Chapter 3: Literature Review
This chapter aims to provide an overview of the extant literature pertaining to the question of general detectives’ capacity to investigate the incidence of fraud. This overview is based on a contextualisation of fraud investigation, in addition to the categorisation of crime investigation in general. The purpose of this literature review is therefore three-fold; firstly, it aims to survey the current state of knowledge in the area of fraud investigation; secondly to identify key authors, articles, theories, and findings in fraud phenomenon; and thirdly, to identify gaps in knowledge in the research area (Bhattacherjee, 2012:21). As such, the central focus of this chapter is to analyse and distill the main strands of fraud in the most significant available literature, tracing the origin of the phenomenon, through to its contemporary manifestation.
This trace of the fraud phenomenon pertains to the struggle of contemporary police services involving the evolution of not only crime itself, but how it is reported (taking into account access of information in society at large), raising the question of the skills of police services to address crime in a time of technological advancement. This question has rendered police services open to criticism by the public.
Keeping police detectives and crime investigators up-to-date with the rapid 21st-century technological and other innovative developments is fundamental to fight crime. This is of paramount importance in terms of fraud, where the advancement and development of technology the internet have created an additional platform for the commission of fraud, as there are measures in place to override security features of institutions worldwide.
This requires the technical evolution of the field of criminal investigation (Swanson, Chamelin & Territo, 2012:xvii). An example of this form of investigative evolution is the discovery of deoxyribonucleic acid (DNA) in 1868 and its first use in the criminal case in 1987 (Swanson et al, 2012:12-13). This view emphasises the new generation of criminal investigations that uses fundamentals of criminal investigations and forensic methods to bolster the fight against crime, particularly of identity theft, insurance, internet-banking fraud, and other phishing3 scams that are perceived to be evolving and too sophisticated to investigate.
This literature review examines the deeper and long-standing philosophical and operational affairs that cause conflicts between local and specialised detectives about the capacity of handling fraud investigations (Burger, 2015a). Further, this analysis explores nature of fraud and the difference between investigating fraud and other crimes. The central thesis centres around investigative capacity proving to be the key challenge that hinders effective fraud investigation efforts undertaken by the station-based police detectives. This study seeks to determine whether general detectives are better suited to handle and deliver prosecution driven fraud cases (trial-ready dockets) or not. This chapter also examines the factors that cause continuous disagreements between the local and specialised detectives of the South African Police Service (SAPS) regarding fraud investigation directives.
Origin and nature of fraud
There have been many attempts by scholars, researchers, law enforcement practitioners, and government officials to find an adequate definition of fraud (Firozabadi, Tan & Lee, 1999). The term fraud is often quoted and applied but not well understood. The origin of the concept of fraud comes from the Latin fraus or fraudis, meaning “harm done to someone” (Brock & Boutin, 2012). Fraud can be traced back to ancient Egypt, Greece, and Rome, and is also evident in Christian history – One of the first documentations of the concept of fraud is found in Genesis 27 where Rebecca and her son Jacob intentionally deceive a blinded Isaac to bless Jacob instead of Esau, depriving Esau of his birth right as customarily observed (Good News Bible, 2013).
Bucur (2015) describes fraud as a way to swindle embodied by illegalities committed by fraudsters violating the criminal law with bad faith and by inflicting damages on the fraud victims. However, there is a common denominator that the act of misrepresentation is against the criminal law. Palmiotto (2013:202) defines fraud as an intentional misrepresentation or deception employed to deprive another of property or a legal right or to otherwise do them harm.
It is important to highlight that most studies often used the term “fraud” when referring to “general fraud”. General fraud is an operational phrase to be used specifically at a different level by detectives in order to understand the categorisation of fraud activities, which has been recognised by SAPS Detective Services. The phrase “general fraud” is common within policing environment and has been used to describe or identify the types of fraud cases investigated at the local level. Based on methods of operation and real or imagined ideology, the general definition must be modified to accommodate the various subcategories of low level-fraud as well, bearing in mind that there is no universal definition attached to the concept of fraud (Unlock, 2016).
Within the detective’s circle, the categorisation of fraud affects which fraud matters/cases are assigned to general detectives and the specialised units. At the heart of general detectives’ perspective lies the assumption that fraud and general fraud are the same. Goldstein (1990) affirms that despite variations under which detectives operate, their major functions are essentially the same. The interpretation of the term general fraud is often clouded when generalist and specialist detectives include their own particular criteria and specific interests and perceptions – this is when general fraud may be perceived to be a secondary or low-level fraud crime, which requires low-grade criminal investigation practices. Based on this artificial distinction, general fraud is a simple fraud generally committed by individuals.
This study also challenges these types of assumptions. For years, the South African local detectives were led to believe that fraud investigated at the local stations is secondary, meaning it is unimportant despite its impact and lamentations of poor detection rates. Another important factor to consider is that “white-collar crime”, “commercial crime”, and “economic crime” are terms often used to describe the acts of fraud, or fraudulent activities (Russow, 2000:886), and often the terms “white-collar crime” and “fraud” are used interchangeably (Picket & Picket, 2002:3). Minnaar (2000a) acknowledges the fact that the difference between fraud, white-collar crime, and other fraud-related acts may be confusing, which is why it is necessary to assign the term “white collar” to a type of criminal, as opposed to using it to categorise a type of crime.
Fraud is distinct from other types of crimes and it has been committed since the beginning of commerce (Dorminey, Fleming, Kranacher & Riley, 2012:556). Cunningham (2015) notes that, over the centuries, fraud has been associated with money or objects of value. This reflects in the numerous definitions of fraud collected over the years (Akers & Bellovary, 2006:248; Minnaar, 2000a). Practitioners in criminal justice systems define fraud differently than those in the accounting and auditing profession.
As a crime, it may be argued that fraud cannot be committed spontaneously without planning, and thus requires premeditation (Brodie, 2015). It is necessary to note that those who perpetrate fraud are often called “fraudsters” and are not seen as dangerous, and this contributes to the perception that fraud is less severe than violent crimes (Rossouw, 2000:891). However, this study supports the argument that the damage caused by white-collar crime and unethical conduct is equal to that of violent crimes (Minnaar, 2000a). From a criminal justice perspective, Joubert (2010:158) and Snyman (1995:487) define fraud as the unlawful and intentional making of misrepresentation, with fraudulent intent, which causes actual prejudice, or which is potentially prejudicial to another. This definition gives criminal justice agencies some leeway, particularly in terms of police who carry the responsibility of criminal investigations to distinguish “general fraud” from other types of fraud.
This distinction in terms of the definitional elements of fraud affects the general detectives, as they deal with general fraud, as opposed to the specialised detectives at Commercial Crime Units and the Directorate for Priority Crime Investigation (the Hawks) who are allowed to select “commercial related crime cases” or rather complex fraud, including corruption in terms of the Corruption Act No. 94 of 1992. According to research participants, many of the cases that the specialised unit investigate are manageable and can be investigated by the local police detectives. This is observed in the informal method of deciding the jurisdiction where a case should be investigated. This forms part of the crux of this study, as the perception of fraud in itself, and that of general fraud affects the perception of the capacity necessary to investigate its commission.
One of the difficulties faced by detectives is the challenging process of distinguishing between general or complex fraud, to prove misrepresentation. Due to the nature and complexity of commercial crimes, a perception exists that fraud cases, in general, are complex to investigate (Thomson, 1999:94). This perception may stem from outdated technical knowledge and legal aspects which are insufficient to meet contemporary investigative needs in fraud cases (Robertson, 2003:1; Miller & Gordon, 2014:165). If confronted with an intricate case, detectives have a duty to refer to case law on the matter.
Fraud investigation involves gathering, assessing, documenting, and presenting evidence, within a legal context and based on rules of evidence, which enables detectives to pursue criminal matters (Miller & Gordon, 2014:17). The question of capacity may, therefore, be asked in terms of evidence collection in fraud cases, as there is a lack of physical evidence in the instance of digital fraud.
A crime affects the public interest, irrespective of its consequence. Robertson (2003:39) asserts that there is a belief that economic crimes do not hurt anyone. However, fraud can range from a minor offence to international commercial fraud that threatens the world economy (Okoye, 2006; Rossouw, 2000:885; Cunningham, 2015). For example, the Ponzi scheme of Bernard Lawrence “Bernie” Madoff, the Enron scandal in the USA and the Belvedere’s Ponzi scheme in South Africa illustrate how fraudulent acts can lead from minor issues to having massive criminal and economic impacts (Langevoort, 2009; Dembinski, Lager, Cornford & Bonvin, 2006; Church, 2015). The economic impact, therefore, can be as devastating as violent crimes, especially in terms of scale (Picket & Picket, 2002:13; Rossouw, 2000:885). Part of this devastation is that people can lose their jobs and their pension funds because of fraud that goes on unnoticed.
Motivation to commit fraud
Understanding fraud requires an understanding of the motivations for committing fraud. The prime causes of fraud and why it is committed are illustrated in the succeeding section using Cressey Donald’s Fraud Triangle as presented by Dorminey et al (2012:555-579) in Figure 3. This study narrows the focus to the so-called “general fraud” mainly investigated by the detectives placed at local police stations.
In every fraud case, police detectives and corporate investigators make an effort to find a causal story along with a reason to blame the victim for lack of skepticism (Hannah, 2017; Button, Lewis & Tapley, [sa]) and security procedures. According to Kennedys (2009), what motivates people to commit fraud is not very clear, and the investigation into fraud in general is hindered by its evolution, and the perception that it is not a real threat to society. This highlights the disconnect between the motivation to commit a crime, such as fraud, its perception by the public in terms of reporting the crime, and its investigation, when the perception prevails that fraud is not severe (Michel, 2016:53). Furthermore, the police may fail to recognise unlawful criminal activities. Rossouw (2000:885) argues that fraud is a worldwide phenomenon and it is detrimental to developing countries and continents such as Africa. Mangan and O’Connor (2012) assert that in developing or post-conflict countries, investigative police capacity does not receive sufficient international support. One of the major motivations to commit fraud is financial gain; and in countries where poverty is a threat to society, fraud becomes difficult to eradicate. Fraud may therefore be interpreted to be a socio-economic phenomenon (Pomeranz, 1995).
Fraud is difficult to measure because it is subjected to concealment by perpetrators and corporates for fear of reputation damage and financial cost to institutions (Miller & Gordon, 2014:166). To cover the extent of fraud and for fear of reputation damage, corporations use in-house expertise and investigators without engaging police detectives to guard against the collateral intrusion and breach of privacy, which is morally problematic. For example, banks and other big corporations are often unwilling to discuss what happened under the obligation of confidentiality to the clients.
Despite the drop in commercial crime from 91500 in 2013 to 67830 reported cases in 2015 (SAPS Annual Report, 2014/2015; Corruption Watch, 2015), police still see a fluctuating number of fraud cases being reported. It is difficult to pinpoint the separate causes of general fraud and those categorised as complex fraud. These crimes are considered to continue to test police capacity.
Various sources cited the Fraud Triangle, as depicted below in Figure 3, as an incomplete method to explain the causes of fraud. It would be unreasonable to use the Fraud Triangle as the only advisory on the causes of all varied fraud crimes.
Schuchter and Levi (2013:1-15) highlight three elements of motivation to commit corporate fraud, namely pressure, opportunity, and rationalisation. It is noteworthy that these elements of what causes fraud are fundamentally linked to the criminal liability of a crime of fraud. Riley (2010) describes these as follows:
a habitual criminal who steals for the sake of stealing; personal prestige, goal achievement;
morally superior, exempt from accountability; the desperate need for money;
undue family, community, university expectation.
weak internal controls;
circumvention of internal controls;
the greater the position, the greater the trust, and exposure to unprotected assets;
most trusted employee.
I need it more than the other person;
I am borrowing and will pay it back later; everybody does it;
the institution is big enough that it won’t miss it; nobody will get hurt;
I deserve it;
It is for the greater good; I am not paid enough;
the institution is not equitable in compensation; it’s just part of the job;
I am not gaining personally;
resentment of superiors and frustration with the job; it’s legal.
Despite the aforementioned elements, fraud is a crime, which requires fundamental elements of a crime to take place; this includes prejudice or potential prejudice, conduct (act) of misrepresentation, unlawfulness and intention/culpability (blame) (Snyman, 2002:520-523; Minnaar, 2000b). In fraud, the element of culpability is the intention, which is usually the intent to defraud. It should be noted that these elements must be present as a common requirement to prove the commission of fraud. Despite the fact that some scholars argue that the motivation to commit fraud is under-hypothesised in Fraud Triangle (Ramamoorti, Morrison & Koletar, 2009), according to Dorminey et al (2012), what motivates fraudsters largely depends on the three theoretical factors, pressure from financial problems, opportunity, and rationalisation. This argument remains valid in the accounting and auditing field. The second factor, opportunity, signals a fraudster to commit the act with a perception of not being caught for the conduct. Robertson (2003:39) argues that opportunities are available to all, but the upper class has more opportunity to commit fraud. Thirdly, the fraudster commits fraud based on a justification of the act – that justification equates to rationalisation. Kruger (2008:2) states that Aristotle commented on the fact that some people commit a crime for mere pleasure and even to fulfill a craving for superfluities with a view to painless delights.
Despite its relevance and applicability, it is necessary to note that the Fraud Triangle does not consider all possible motivations, and lacks inclusion of psychological and sociological factors. Motivations for fraud are complex. That is why two more causes or motivations for fraud were added. The concepts of Fraud Triangle (FT) have since been expanded and enhanced, as evidenced by the Mice Model, which stands for M-money, I-ideology, C-coercion and E-ego (Kranachner, Riley & Well, 2011), and the Fraud Diamond (meta-model) that promotes future fraud research in unexplored areas. Both Mice and the Fraud Diamond models modify the opportunity in the Dorminey et al (2012) FT theory. The latter idea expands on the theory of Fraud Triangle that it is important for the fraudster to have capabilities to commit the act (Wolfe & Hermanson, 2004). The causation of fraud in fraud models is not globally applicable, particularly to other types of frauds that take place outside organisations.
According to Kennedys (2009), fraudsters are untypically well educated and have a perception of intellectual superiority driven by the following key drivers:
need – lack of money, possibly the result of unemployment;
greed – I would like more money or property to improve my lifestyle;
the desire to get value from insurance – recover money paid in premiums;
peer pressure – the accepted norm – friends and colleagues are seen to have made successful fraudulent claims;
credit crunch/periods of inflation; it is perceived to be “easy money”.
The criminal investigators are under a duty to establish the motive in all criminal acts so that they can assess whether it is relevant to a criminal investigation and to reveal it to the prosecutor.
The costs of fraud
The forms in which crimes are generally committed to having increased dramatically since alongside technological development, particularly with online spending behaviour. Not all crimes generate the same amount of harm, on the contrary, it is estimated that in South Africa it is expected that online shopping will reach R53 billion; up from R37 billion in 2017. However, Mangan and O’Connor (2012) indicate that one of the challenges of investigating crimes of fraud is for detectives and prosecutors to prosecute and convict criminals behind the losses. As previously stated, the inability of the police to undertake certain criminal investigations can be destabilising for the country. Additionally, the resources used to commit fraud relate very well to the concept of loss, be it emotional, physical, tangible, and intangible costs. It is not easy to measure the extent of fraud impact and compile reliable statistics because it can be difficult to identify all fraud activities reported. This reflects in the Statistics South Africa (2017) survey, where categories of fraud (activities such as theft by means of misrepresentation, corruption, conspiracy, embezzlement, money laundering, bribery, and extortion) are not explicitly, cited but brought together under the constricted concept of consumer fraud. Tamukamoyo (2014) points out that, the reporting of crimes under broad categories can hamper efforts to identify and monitor specific trends of crime.
The followings points illustrate examples of fraud:
1. “On 21 June 2012 the accused, Thando Kwatsha (a financial planner at Standard Bank) was convicted, on his plea of guilty of 37 counts of fraud involving the total sum of R5955000,00 (±6 million rands) between 2008 and 2010. The details of the case are recorded in the matter between the State versus Thando Kwatsha, in the KwaZulu-Natal High Court, Pietermaritzburg, Republic of South Africa, Case no: CC65/2011” (Broughton, 2012). It is believed that Thando Kwatsha led unsophisticated bank clients to deposit their pensions and life savings into long and short-term investments with Standard Bank and Liberty Life. The money was deposited in the bank account of Messin Projects CC of which Kwatsha’s father was a partner (Broughton, 2012).
2. “A Cape Town businessperson, Johannes Erasmus van Staden, whose scheme resulted in SARS losing R250m was found guilty of fraud, racketeering, money laundering, and reckless trading. The Western Cape High Court found Johannes Erasmus van Staden guilty on 35 of 184 counts. The court found Van Staden conducted a multi-million Rand fishing business as a front for submitting false VAT returns between 2005 and 2008. The State described it as one of the largest fraud cases ever prosecuted in the high court” (Etheridge, 2016).
3. “Major SA banks have taken to court over internet fraud. Unhappy banking clients have instituted legal action against the banking ombudsman and a number of South African banks due to the manner in which they handle Internet fraud cases. Twenty Absa and Standard Bank clients, who have each lost between R1 million-R2 million to Internet banking or SIM swap fraud, want the banks to be held accountable for fraudulent activities. According to the report, the banks and the ombudsman argue that where a PIN or a password is fraudulently obtained, the client must be responsible as they are the only person’s privy to that information” (Swanepoel & De Lange, 2017).
These examples show that fraud affects individuals and businesses. Fraud can result in a financial loss that can ultimately lead to the downfall of an organisation. The 21st century has seen an example of the collapse of many large international companies such as Enron, and World Com, due to errors in financial reporting and committing overt acts of financial fraud (Deakin & Konzelmann, 2003:583-587; Dembinski et al, 2006). There is no doubt that fraud is prevalent within organisations and remains a serious issue for government departments. The examples above do not offer a perfect reflection of all fraud cases, but a general picture of a growing problem. It is estimated that the majority of fraud goes undetected (Doody, 2009). The consequences of fraud are not easily observable as some of the cases get undetected, which compounds the efforts to measure its true harm. Furthermore, the risk of being caught, convicted, and effectively punished is outweighed by illicit gains from fraudulent (Sadka, 2006).
According to a report by Tracey (2015) from the World Economic Forum, fraud and corruption in South Africa cost economy billions (Tamukamoyo, 2014), however, the real impact of these crimes is felt beyond the national fiscus. In the business sphere, organisations that experience loss through fraud can recover from insurance claims, which then increases premiums. The loss in company turnover (revenue) hampers the business projections, growth and employment in the affected business sector. This implies big corporations and small enterprises spend some of their resources putting tougher security and safety measures in place. Furthermore, goods prices can increase to cover the loss through fraud. Individual victims of fraud can withdraw from using internet-banking services (untrustworthiness of the technologies and systemic issues with negative effects) – further pertaining to individuals, only 22% of cases of internet fraud in South Africa was ruled in favour of the customer, while the remaining 940 cases of internet banking-related complaints went in favour of the banks (Staff Writer, 2017). With such unfavourable statistics, the police services, and detectives play a vital role in assuring the public that fraud is not only worth investigating but worth prosecuting as well. This is done, in part, through addressing the economic impact of fraud.
According to Albertson and Fox (2012:144), it is necessary to investigate the cost of crimes such as fraud on institutions, society, and individuals. Fraud creates institutional and societal burdens due to the fact that in countries where there are fewer developments in terms of policing, members of the police force who are desperate to achieve certain objectives may resort to harmful means such as torture and coerced confessions to solve the crime and gratify concerned communities. This may include unfair convictions deprived of comprehensive investigations because of the pressure of the workload and complaints on cases already reported and that remained unsolved. The volume of tasks involved in fraud investigation irrespective of the type of fraud is significant and requires a range of tangible and intangible capacities.
The cost constraints in the policing are critical to the type of service experience in the SAPS. Police cannot fully address the cost and burden of fraud, especially general detectives with high investigative workloads in a variety of cases. Nevertheless, instilling societal confidence in the police force may benefit vulnerable crime victims, and the effective use of detectives’ skills and abilities may go a long way to deter fraudsters. The impact of fraud reaches beyond the banking industry, and the issue of fraud investigation should be addressed in terms of that larger scope (Broughton, 2012).
Fraud versus other crimes
It is difficult to combat a crime which lacks a universal definition, especially when fraud cannot truly be compared to other crimes. Fraud may be contextualised based on the motivation behind its commission, which is based on economic gains. According to Albrecht et al (2016:7), there are two principal methods of getting something from others illegally, and this is applicable to fraud – either using physical force or misdirection and against someone to get that person’s assets. Misdirection, misrepresentation, and deceit may be prevalent when the level of fraud awareness is low in a certain demographic (Michel, 2016:55). The broad concept and lack of a universal definition of fraud enable this lack of awareness in most communities.
Fraud is a broad concept that covers indiscernible acts of non-violence (Minnaar, 2000a; Pickett & Pickett, 2002:2), much like unethical behaviour, which is rife in corporate institutions. However, unethical behaviour is not deemed serious in relation to violent crimes (Minnaar, 2000a). According to Picket and Picket (2002:13), police agencies tend to treat fraud as a low priority compared to other types of crime. Miller and Gordon (2014:165) emphasise that fraud is a specialised form of crime which requires a specialised form of investigation. However, despite this view, it is evident that when fraud is not highly prioritised, the efforts to address it are negligible. Some detectives, particularly seasoned investigators, may believe that there is no need to improve or acquire new skills to investigate fraud because they are exposed to investigation experience of violent crimes.
Table of Contents
Declaration by Editor
Abbreviations and Acronyms
List of Tables and Figures
Chapter 1: Introduction 1
1.2 Background to the study
1.3 Problem statement
1.4 Aim of the study
1.5 Research questions 9
1.6 Significance of the study to crime investigation
1.7 Key theoretical concepts
1.8 Different types of fraud
1.9 Investigative legislation
1.10 Commercial crime detectives
1.11 Criminal investigation standards
1.12 Chapter layout
1.13 Limitations of the study
Chapter 2: Methodology
2.2 Research method
2.3 Population and sampling plan
2.4 Data collection procedure
2.5 Data collection challenges
2.6 Qualitative data analysis
2.7 Validity and reliability
2.8 Ethical considerations
Chapter 3: Literature Review
3.2 Origin and nature of fraud
3.3 Fraud versus other crimes
3.4 The role of detectives as defined in the Police Service Act
3.5 Skills of fraud detectives/investigators
3.6 Contemporary fraud perpetrators
3.7 Fraud investigation capacity
3.8 Theoretical systemic capacity
Chapter 4: Police Capacity and Fraud Dimensions
4.2 Capacity narrative in a broader context
4.3 Resourcing in public service
4.4 Capacity driving forces
4.5 Developing capacity to perform
4.6 Detective structure and capacity pyramid
4.7 Management of police resources
4.8 General versus specialist detectives
4.9 Cooperation and bureaucracy
4.10 The degree of the fraud phenomenon
4.11 Consequences of fraud
4.12 Criminal convictions of fraud perpetrators
4.13 Collaborative investigative approaches
4.14 The complexity of fraud
Chapter 5: Research Findings
5.2 Participant response rate
5.3 General versus specialised fraud investigation
5.4 The allocation and investigation of fraud cases
5.5 The investigation of fraud versus other crimes
5.6 General detectives’ investigative capacity
5.7 Impediments to investigative capacity in fraud cases
5.8 Skill requirements for fraud investigations
5.9 Additional findings
Chapter 6: Discussion and Conclusion
6.3 Ideal investigative capacity
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