NCJ Number
193106
Date Published
2001
Length
14 pages
Annotation
Using examples drawn from the savings and loan crisis of the 1980's, this essay elaborates on the concept of "control fraud," discussing how it occurs both in nations and firms.
Abstract
"Control fraud" refers to theft through lying by persons in control of the assets being plundered. Control fraud comes in two primary forms: kleptocracies and firms. A kleptocracy is a nation that is being plundered by its rulers. The most costly thefts from firms are perpetrated by those who control them. The two variants of control fraud share four important traits: exploiting control increases the "take" from fraud; the need to maintain control causes the leaders to act like "control freaks" over their citizens and employees; their ability to control their firms and nations makes it difficult to prosecute their frauds; and the combination of these elements ruins the firms and nations that are being looted. The focus of this article is on how and why control frauds create a firm culture that supports fraud and produces efforts to restrain regulators and prosecutors. The essay argues that the dynamics of control fraud favor CEO's who are successful control freaks. Being a control freak, however, intensifies the already destructive effects of cultivating a culture of fraud among the senior managers. The result is larger losses to the firm's creditors. The effort to control the regulators can expand the collateral damage to the country by corrupting politicians and regulators. After explaining why control frauds can be uniquely destructive, the essay explains how fraud can occur even if the CEO owns all the firm's stock. The author then explains why the creation of a culture that supports control fraud is vital for the CEO and how that culture is created by control freaks. The essay concludes with a discussion of why the efforts to extend such control beyond the firm to protect against regulators and prosecutors can lead to scandal. 37 notes