Red Flags of Financial Motive

Next week I will be presenting at a conference to a group who fight fraud every day. They focus on evaluating insurance claims for potential fraud. This conference provides them the opportunity to sharpen their saws and collaborate with others. They will learn about best practices and lessons learned from other experts in their respective fields. I have the privilege of speaking to them about the red flags of financial motive. Understanding the fraudster’s financial motive is important because it can help with planning and execution of the investigative procedures.

In almost every case of fraud, the fraudster receives a financial benefit from the fraud. Often, the fraudster is experiencing financial pressure in their life, which creates the financial motive to commit fraud. These events that cause the pressure are the red flags of financial motive.

The following are examples of events that create financial pressure:

• Loss of a household wage earner – Most individuals build their lives—usually highly debt-leveraged—around a certain level of income. Then, when something happens abruptly to reduce their income—like the loss of a job, a bonus, or even a life—this creates financial stress.
• Increase in the number of family members – This could be through childbirth or older children returning to the nest. It is hard for people to say “no” to a family member who may need help, and this can create additional expenses for the household.
• Illness in the family – Unexpected illnesses can create huge obligations for a family, especially if the family doesn’t have health insurance to cover the costs of treatment. There are some illnesses for which the treatment can cost a lot of money.
• Increase in expenses – This can happen to a family or individual who entered into an adjustable rate mortgage when they purchased their home. They may have anticipated refinancing their home as the prices increased prior to the rates’ increasing, but for some reason, the price of the home decreased. Now, they could be stuck with an increased mortgage payment that they are no longer able to afford.
• Living beyond their means – This is the number one reason fraudsters commit fraud. This can be shopping sprees, exotic vacations, or highly leveraged debt to assets. It is usually caused by a bunch of small decisions or a few large ones that lead to cash flow issues.
• Relationships outside of the marriage – Fraudsters are risk takers, and there are times when they take these risks in their personal lives. They may have sexual relationships outside of their marriage which create the need to live a double life. This can lead to hotel or condo rental costs as well as to additional living expenses for the extra partner.
• Gambling or any other expensive habit – From collecting high-end cars to using recreational drugs, these expensive habits can create a significant strain on a person’s finances.

Any one of these events by itself can easily create financial pressure for a person. Often, a person experiences several events at once which create an even greater financial pressure. And, financial pressure always provides financial motive.

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