism Revisited' (3) uses this term.

Sam was diagnosed as an NPD whilst serving time in an Israeli jail after being convicted on fraud related charges. Sam, in an interview for Radio National Australia, on the subject of 'psychopaths in suits', states:

'Many narcissists are also psychopaths and most psychopaths also have narcissistic traits, or a narcissistic style, or even a narcissistic personality, so the distinctions are blurred, and many people think that they are artificial. There’s very rarely a pure diagnosis of narcissism'.

If we accept that many with these disorders are usually highly intelligent, well qualified individuals, it may surprise many to learn that such people are manipulative and lack empathy for other human beings, and also 'have no conscience'.

In his book 'Without Conscience' (4) Professor Hare has this to say about trust when referring to a specific white collared psychopath;

'Mr ----------- was able to use his charm. Social skills and family connections to gain the trust of others. He was aided by the common expectation that certain classes of people presumably are trustworthy because of their credentials'.

Hare goes on to say: 'In most cases trust is not misplaced, but the very fact that we are so willing to give it makes us easy prey for every opportunist shark that we encounter. Most dangerous of all, the Jaws of the trust mongers, are psychopaths. Having obtained our trust, they betray our trust; they betray it with stunning callousness'. 

If we consider what Hare and other eminent psychologists have to say about white collared criminals, it becomes easier to understand the damage caused to the owners and managers of victim companies.

Betrayal of trust in society is a fundamental betrayal. Complex societies need trust in order to function. Trust is naturally taken for granted. In fact most companies, institutions and fundamental relationships in our society rely on trust.

We all trust naturally and cannot function effectively without trusting people and institutions. We all trust our doctors, surgeons and anaesthetists when we undergo surgery. We trust our banks to take care of our money. We all trust each other and the concept of trust is fundamental to our lives.

The betrayal of this trust by perpetrators of occupational fraud is, therefore, a severe blow to our naturally trusting nature. We cannot go through our lives distrusting every one, we could not function in society in this mode, and nothing would get done. The trusting manager, business owner, company director therefore suffers when this fundamental trust is betrayed.

Recent research carried out in the UK and the U S A with victim companies, has concluded that in many cases there has been significant damage to the victim manager. Other than extreme emotional and psychological damage, cases have been seen where the events are believed by victims to have triggered severe illness.

Examples discussed at interviews include, depression and nervous breakdowns, the feeling of failure for not having seen what was happening, how could he/she do this to me, 'I trusted him/her'.

The triggering of latent medical problems have also been mentioned when interviewing staff in victim companies. Such conditions include, miscarriages, stress induced diabetes, heart attacks, strokes and other heart conditions.

Many interviewees state: 'It's not the money, I feel let down, I really trusted him'. Others have commented 'why would I not trust a chartered accountant?' For many and varied reasons victim managers find ways or justifications not to bring in the authorities.

Typical reasons are the bad publicity that will follow, he only got away with £X,000, the company will survive. In cases where the resultant cash flow causes the company to fail, interviewees initially want revenge and then they become depressed or worse, particularly in the company where the director concerned is the owner/founder or indeed a significant share holder.

The thoughts of adding to the hurt by going through a trial and months of meetings of preparation are also a strong deterrent. One victim interviewed indicated that his lawyer had advised against legal action on the grounds that he had suffered enough and 'did he really want up to two years of added grief with no guarantee of a conviction or a return of the money?'

If we accept that the damage is more than just the money then what does the law have to say about, not the theft, but the betrayal of trust and larceny itself?

In medieval times larceny was a capital offence. The most well known piece of medieval literature; (Dante's Inferno) discusses betrayal. In the Inferno, those who suffer in the ninth circle are all guilty of betrayal. Their common sin is described as the intentional betrayal or deception of friends, family and/or country.

In Dante's afterlife such betrayals of trust are seen as the most serious of crimes, worse than sins of passion and even acts of violence. The inferno argues that acts of deliberate betrayal of duty to others, tears at the social fabric and therefore damages society more significantly than other so called violent crimes. (5)

Modern law sees the opposite, violent crimes, rape and murder are seen as justifying long prison sentences. There is no appropriate legal charge for betrayal of trust as such, but dereliction of fiduciary duty by a director or manager may result in a charge being brought.

The law appears to sentence fraud related crime, to a large extent on a scale that would seem to be related to the amount of money stolen; in other words the higher the sum the longer the sentence.

As an example of a long sentence, Andy Fastow the creative accountant working for Enron was facing a minimum of thirty years for his part in the Enron affair. Initially he was going to fight all ninety eight counts of his indictment, later he agreed or was persuaded by his council, to admit to two counts in exchange for a reduced sentence of ten years without parole.

This reduced sentence, the result of a plea bargain, was after Fastow agreed to help the authorities and testify against other Enron executives. Part of the deal was his agreement to pay back almost twenty four million dollars, most of which was already frozen in various accounts.

Even though this reduced sentence was a federal agreement, which is meant to be non contestable on an appeal, Fastow's lawyers managed to create sympathy with an appeal court judge and his sentence was reduced to six years. The judge, Kenneth Hoyt, remarked that Fastow had already paid a heavy price for his actions,'Prosecution is necessary not persecution'. (6).

Fastow exhibited many of the traits seen in industrial psychopaths, and also looked after number one when caught. Both NPD's and Psychopaths always consider themselves to the exclusion of others, all of the time. An illustration of this: Fastow's wife went to jail for a year, again following a plea bargain, for her part in helping Fastow hide his ill gotten gains.

The Enron affair is a good example of judges not accepting the hurt done to others by white collared criminals. What about the suffering of thousands of Enron employees who not only lost their jobs but their pensions as well? A good example, of pension fund victims in the UK, is of course the Robert Maxwell debacle.

One prosecuting state attorney interviewed in the US, is concerned that in his state judges often put perpetrators on probation because 'no one was hurt'. He believes that all perpetrators should 'go down' for occupational fraud; in his opinion the psychological damage caused by occupational fraudsters should be punished by a significant jail sentence.

He related one case where the company was the so-called Ma and Pa shop; they had been in the same business for over forty years and had had a good but not excessive life style.

When, in their early seventies, the couple hired a much younger man and gave him some shares in the business. They had picked him because he was talented, told them what they wanted to hear and was extremely hard working, never taking holidays. He was always in work early. 

There is a strong suspicion that this perpetrator picked the elderly couple as he saw an opportunity, in a word he conned them. They wanted him to run the business in order that eventually they could retire; his job was to build the company with a view to an eventual sale of the business.

The shares in the company given to him would ensure that he was rewarded for his work following the sale. Over a period of several years he bled the company dry, the company went bust and the resultant investigation showed the owners that it was not the business that had gone down but the fraud carried out by the trusted employee that had caused the cash flow problem.

The old couple blamed themselves and today are in their early eighties and both out at work in order to live. In this case the perpetrator did go to jail, but this gave the couple no satisfaction; they still cannot understand. How he could do it to them? They were good to him and TRUSTED him, with their retirement plans. 

The couple paid the ultimate price of trust. The betrayal and the loss of their comfortable retirement took away their self esteem. They both ended up doing menial tasks in Wall Mart to earn enough money to live.

Notes about the author

The author of this article is currently completing his PhD; he is lecturing and giving presentations on occupational fraud in universities and business. He covers UK statistics in detail, methods used by fraudsters, identifying fraud, early warning signs both corporate and people, some case studies, personality disorders in detail, anti fraud policies and identifying psychopaths.

References:

1) 'The Price of Trust'; a documentary case study, as yet unpublished by the author of this article.
2) 'Snakes in Suits (When psychopaths go to work).' 2006. Paul Balbiak PhD and Robert D Hare PhD.
3) 'Malignant Self Love Narcissism revisited. The Narcissistic Personality Disorder.'  Sam Vaknin. 1st edition 7th impression.
4) 'Without Conscience, The disturbing world of the psychopaths among us'. Professor Robert Hare. First published 1995. Chapter 7 'White collar psychopaths'
5) New York University Annual Survey of American Law. 2006 Joshua A Kobrin. P8 *803.
6) Public knowledge, the Enron trials.

July 2007