This week I have returned to one my favorite themes for every Chief Compliance Officer (CCO), compliance professional and compliance program: Sherlock Holmes. I am using themes from the short stories to illustrate broader application to components of a best practices compliance program. I have used three primary resources in putting together this series: Maria Konnikova’s Mastermind (Konnikova); the online site shmoop.comand its blog post, The Return of Sherlock Holmes (shmoop); and finally the most seminal print work on the entire Holmes canon, the three-volume The New Annotated Sherlock Holmes (Klinger)  edited with notes by Leslie S. Klinger. Today, I consider the theme of criminality and compliance.

Shmoop believes that a question of what makes someone a criminal, runs throughout the Holmes canon. They go on to ask, “Are criminals born or made? Do they tend to be foreigners or can they be found next door? Why do people commit crimes? While the Sherlock Holmes stories always answer the last question at the end of each story, with a handy run-down of people’s motives, the first two questions get a lot of different answers.” In the series entitled “The Return of Sherlock Holmes”, the thirteen stories looked at all sorts of crimes and all sorts of criminals. Shmoop noted there were “professional gangsters and career blackmailers; people who kill in a rage or by accident; petty thieves and stone-cold killers. Sherlock Holmes stories tend to be fairly comforting and enjoyable in that everything is always solved and answered by the end. But they can also be unsettling. Pretty much anyone can commit a crime (even Holmes and Watson themselves) or can be the victim of a crime in these tales.” There’s a lot of uncertainty in that which is said to constitute criminal London.

In the story The Adventure of the Priory School, Watson meets a character, Reuben Hayes, who  believes to be the most “self-evident villain” he has ever seen. The tale revolves around the disappearance of a Duke’s son who is kidnapped by the Duke’s illegitimate son, James Wilder, who has in turn hired that most evil person Hayes to kidnap the lad. In pulling off the crime, Hayes had killed the lad’s tutor, one Heidegger, who had gone off in search of the boy. Holmes resolves the matter, while Hayes swings for his crime, the illegitimate son, Wilder is packed off to Australia.

Rarely do employees in companies begin with an intent to commit criminal acts. Yet by the time they have engaged in criminal fraud, there has usually been significant damage to the organization. One might only consider the recent criminal indictment of Elizabeth Holmes, founder and former Chief Executive Officer (CEO) of Theranos, Inc. and the company’s former COO, Sunny Balwani. I greatly doubt they originally planned to defraud investors out of millions of dollars or intentionally wrongly reported on the health of all those who were tested with their products. Yet the indictment alleges, at the end of the day, that they did so defraud a wide variety of stakeholders, customers and others. Now the company is down to just a few remaining employees.

But this type of massive fraud, perpetrated at the highest level, is a rarity in Foreign Corrupt Practices Act (FCPA) cases (although not unheard of). Yet, as the Association of Certified Fraud Examiners (ACFE) noted in its most recent Report to the Nations (Report), corruption represents one of the most significant fraud risks for organizations. This means that companies should understand the specific factors involved in corruption schemes so they can work to effectively prevent, detect and remediate them.

Some of the key findings in the Report around corruption were that 70% of corruption cases were perpetrated by someone in an organization who was in a position of authority; either a manager or senior executive. The top red flags in corruption cases were (1) an employee living beyond their means; (2) employees with unusually close associations with vendors or customer; (3) employees who were in financial difficulties; and (4) employees who had a ‘wheeler-dealer’ attitude when it came to doing business. Interestingly, corruption continues to be a worldwide problem. While the usually geographic regions of southeast Asia and west Africa have high indices for corruption, in every region across the globe, with the notable exception of the US itself, corruption was found to be the most pervasive type of fraud.

However, the part of the Report that will bring some of the most important insights to the compliance practitioner is the similarities between the fraud perpetrator and the employee engaged in corruption. They share the same profile. The red flags I noted above are the same for those involved in either fraud or corruption. The mechanisms for concealing fraud are concealing or altering documents, creating fraudulent transactions and entries in the accounting system, altering transactions or files and override of internal controls to allow fraudulent transactions.

One other lesson from our Holmes story is what Konnikova says is “be objective”. She said that it is more than simply investigating the apparent facts of the missing schoolboy as “it entails understanding something very specific: a situation (in its broadest sense, be it mental, physical or something as un-situation like as an empty room) is inherently dynamic. And you by the very action of entering it, shift it from what it was before your arrival to something altogether different.” In the story, this means the Headmaster who calls for Holmes and the investigating police believe a kidnapping has occurred and they report the facts in that manner.

Both the information from the Report and Konnikova’s observations point to the need for robust internal controls in every best practices compliance program. Such compliance internal controls can help detect and prevent fraud and corruption from occurring in a much more objective manner. For the reality is if the red flags noted as the top indicators of fraud appear in your organization, it is an objective sign that a more thorough investigation should take place. Konnikova ends this section of her book with the following, “every time you find yourself making a judgment immediately upon observing—in fact, even if you don’t think you are, and even if everything seems to make perfect sense—train yourself to stop and repeat: It is impossible as I state it and there I must in some respect be wrong. Then go back and restate it from the beginning and in a different fashion than you did the first time… It will save you from many errors in perception.”

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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