The Fraud Diamond and the "Capability"

In 2004, David T. Wolfe and Dana R. Hermanson created the Fraud Diamond framework to help explain the elements that lead to fraudulent activity in an organization. It builds on the previous Fraud Triangle by combining the three basic elements—Pressure, Opportunity, and Rationalization—with a fourth factor, Capability, which focuses on the individual's ability to execute and sustain fraudulent actions.

The Fraud Diamond framework posits capability, is a crucial element in committing fraud because it encompasses the necessary skills, knowledge, and personal traits that enable an individual to exploit opportunities and circumvent internal controls.

A real-life illustration of the Fraud Diamond's capacity is the case of Jerome Kerviel, a trader at the large French bank Société Générale. In 2008, Kerviel was able to carry out one of the biggest frauds in the history of banking, which caused losses of almost €4.9 billion ($7.2 billion).

Here are key reasons why Kerviel's capability is essential according to the Fraud Diamond:

• Technical Expertise: Jerome Kerviel showed a thorough understanding of Société Générale's trading platforms, which allowed him to take advantage of weaknesses and alter data covertly.
• Confidence and Creativity: Kerviel exhibited the confidence to engage in risky trades and the creativity to fabricate transactions and falsify records, evading suspicion through elaborate cover-ups.
• Understanding of Detection Avoidance: Kerviel was skilled at foreseeing and evading audit and monitoring procedures, deceiving documents, and strategically changing records to stay hidden for a long time.

Capability, in short, is the capacity to repeatedly overcome internal control measures and adapt to new ones, thereby enabling fraud to be committed and sustained over time. Without it, there is a far lower chance of effective and sustained fraud, even in the presence of the other three components of the Fraud Diamond: pressure, opportunity, and rationalization.

How to stop "your Kerviel"?!

Stopping the capability to commit fraud entails multiple crucial tactics:

1. Strengthen Internal Controls: To stop one person from having complete control over a transaction, put strong controls in place, such as regular reconciliations and task segregation.
2. Regular Training and Education: Help staff members identify and report suspicious activity by educating them about fraud risks and the value of acting ethically.
3. Whistleblower Program: Create a private whistleblower program so that people can report questionable activity without worrying about facing consequences.
4. Regular Audits and Monitoring: Keep a close eye on financial activity and conduct regular internal and external audits to spot irregularities.
5. Limit Access: Using role-based access controls, restrict employees' access to sensitive information to what they need to perform their jobs.
6. Use Technology and Analytics: Monitor transactions in real-time to identify suspicious activity, and use technology and data analytics to spot odd trends and activities.

Be Smart: Always keep in mind that whoever tries to avoid the first 6 bullets will be your Kerviel.

Sources:

Johnson,?C.?E.?(2020).?Organizational Ethics: A Practical Approach.?Amerika Birle?ik Devletleri:?SAGE Publications.

Stamler,?R.?T.,?Marschdorf,?H.?J.,?Possamai,?M.?(2014).?Fraud Prevention and Detection: Warning Signs and the Red Flag System.?Birle?ik Krall?k:?Taylor & Francis.

10 POINT TO BETTER UNDERSTAND THE JEROME KERVIEL AFFAIR. (n.d.). https://www.societegenerale.com/sites/default/files/documents/proces-jk/jkerviel-10-points-uk.pdf.