Fraud in the workplace

One of the members of Castle Hall's team holds the designation of Certified Fraud Examiner, and we were interested to read a recent article from the association's publication, Fraud Magazine.  The article "intimidation in the office" focuses on workplace bullying or, more accurately, the power dynamic when the head of a group, unit - or organization - uses their authority to deflect questions and potentially conceal fraudulent behaviour.  One of the sidebar (hypothetical, we must add!) examples in the text, as below, seemed like a noteworthy casestudy for due diligence professionals. 

Volatile Trader

Stan, 22, a recent business graduate, thought he was extremely lucky to get a job in the back office of a foreign currency trading department of a large bank. He found the fast-paced environment exciting and liked to be in the center of things. He eventually wanted to become a trader and felt that his new job was the first step. One of Stan’s responsibilities was matching foreign currency trades and monitoring the traders’ positions to ensure they were within their authorized trading limits.

Michael was the chief U.S./Canada trader and had been on the trading floor for about five years. He consistently received large bonuses and had a good reputation for accurately forecasting the foreign currency markets. As the months passed, Stan found that he was having difficulty matching some of Michael’s trades with one of the other banks. Whenever he asked Michael for a specific explanation about the trades, Michael became agitated and verbally abusive; he questioned Stan’s ability to understand basic trading transactions and accused him of wasting time.

After several of Michael’s outbursts, which always occurred in front of other traders and support staff, Stan was beginning to feel a bit stupid because he couldn’t make sense of the transactions. He told his direct supervisor that he didn’t understand why specific trade tickets didn’t match. His supervisor referred him back to Michael. Stan eventually stopped asking Michael about the unmatched trades because he didn’t want to suffer through the uncomfortable and embarrassing confrontations and he thought he might actually be missing something. Soon after, Stan stopped trying to match Michael’s trade tickets and rationalized the situation by telling himself that Michael must know what he was doing. And Stan didn’t want to jeopardize his chances of being promoted to the trading floor by continuously annoying Michael for no good reason. Eventually, the bank discovered that Michael and his friend, a trader at another bank, were manipulating their true positions through fictitious trades with each other.

The bank dismissed Michael and intends to pursue a civil suit. It’s still not clear if Michael personally benefitted from his activities. Regardless, it appears the bullying of Stan prevented the early discovery of irregularities.

Interesting text.

     

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Comments

[Highgamma]

This is the exact scenario that occurred on a mortgage desk at a major bank in the early 1990s. Bullying back office, risk management, or other staff is now considered a significant red flag at the firm. (My recollection is that pencil-throwing was also involved.)

I'm just surprised that this is not a recognized red flag everywhere.