Business fraud comes in many shapes and sizes. This variety speaks to the remarkable ingenuity of many business-owners and managers, as they have adapted long-standing modes of deception to new economic, social, and cultural circumstances. As I stress in chapter two of Fraud, however, deceptive practices by firms also exhibit some remarkable continuities, which map onto enduring cognitive and emotional vulnerabilities. Here I offer three short-hand encapsulations of these consistent patterns in the form and structure of American business fraud, which most likely obtain in other societies as well.
The Most Common Forms of Modern Business Fraud
An overview of the most common forms of business fraud, distinguished by targeted victims, major strategies of deception, and prevalent tactics to carry off those strategies| Targets | Major Strategies | Tactics |
|---|---|---|
| Consumers | Bait and Switch | Fake sales prices Misleading contractual terms False oral promises Passing off (trademark infringement) High pressure upselling False claims – quality, origin Phony endorsements |
| Investors | Market Manipulation Creation of “Special Intelligence” | Pump & dump/bear & buy “Affinity” selling (pyramid schemes) High pressure selling Decoy directors Falsified accounting Reloading (post-bankruptcy pleas for capital injections) Insider trading |
| Business Counterparties (Creditors, Debtors, Suppliers) | Bait and Switch | Advance fee scams (client lists; credit access) False representations to gain credit Credit “bust-out” Misleading contractual terms Misleading financial data (franchise solicitations) |
| Government | Contracting overcharges | False representations to gain contracts "Upcoding" (healthcare reimbursement) Provision of shoddy goods or services |
| Employers | Internal corporate "looting" | Embezzlement Self-dealing Excessive compensation False reporting/accounting |
Organizational Fraud, Occupational Fraud, and Control Fraud
Below is a Venn diagram that conveys the relationship among “organizational fraud,” committed by a firm against one or more of its counterparties (consumers, investors, other businesses, and some agency of the state), and “occupational fraud,” committed by corporate employees against their employer.
Cognitive Heuristics and Economic Strategies of Deception
An overview of the most important fraud-related cognitive and emotional vulnerabilities identified by behavioral psychologists, linked to the specific forms of deceptive marketing that take advantage of them. Scholars of risk regulation tend to distinguish between the magnitude and probability of risk vectors, and the susceptibility of targets to those risks. This catalogue of psychological vulnerabilities identifies common weak spots of fraud targets, and by implication, potential opportunities to heighten the resilience of economic actors when they confront economic deception, resilience typically built up through strategies of education and information disclosure.| Psychological Shortcut | Related Deceptive Tactics |
|---|---|
| Faith in Social Proof (reliance on the judgments of other individuals in one’s social group) | Pyramid schemes (affinity marketing) Pump & dump schemes Multi-level marketing schemes (affinity marketing) |
| Representativeness Heuristic (presumption that social markers and cultural cues provide evidence of trustworthiness and reputation) | Variations on Social and Cultural Mimicry (emulating key features of successful/trustworthy firms) “Decoy” corporate directors Trademark infringement Reputable business address High-toned offices and slick salespersons Shows of anti-fraud investigations/critiques |
| Availability Heuristic (tendency to make probabilistic inferences on the basis of memorable recent events/experiences) | Especially significant with investment frauds Bait payment of dividends (pyramid schemes; fake mutual funds) Invocation of massive returns by early investors in blockbuster companies Floating fraudulent firms within sectors undergoing asset booms |
| Anchoring Heuristic (reliance on baseline economic valuations as reference point for later decision-making) | In consumer frauds: Offers of “free” merchandise Fictitious pricing (fake discounts from excessively marked up “standard” pricing) Bait advertising of special deals In investment frauds: Low pricing of investment units Offer of installment purchasing |
| Loss Aversion (Tendency to value perceived losses as greater than potential gains of an equivalent magnitude) | In consumer frauds: Expectation of ability to hold on to consumers attracted by bait advertising In investment frauds: “Last chance” pitches for getting in to a fantastic opportunity early “Reloading” schemes (pleas for additional injections of capital to reorganize bankrupt companies) In occupational frauds: Inclination of embezzling employees or traders who have racked up big losses and then hid them to take big risks on behalf of their companies in hopes of recouping losses/covering up initial improprieties In control frauds: Inclination of managers of failing firms to falsify accounts and take big risks in hopes of staving off bankruptcy |
©2017 Edward J. Balleisen
"Suckers & Swindlers" provides a range of online resources that complement my book, Fraud: An American History from Barnum to Madoff. A portion of the content represents material that sometimes appears within the covers of a scholarly book, such a full bibliography. But I also have posted lots of other material – essays about sources and methods, the scholarship on American business fraud, and avenues for additional research; links to reviews/discussions of the book; and much else besides. The site will eventually furnish a platform for the provision of primary sources, including an image gallery, along with other teaching materials. A long-term project such as this one benefits from collaborations and help along the way. Please 