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<title>Control fraud</title>

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<span id="openzim-page-title" class="mw-page-title-main"><span class="mw-page-title-main">Control fraud</span></span>

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<p><b>Control fraud</b> occurs when a trusted person in a high position of responsibility in a <a href="Company" title="Company">company</a>, <a href="Corporation" title="Corporation">corporation</a>, or <a href="State_(polity)" title="State (polity)">state</a> subverts the organization and engages in extensive <a href="Fraud" title="Fraud">fraud</a> for personal gain. The term "control fraud" was coined by <a href="William_K._Black" title="William K. Black">William K. Black</a> to refer both to the acts of fraud and to the individuals who commit them.

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<div class="mw-heading mw-heading2"><h2 id="Concept">Concept</h2></div>

<p>The concept of control fraud is based on the observation that the CEO of a company is uniquely placed to remove the checks and balances on fraud within a company, such as through the use of selective hiring and firing. These tactics can position the executive in a way that allows him or her to engage in accountancy fraud and embezzle money, hide shortfalls or otherwise defraud investors, shareholders, or the public at large. A control fraud will often obtain "investments that have no readily ascertainable market value",<sup id="cite_ref-black_book_1-0" class="reference"><a href="#cite_note-black_book-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> and then shop for appraisers that will assign unrealistically high values and auditing firms that will bless the fraudulent accounting statements.<sup id="cite_ref-2" class="reference"><a href="#cite_note-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup>

</p><p>Some control frauds are reactive in the sense that they turn to fraud only after concluding that the business will fail.<sup id="cite_ref-3" class="reference"><a href="#cite_note-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup> Opportunistic control frauds, by contrast, are attracted to a criminogenic environment where it is harder to detect fraud, e.g., as a result of <a href="Deregulation" title="Deregulation">deregulation</a>.<sup id="cite_ref-4" class="reference"><a href="#cite_note-4"><span class="cite-bracket">[</span>4<span class="cite-bracket">]</span></a></sup>

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<div class="mw-heading mw-heading2"><h2 id="Examples">Examples</h2></div>

<p>An example would be when an insolvent company publishes accounts showing massive profits. This will cause the stock to rise beyond its actual value, and those exercising the control fraud will cash in their stocks before the reality is known by others.<sup id="cite_ref-black_book_1-1" class="reference"><a href="#cite_note-black_book-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> Additionally, companies can lobby for changes to weaken the law or accompanying regulation. This can be particularly effective with large campaign contributors like <a href="Charles_Keating" title="Charles Keating">Charles Keating</a>, who with other control frauds in the United States League of Savings Institutions, was able to get his own people placed on the board of the primary regulatory agency, the <a href="Federal_Home_Loan_Bank_Board" title="Federal Home Loan Bank Board">Federal Home Loan Bank Board</a> (FHLBB). With the assistance of people like Speaker of the House <a href="Jim_Wright" title="Jim Wright">Jim Wright</a> and the <a href="Keating_Five" title="Keating Five">Keating Five</a>, he was able to convert <a href="Lincoln_Savings_and_Loan_Association" title="Lincoln Savings and Loan Association">Lincoln Savings and Loan Association</a> into a <a href="Ponzi_scheme" title="Ponzi scheme">Ponzi scheme</a>, making millions for himself, while suppressing the investigative and regulatory functions of the FHLBB. Eventually, the Ponzi collapsed, as all Ponzis must, but with a massive cost to the taxpayers and unsecured investors.

</p><p>Control fraud can also occur in a political situation, for example by the leader of a country who can use their position to embezzle public funds and turn the country into a <a href="Kleptocracy" title="Kleptocracy">kleptocracy</a>. For example, the post-Soviet republic of <a href="Azerbaijan" title="Azerbaijan">Azerbaijan</a>.<sup id="cite_ref-5" class="reference"><a href="#cite_note-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup>

</p><p>Examples of control fraud include <a href="Enron" title="Enron">Enron</a>, the <a href="Savings_and_loan_crisis" title="Savings and loan crisis">savings and loan crisis</a>, <a href="Sam_Bankman-Fried" title="Sam Bankman-Fried">Sam Bankman-Fried</a>, and <a href="Ponzi_scheme" title="Ponzi scheme">Ponzi schemes</a> such as that of <a href="Bernard_Madoff" class="mw-redirect" title="Bernard Madoff">Bernard Madoff</a>.

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<ul><li><a href="Graft_(politics)" title="Graft (politics)">Graft (politics)</a></li>

<li><a href="Moral_hazard" title="Moral hazard">Moral hazard</a></li>

<li><a href="Principal%E2%80%93agent_problem" title="Principal–agent problem">Principal–agent problem</a></li>

<li><a href="Regulatory_capture" title="Regulatory capture">Regulatory capture</a></li></ul>

<div class="mw-heading mw-heading2"><h2 id="References">References</h2></div>

<dl><dt>Notes</dt></dl>

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</style><cite id="CITEREFBlack2005" class="citation book cs1">Black, William K. (2005). <i>The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry</i>. University of Texas Press. p. 2. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>0292754183</bdi>.</cite></span>

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<li id="cite_note-2"><span class="mw-cite-backlink"><b><a href="#cite_ref-2">^</a></b></span> <span class="reference-text">Black(2005, pp. 51, 251, 253)</span>

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<li id="cite_note-3"><span class="mw-cite-backlink"><b><a href="#cite_ref-3">^</a></b></span> <span class="reference-text">Black (2005, pp. 5, 7, 8, 60, 282)</span>

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<li id="cite_note-4"><span class="mw-cite-backlink"><b><a href="#cite_ref-4">^</a></b></span> <span class="reference-text">Black (2005, pp. 5, 7, 8, 11, 37-38, 61)</span>

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<li id="cite_note-5"><span class="mw-cite-backlink"><b><a href="#cite_ref-5">^</a></b></span> <span class="reference-text"><cite id="CITEREFLahiff2017" class="citation web cs1">Lahiff, Colin (21 November 2017). <a rel="nofollow" class="external text" href="https://www.aei.org/foreign-and-defense-policy/asia/defining-kleptocracy-a-first-step-toward-victory/">"Defining kleptocracy: A first step toward victory"</a>. <i>American Enterprise Institute - AEI</i>.</cite></span>

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<dl><dt>Bibliography</dt></dl>

<p><cite id="CITEREFBlack2005" class="citation book cs1"><a href="William_K._Black" title="William K. Black">Black, William K.</a> (2005). <span class="id-lock-registration" title="Free registration required"><a rel="nofollow" class="external text" href="https://archive.org/details/bestwaytorobbank0000blac"><i>The Best Way to Rob a Bank Is to Own One</i></a></span>. University of Texas Press. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>0-292-72139-0</bdi>.</cite>

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<div class="mw-heading mw-heading2"><h2 id="External_links">External links</h2></div>

<ul><li><a rel="nofollow" class="external text" href="http://www.schneier.com/blog/archives/2010/11/control_fraud.html">Schneier on Security: Control fraud</a> (He refers to a paper with a dead link; the paper is <i>When Fragile becomes Friable</i>.)</li>

<li><cite id="CITEREFBlack2005" class="citation conference cs1"><a href="William_K._Black" title="William K. Black">Black, William K.</a> (19 December 2005). <a rel="nofollow" class="external text" href="http://www.peri.umass.edu/fileadmin/pdf/conference_papers/SAFER/Black_Fragile_Friable.pdf"><i>When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse</i></a> <span class="cs1-format">(PDF)</span>. <a rel="nofollow" class="external text" href="http://www.networkideas.org/ideas-activities/2005/12/workshop-entitled-financial-crime-and-fragility-under-financial-globalisation/">Financial Crime and Fragility under Financial Globalization</a>. Delhi, India.</cite></li>

<li><a rel="nofollow" class="external text" href="https://www.pbs.org/moyers/journal/04032009/profile.html">Bill Moyer's journal: William K. Black: CSI Bailout</a></li>

<li><a rel="nofollow" class="external text" href="https://www.federalreserve.gov/pubs/ifdp/2009/985/ifdp985.pdf"><i>Executive Compensation and Earnings Management under Moral Hazard,</i> Bo Sun</a></li>

<li><a rel="nofollow" class="external text" href="https://www.youtube.com/watch?v=ld5tERIBvsg">Bill Black testifies re: Lehman Brothers</a></li></ul></div><div><div class="zim-footer">

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