Every type of fraud has red flags, signs that may cause a person to proceed more cautiously. Many red flags are also common between frauds. The red flags of fraud do not mean stop, the way a red flag at the beach would tell you not to enter the water. Instead, these flags indicate that there may be fraud and that further investigation is warranted.
Common Red Flags
Common red flags are control, living beyond one’s means, and high personal debt. Control is a red flag because it is often used to restrict access to information. It may indicate that an individual or a small group is hiding something or manipulating information. Living beyond one’s means and high personal debt are red flags because they can contribute to the feeling of pressure and the need to commit fraud to maintain a lifestyle.
We can’t quantify the number of flags that warn us of potential fraud. I have a list of over 60 different red flags that could indicate fraudulent activity, but I’m confident there are more that I haven’t thought of or found in my resources. It is more about the types of flags that exist. Instinct, pressure, opportunity, and possible outcomes are just some examples.
Instinct
All of us have some level of instinct. That voice inside tells us when something is really good, really bad, or maybe we should take a step back. Sometimes, we have ignored our instincts to the point that we no longer notice them. Other times, we let our heads override what our instincts are telling us. As a result, on some level, we may know that there is something off about an investment opportunity, but we may choose to invest anyway. Listening to your instinct doesn’t mean you don’t invest; it means you do a little more investigation before making a decision to invest. Don’t be afraid to take a bit of time when it comes to making a decision about something your instincts are warning you about.
Pressure
There are two types of pressure that we need to be aware of when it comes to fraud: internal and external. Internal pressure is what makes an otherwise law-abiding person commit fraud. In these cases, the perpetrator seizes an opportunity and rationalizes the crime that has been committed due to some kind of pressure. Perhaps they have bills that need to be paid and believe that committing fraud is their only option.
Another way that pressure indicates fraud is when you are pressured to make a decision or investment quickly. The threat is that if you don’t send money to the caller, something dire will happen to you or someone you love. Perhaps the threat is that you won’t receive the prize or that the police will be at your door. When someone pressures you to do something, recognize it as a flag and take a breathe. You shouldn’t be pressured into making a decision about an investment.
Opportunity
Predatory fraudsters seek out opportunity. We all know the type. These are the people who call you, trying to convince you that the police are at your door for one reason or another. These are the ones that will tell you that you have won a prize and have to pay to receive it. These are the ones that ask for payment by gift card. Predatory fraudsters see a weakness and exploit it.
Opportunity is also a red flag for situational fraudsters, but in a different way. For situational fraudsters, it is access to things of value that works in combination with pressure and rationalization that is a flag. Opportunity, pressure, and rationalization are known as the three sides of the fraud triangle. If you suspect that someone has committed some type of fraud and these elements exist, it is definitely worth further investigation. Just make sure the investigation is done by a trained expert in case it goes to court.
Knowing what red flags to watch for, trusting your instincts, and not caving to the pressures of fraudsters are all ways to reduce your risk of fraud.
Kathleen O’Donoghue, CFE
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