Home » Financial Fraud Investigations: Bernie Madoff and the Art of Spotting Fraudsters

Financial Fraud Investigations: Bernie Madoff and the Art of Spotting Fraudsters
Bernie Madoff

A few weeks ago, Bernie Madoff, architect of one of the largest and most infamous Ponzi schemes in history, died in prison. He was serving a 150-year term for swindling thousands of people to the tune of $65 billion.

Madoff’s death serves as a grim reminder of how just one person devoted to deception can take in even the most sophisticated people—in this case a who’s who of rich and famous investors. The scheme and Madoff’s eventual unmasking also underline some of the common misperceptions that many of us have about those who engage in fraud and how we respond to them.

While most of us won’t face a Madoff-sized scheme, you may be working or doing business with people who are engaged in fraudulent activity. It’s a common problem: A 2020 study by the Association  of Certified Fraud Examiners found that most organizations lost at least 5 percent of their revenue per year to fraud, with losses averaging more than $1.5 million per case. 

Understanding how fraudsters work—and fine-tuning your internal lie detector—can help you avoid being taken, or at the very least prompt you to ask questions that can lead to and assist a financial fraud investigation.

BORING—AND RUTHLESS

As a senior Bloomberg editor opined in a recent article, Madoff radiated an almost boring reliability among investors. He was able to engage in a long grift by reflecting back to clients the kind of calm, steady image they believed was the hallmark of safe financial advisor.

Madoff was consistent, the Bloomberg article said. Though his investment record would have been too good to be true if it had been viewed over the course of several years, on a year-over-year basis it never seemed off the charts. Returns to clients were never much more than 10 percent—even in years when the capital markets were up by 20 percent. He backed this up with fictitious financial statements and paid out cash quickly when asked.

He knew his client base, as well. Most of his clients, the Bloomberg article said, were conservative investors who weren’t out to make a quick buck. He cultivated them with routine returns and an aura of exclusivity, making people feel privileged to be a part of the funds he controlled.

And Madoff was ruthless and able to look people in the eye while telling audacious lies. He stole not only from wealthy investors, but from religious organizations and charities alike, all the while maintaining an image as an upstanding Wall Street figure. He even chaired NASDAQ. When he was caught in 2008, the Bloomberg article noted, “across the world of finance the reaction was the same: How is this even possible?” 

THE WRONG SIGNALS

The scheme was possible, of course, because Madoff presumably understood something that most of us do not: The vast majority of people are not adept at spotting liars. Every human being lies—whether to spare feelings, protect themselves, or to get what they want. And because of this, people tend to believe that their internal lie detectors are primed to spot con artists. 

Unfortunately, most of us tend to focus on the wrong signals and subscribe to a number of myths about deception. We believe that liars touch their noses, use absolute statements, or drown us in detail.  One of the most common misconceptions is about the eyes—many believe that liars have shifty eyes, or that they avoid making eye contact. 

Consider again the people who invested with Madoff. They saw him as anything but shifty. (The actor John Malkovich, one of Madoff’s celebrity victims, said in 2013 interview that Madoff seemed to him “very pleasant.”)

The critical behaviors to watch are not whether the person is avoiding eye contact, but whether they are deviating from normal behavior.  Everyone has a “norm” – a basic pattern of behavior exhibited under normal amounts of stress – from how we blink to the words we tend to use. We also have a “tic,” or a signal that we are uncomfortable. You’ve seen these in your family and friends – for example, the little smirk or quick scowl that washes over them when you have said something they disagree with.

OBSERVING BODY LANGUAGE

Whether this attention to tics would have worked with Madoff is debatable. Most of his clients did not see him on a regular enough basis to learn his “norm.” But in a workplace setting, you are far better positioned to notice and study the way people react. 

For instance, does an employee give an ever-so-slight shrug when talking about the importance of teamwork? Or does a fleeting look of contempt wash over a business partner’s face while you discuss plans for a new office? 

When a person’s expressions and gestures don’t match their words, pay attention. Emotional “leakage” in the face can speak volumes. Body language red flags include signs of physical discomfort or gestures that just don’t match what the person is saying—like a shrug that shows up with a definitive statement like, “Of course I’m being honest with you.”

Refining deception-detecting skills takes practice, but it’s something of great value in the workplace. People-watching can be a great way to hone your skills. Look out ill-timed gestures, changes in posture or other nonverbal cues that may indicate a hidden agenda.

FOCUSING ON THE TRUTH

A key to success is to remember you are looking for the truth – not the lie. To increase your chances of success, prime your subject for the truth. It turns out that asking a person to “swear to tell the truth, the whole truth and nothing but the truth” actually works. 

That’s because lying makes most people uncomfortable—especially when put on the spot. People are primed to tell the truth, and when they aren’t truthful, their stress levels rise. As a result, the “tells” that indicate deceit can increase. This method can work whether you are negotiating a big deal or trying to find out where your teenage daughter was last night.

Understanding this can be a key advantage for employers and managers looking to curb workplace wrongdoing or determining whether they should conduct a full financial fraud investigation. While hints of deception may not prove wrongdoing—or help you determine if you have a Madoff-scale fraud on your hands—they can give you the ammunition you may need to probe deeper.

To learn more about how FSS assists organizations with financial fraud investigations, contact us for a consultation.