Understanding Fraudsters Goes Beyond Stereotypes: Why Profiling Fraudsters is Useless

In the world of fraud detection we often come across the notion of profiling fraudsters to anticipate and prevent fraud. However, the practice of categorising fraudsters into specific profiles, might be misleading and, in many ways, ineffective. We are of opinion that such profiles makes us focus on the wrong things. This blog seeks to shed light on the limitations of profiling fraudsters and why it fails to capture the nuanced nature of white-collar crime.

There are numerous studies available that provide insights into the characteristics and patterns associated with fraudsters. However, the danger lies in assuming that fraudsters fit a specific mould or share certain traits. Typically, the stereotypical profile includes traits such as an individual in a position of trust, with a longer tenure in an organisation, exhibiting a lack of genuine remorse, work in operational or finance/accounting roles, and often male. While these characteristics may hold true in most cases, they represent a narrow perspective that fails to encompass the breadth of white-collar crime and it has little value in predicting and preventing fraud. Take for example gender, although the profile of a fraudster is ‘male’, the proportion of women perpetrating fraud is on the rise for years and also is higher in countries were women have higher participation in the workforce. Thus there might be a different explanation why there are more male fraudsters. In our experience gender does not say anything about becoming a fraudster or not (and no, women are not better in hiding fraudulent behaviour as some claim). 

The reality is far more complex and calls for a deeper understanding of the circumstances that lead individuals to commit fraud. In reality, the motivations and backgrounds of individuals who engage in fraudulent activities are far more diverse than the conventional image of a criminal mastermind suggests. Many fraudsters are not hardened criminals but rather common employees who, due to certain circumstances, find themselves pressured to commit fraud.

The challenge with relying on specific profiles becomes even more apparent when looking at some specific real life situations. Take, for instance, the Wells Fargo scandal. Thousands of employees engaged in fraudulent activities, obviously not due to specific traits but because of a toxic organisational culture prioritising results over ethical conduct. The fraud was systemic, i.e., the result of the organisation’s culture, structure and targets. Or take Bernie Madoff, he orchestrated one of the largest Ponzi schemes in history, deceiving investors, accountants and authorities for years. Madoff was a highly respected financier, serving as the chairman of NASDAQ at one point. The Madoff case shows that fraudsters can emerge from unexpected quarters and engage in sophisticated schemes that defy easy categorisation. Or at least a category completely different than your average asset misappropriating fraudster.

Profiling becomes even more unexplainable when considering individuals committing fraud due to personal struggles like debt or addiction. These individuals lack a distinct profile, they are often ordinary people that find themselves in a situation where they feel pressured to perpetrate fraud. Profiling fails to capture the complexities of underlying issues leading to fraudulent behaviours.

We immediately agree that individuals in certain roles, such as operations, accounting/finance or management, are more prone to specific types of fraud due to their access or position. However, even within the various fraud categories, the motives and circumstances vary widely. Furthermore, there are numerous fraudsters archetypes. Just open the newspaper or a streaming service and you can’t miss the stories of ‘serial fraudsters’ and larger-than-life characters. But in real life there are even more ‘ordinary’ people (who have nothing in common!) committing fraud. Thus, profiling fraudsters is a useless exercise, where the results are merely conversational starters or something to chat about over drinks. It does not provide us with any meaningful insights in the fight against fraud.

In our view organisations should explore more nuanced and effective approaches to prevent and detect white-collar crime and fraud. First and foremost organisations should have a robust fraud risk management framework. But key in building such a framework is understanding fraud and how fraudster operate. Identify where you are vulnerable? Which might fraud occur? There are alternatives to the profiling of fraudsters that offer a better and more comprehensive understanding of fraudsters, transcending stereotypes and embracing a holistic perspective to strengthen defences against white-collar crime and fraud.

Understanding the System – Instead of focusing on individual traits, organisations must obtain and understanding of the system which the organisation is part of. This includes an in-depth examination of the environment, the business, organisational structures and processes that may inadvertently create an environment conducive to fraudulent activities. Addressing systemic issues can act as a pre-emptive strike against fraud, mitigating the likelihood of individuals succumbing to unethical conduct due to for example a toxic workplace cultures or inadequate checks and balances.

Understanding the Culture – Culture, including tone at the top, is an important driver for ethical behaviour (and the other way around, a driver for fraudulent behaviour).A culture that values ethical behaviour and promotes open communication is one of the most powerful deterrents against white-collar crime and fraud, as employees become less inclined to engage in fraudulent activities when they perceive a commitment to integrity at all levels of the organisation. This includes establishing a robust whistleblower program that empowers employees to discuss and report concerns without fear of retaliation.

Understanding People (and behaviours) – Rather than relying on static profiles, organisations should invest in behavioural analysis techniques to detect deviations from normal patterns of behaviour. Monitoring changes in employee behaviour, particularly in terms of transactions or access to sensitive information, allows for the identification of potential red flags. Furthermore, organisations must continuously train employees and communicate on their fraud risk management efforts. I.e., equip employees with the knowledge and skills necessary to identify and prevent fraud through ongoing training and education programs. By fostering a heightened awareness of the risks associated with financial misconduct, organisations empower their workforce to become active participants in fraud prevention efforts.

Understanding Technology – It is no surprise that technology provide fraudster with the more and better opportunities to perpetrate fraud. But the same technology could also be used by organisation to protect themselves. Harnessing the power of data analytics offers a proactive means of identifying unusual patterns and anomalies indicative of fraudulent activities. By leveraging advanced analytics tools, organisations can scrutinize enormous amounts of data to detect irregularities that may elude traditional profiling methods. Machine learning algorithms, for example, can continuously evolve to recognise emerging patterns of fraud, providing a dynamic and adaptable defence mechanism.

To conclude, when organisations aim to defend themselves against fraud, it is imperative to move beyond profiling fraudsters to identify fraud risks and determine where these might materialise. Recognising the diversity of backgrounds, motivations, and circumstances that lead to fraud is the first step in developing effective preventive measures. This should be supplemented by an understanding of the system in which the organisation operates, the culture, the people and technology.

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