May 18, 2015

I’ve never been accused of being a fashion expert, but I have always found it interesting that certain fashion fads are huge for a while, eventually fall out of favor to the point of being mocked, and then spin back into popularity as time passes. Just like the fashion industry goes through cycles, it is important to look back at successful fraud schemes from the past and observe how they were accomplished and which prevention techniques were effective. You never know when those old trends will come back around.

In 2011, an investigator named Christopher T. Marquet, in conjunction with his investigative and intelligence firm Marquet International, published a study of 10 fraud cases spanning from 1930 to 2009. One case in particular struck me as an interesting case study in how fraud prevention has evolved.

The case involved Minnie Mangum who perpetrated what was then called the largest fraud ever perpetrated in the US by a female. She embezzled $2.9M from the Commonwealth Building & Loan Association in Norfolk, VA over a period of 22 years from 1933 to 1955. That equates to $37.5M in today’s dollars. Minnie had a lot of responsibility and control over the bank’s processes, including hiring and firing employees. Described as the largest female fraudster in US history, she could have also been described as the most generous fraudster as well. Her scheme was largely perpetrated for the purpose of providing lavish gifts and contributions to her friends, her church, and other charities. She lived in a modest house, drove a modest car, didn’t take vacations, and dressed “in the same dowdy clothing year after year.”

In some respects the mice, like Minnie, have gotten smarter and been able to get around our clever mousetraps. However, in other respects the same tried and true schemes from yesteryear are still alive and well today. The risks, overall scheme, and prevention measures that are presented in this case from 60 years ago are very similar to what we see today.

  • Risks
    • Concentration of duties – Minnie had too much control and autonomy over the bank’s operations.  She handled the hiring and firing.  If one of her bookkeepers got too close to the scheme, it was far too easy for her to terminate them.  She also made sure she hired bookkeepers that were barely good enough to perform their job, but not good enough to challenge her fraudulent methods or even notice them.
    • Control issues – Minnie reportedly never took a vacation and often worked on weekends as well.  This can be seen as dedication, but for individuals in control of a company’s assets and in a position of trust, this kind of “commitment” is a major risk.
    • The perception that longevity is a safe harbor – the bank saw Minnie’s tenure as an advantage, and in many ways it may have been.  However, the trust they had in her was blind trust and eventually led to her perpetrating a scheme for over 20 years.
  • Schemes
    • At first, Minnie stole small amounts, as many fraudsters do.  She was testing the control structure to see if she would be caught.  Once she knew the system had vulnerabilities she exploited it frequently and in larger amounts.  In 1955 alone she stole $600,000.
    • Over the course of her scheme, she also reportedly stole over $500,000 in cash that was simply not properly secured.
    • Banks are heavily regulated today and they were certainly regulated then as well.  Minnie had a cadre of janitors she would pay to let her know when bank auditors were nearby.  These advance tips allowed her to fabricate records to make sure that the auditors’ testing worked out perfectly.
  • Prevention
    • The fraud eventually came tumbling down when Minnie hired a bookkeeper who was a little more skilled than Minnie expected.  She challenged Minnie and was eventually fired for it.  However, she apparently anonymously contacted authorities to report what was going on at the bank and law enforcement crashed in.  This function has vastly evolved today into the fraud hotline industry.  Rather than relying on someone contacting the authorities, anonymous tip lines are available over the phone or online on a 24×7 basis.  Chances are the availability of a tool like this to the team of bookkeepers or the janitors would have caught this fraud much sooner than 22 years.
    • Stronger human resource management would have helped here as well. In today’s business environment, the bookkeeper pool would have had formal job descriptions and experience/education requirements.  The simple ability to hire and fire who she wanted would not have gone over as easily.
    • Segregation of duties is something auditors are continually stressing to our clients, and for good reason.  Concentrated duties with people like Minnie Mangum – the little old lady who has been here forever and would never do anything like this –  provide the opportunity to perpetrate and sustain a fraud scheme.
    • One last thing we have today that wasn’t in place in 1955, are formal internal control frameworks like COSO and the controls established when the Sarbanes-Oxley Act was enacted. These form the backbone of modern day internal control design and a bank would surely be required to follow these measures today.  The risk assessment process described in the COSO framework would have identified Minnie’s position and current responsibilities as a major risk.

We may be better armed today to prevent these kinds of frauds from taking place, but this serves as a reminder. If we don’t respect these fraud history lessons, it can be very easy for a fraud to be committed, sustained, and covered-up.

© Clark Nuber PS and Focus on Fraud, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.