Understanding Why Fraud Occurs and How Professional Athletes Can Be Protected
The fraud triangle states a trusted person who controls your finances commits fraud based on three factors:
The only factor you can control is the trusted person's opportunity to defraud you. You are typically unaware of the other two factors, thereby making fraud prevention that much more difficult.
Read more to learn controls to mitigate fraud.
In my previous blog post, Where is the Data on Fraud with Professional Athletes? I briefly spoke about The Fraud Triangle. This blog post will provide more detail on this concept to help you understand why fraud occurs and how you can protect yourself from fraud.
The Fraud Triangle1 states that a trusted person, such as a financial advisor or money manager, commits fraud based on three factors:
- Pressure - Trusted person has a problem that money can solve.
- Opportunity - Trusted person has access to someone’s money and believes his fraud is unlikely to be discovered.
- Rationalization - Trusted person justifies what he is doing to absolve himself of the guilt of the crime.
Of the three factors of fraud, the only factor you can control is the trusted person’s opportunity to defraud you. You are typically unaware of the other two factors - pressure and rationalization - that personally affect the trusted person. Therefore, to mitigate the risk of fraud, you must control the opportunities that a trusted person has to defraud you.
Let’s dive into each of the three factors a bit more.
Individuals face financial pressures in their life constantly. We are complex people with complex problems. Some suffer with drug, alcohol, and gambling addictions. Others have to maintain a lifestyle that is no longer possible with their income. Some have personal investments that are failing and need more money to keep them afloat. Some just have debts that they cannot repay. No matter the pressure, these are non-shareable financial problems which you will not become aware of until after a fraud.
It’s important to understand that not all people who commit frauds are bad people. 88% of people that commit fraud are first-time offenders with no criminal history. They have run into serious problems and/or are in serious danger and resort to fraud to cover up their wrongs. Desperate people will do desperate things.
Imagine your advisor and/or money manager has one of these pressures. These are not problems that someone trusted with your finances will likely tell you because they will be worried (rightly so) their financial troubles will make you think twice about their ability to manage your money.
If you have given control of your investments and/or money management to a trusted person, their opportunity to defraud you is now possible. This type of control is given to trusted persons all the time, but you must determine if you have controls in place to identify if fraud is occurring.
Ask yourself if you review your investment account statements or bank statements on a periodic basis? Do you understand these statements? Do you review the inflows and outflows of your cash? Do you review ATM withdrawals? Do you know how many debts are in your name? Do you review your credit card activity? And so on.
If you answered “no” to one or many of these, your trusted person likely knows you are not reviewing this activity. Therefore, if he were thinking of defrauding you, his perceived risk of getting caught would be low because he knows you do not have the controls in place to identify fraudulent activity.
In a 2016 study of over 2,400 companies by the Association of Certified Fraud Examiners, 49% of cases cited a lack of internal controls and management review as the primary weakness that contributed to fraud.
The most amazing part of humans is also the most fragile: our minds. We have so many behavioral biases and inexplicable tendencies to convince ourselves what we want to believe. In fact, there are 12 different types of biases that prevent us from being rational!
We all have a family member or friend who rationalizes everything. We’ve read and watched interviews of sociopaths and narcissists who have convinced themselves their criminal or unethical actions are good for society.
I recently watched a CEO pitch a pyramid scheme on TV to unsuspecting people with the promises of riches to finally realize, “Wait, this guy actually believes he is doing something good for these people. He has convinced himself that screwing millions of people out of millions of dollars is somehow a cause for the greater good!” It is truly amazing.
If Mr. CEO can perpetuate a fraud against millions of people, do you think one person could rationalize a fraud against you?
Consider that as a professional athlete, you’re making millions of dollars a year. Assume one of your trusted persons is making 2% of your annual salary. Do you think there’s a possibility that your trusted person:
- Believes he/she is underpaid?
- Thinks you do not value his/her contribution?
- Needs to borrow some money and plans to repay it?
- Thinks he has earned it after all this time?
- Doesn’t think you would miss another 2%?
- Heard about another trusted person stealing money so he might as well do it too?
These are all potential rationalizations for fraud.
This may all sound daunting, but you have to remember that this is your money, and it is within your control to mitigate the opportunity of fraud by another person.
If other people are managing your money and investments, you have a number of things you can do yourself to protect your finances:
- Educate yourself on the basics of money management and investment. There are tons of free resources online that simply explain and educate you.
- Review your investment activity on a periodic basis to ensure that your best interests are at heart.
- Understand your investment objectives and risk tolerance and how those should dictate what you invest in.
- Understand what you are invested in and the risks inherent in your investments.
- Understand the average athlete only plays pro sports for a handful of years and will never have the same salary again.
- Simplify, simplify, and simplify some more - Finance can be very complicated, and the more complicated it is, the easier it is for you to be duped, hosed in fees, and unaware of the risks.
A Helping Hand
BrightLights is here to help you if you cannot accomplish these protections on your own. This process starts with a risk assessment questionnaire that you complete so BrightLights can get an understanding of your financial risks.
BrightLights will then schedule a free risk assessment consultation to discuss your options.
Please contact BrightLights to get started.
1 - The concept of the Fraud Triangle was developed by sociologist Donald R. Cressey, an expert on the sociology of crime.