Fraud Discovery Institute's Checklist Program
The Fraud Discovery Institute has an interesting approach to detecting white collar fraud: combine the practical skills of a former fraudster with professionals who specialize in fraud detection, lawyers and examiners. The underlying premise behind Mr. Barry Minkow's enterprise is that the existing educational materials have not and will not prevent corporate fraud, but his checklist program will. He states that there are always three elements to a fraud: a) failure to disclose material facts, b) diversion, and c) drawing big conclusions from little evidence. Apparently, his checklist program is designed to identify these features in an interactive method.
I have not reviewed the checklist program, but I did listen to Mr. Minkow's introduction to it, you can listen to it here. As an example, Mr. Minkow suggests that his checklist program would have prevented the auditors from signing off on the New Era Philanthropy Ponzi scheme, a scheme masterminded by John G. Bennett.
The New Era scheme, as discussed by Stephen Pressman saw:
"In the early 1990s, hundreds of nonprofits gave large sums of money to Bennett. Some were prominent nonprofit organizations such as the American Red Cross, the Salvation Army, and elite academic institutions such as Harvard, Princeton, and Brown Universities. When New Era folded, these institutions all lost the money they had on deposit. John Brown University in Siloan Springs, AK, lost $2 million, close to 4 percent of its endowment. The big loser, however, appears to be Lancaster Bible College in Lancaster, PA, which had $16.9 million deposited with New Era."
How did this scheme work? In the early 80's Bennett set up a corporation which advised which non-profits or charitable organizations corporations should give donations to. It was called the "Center for New Era Philanthropy". By the late 80's, Bennett had turned to "fund raising" for the non-profits; he promised them returns of 100% within six months. Bennett claimed that he had access to a group of secret investors who would match the non-profits "investment" with the Center. The group of investors was secret because they wanted to donate anonymously - efforts to contact them would lead to them to withdraw their support for the Center.
Very bright, knowledgable and serious individuals accepted Bennett's explanation at face value. Mr. Minkow argues that this "diversion" or wall of secrecy is a huge red flag and must be investigated further or real due diligence cannot proceed.
Is Mr. Minkow right or is this just a case of reasoning after the facts, having acquired that wonderful hindsight vision which comes to all investors when they discover they have been defrauded?
Technorati Tags: white collar fraud, corporate fraud, fraud detection, ponzi scheme, barry minkow, era philanthropy, apparently, discovery institute, new era, diversion, premise, disclose, conclusions
My own sense is that Mr. Minkow has uncovered an important illusion - remember his description of fraud as a sausage with the skin of truth, stuffed with lies. If a fraud is going to work, then much like a good magic trick or illusion, once it is uncovered there still is a compelling story left. Otherwise the fraud would not stand up to even routine scrutiny - if it works even though you know some of the trick behind it, it is a well designed scheme.
Bennett's scheme has some plausible premises. There are wealthy benefactors, who wish to remain anonymous. It is not inconceivable that they might donate at a rate in which funds could be doubled in 6 months. The benefactors may have conditioned their donations upon remaining anonymous. So there could be this group of wealthy do-gooders. Right? Well, there is something plausible about this scheme. And won't those nice charities get something for nothing?
That is the key: paying real coin of the realm, to participate in a scheme in which you are going to get something for nothing. Why do the non-profits need to deposit any money to the Center? "For its operating costs"? Why doesn't the Center raise funds in the usual manner - have the non-profit raise $X in six months, which is in turn matched by the Center's anonymous donors?
Like all frauds, the mark has to believe that they are getting something for nothing - and they believe it so much that they will pay for the opportunity - and somebody is getting something for nothing, but it isn't the mark. Unless they perceive getting an education in human psychology was getting something.
Technorati Tags: white collar fraud, corporate fraud, fraud detection, ponzi scheme, barry minkow, era philanthropy, apparently, discovery institute, new era, diversion, premise, disclose, conclusions
