"How to commit fraud and get away with it: A Guide for CEOs"
From macroresilience:
Shorter Version
A strategy to maximise bonuses and avoid personal culpability:
- Don’t commit the fraud yourself.
- Minimise information received about the actions of your employees.
- Control employees through automated, algorithmic systems based on plausible metrics like Value at Risk.
- Pay high bonuses to employees linked to “stretch” revenue/profit targets.
- Fire employees when targets are not met.
- …..Wait.
Longer Version
CEOs and senior managers of modern corporations possess the ability
to engineer fraud on an organisational scale and capture the upside
without running the risk of doing any jail time. In other words, they
can reliably commit fraud and get away with it.
Imagine that you are the newly hired CEO of a large bank and by some
improbable miracle your bank is squeaky clean and free of fraudulent
practises. But you are unhappy about this. Your competitors are making
more profits than you are by embracing fraud and coming out ahead of you
even after paying tens of billions of dollars in fines to the
regulators. And you want a piece of the action. But you’re a risk-averse
person and don’t want to risk spending any time in jail for committing
fraud. So how can you achieve this outcome?
Obviously you should not commit any fraudulent acts yourself. You
want your junior managers to commit fraud in the pursuit of higher
profits. One way to incentivise this behaviour is to adopt what are
known as ‘high-powered incentives’. Pay your employees high bonuses tied
to revenue/profits and maintain hard-to-meet ‘stretch’ targets. Fire
ruthlessly if these targets are not met. And finally, ensure that you
minimise the flow of information up to you about how exactly how your
employees meet these targets.
There is one problem with this approach. As a CEO, this allows you to
use the “I knew nothing!” defense and claim ignorance about all the
“deplorable” fraud taking place lower down the organisational food
chain. But it may fall foul of another legal principle that has been
tailored for such situations – the principle of ‘wilful blindness’ – “if
there is information that you could have know, and should have known,
but somehow managed not to know, the law treats you as though you did
know it”. In a recent essay,
Judge Rakoff uses exactly this principle to criticise the failure of
regulators in the United States in prosecuting senior bankers.
But wait – all hope is not lost yet. There is one way by which you as
a CEO can not only argue that adequate controls and supervision were in
place and at the same time make it easier for your employees to commit
fraud. Simply perform the monitoring and control function through an
automated system and restrict your role to signing off on the risk
metrics that are the output of this automated system.
It is hard to explain how this can be done in the abstract so let me
take a hypothetical example from the mortgage origination and
securitisation industry. As a CEO of a mortgage originator in 2005, you
are under a lot of pressure from your shareholders to increase subprime
originations....MUCH MORE
HT:
naked capitalism