Fraud Victimization Research Paper

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Generally defined, fraud victimization refers to a form of economic crime. A variety of crimes might be included in this category, but fraud victimization generally takes one of two forms: victimization of organizations, or victimization of individuals. There is considerable evidence indicating that fraud victimization continues to increase, and that losses experienced by victims of fraud greatly exceed those of street crime. Given that many fraud victims are reluctant to report their victimization to criminal justice officials, the problem is likely even more severe than official statistics suggest.

This research paper examines key issues in the study of fraud victimization. Definitions and examples of occupational fraud and personal fraud are provided, with special attention to the nature and context of these offenses (e.g., the importance of fraud targeting and the methods of targeting victims). Theory and research on both forms of fraud victimization are presented. In addition to financial losses, other outcomes of fraud victimization (e.g., negative publicity, consumer confidence, reporting behavior, and risk perceptions) are considered. Directions for future research and implications for the prevention of both types of fraud victimization are discussed.

As noted at the outset, fraud victimization can take a variety of forms. Victimization of organizations, which includes occupational fraud, is primarily perpetrated by employees. Victimization of individuals, which includes consumer fraud, may be perpetrated by businesses or other individuals. Each is discussed in more detail in the sections that follow.

Victimization Of Organizations

Occupational Fraud Defined

Occupational fraud, defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets,” takes place in organizational settings (Association of Certified Fraud Examiners, 2006, p. 6). This definition can be further divided into three categories of occupational fraud: asset misappropriation, corruption, and fraudulent statements. Examples of asset misappropriation include theft of cash or other inventory. Reports indicate that asset misappropriation is by far the most common form of occupational fraud. Examples of corruption include bribery and other forms of wrongful use of influence in business transactions. Finally, examples of fraudulent statements include falsification of an organization’s financial documents or other (i.e., nonfinancial) documents, such as an employee’s resume or credentials. Although the nature of these forms of occupational fraud varies, all are considered violations of trust because they go against an employee’s fiduciary duties to the organization. Along these lines, occupational fraud is generally considered to be a form of white-collar crime (Holtfreter 2005).

Theory And Research

Offender Characteristics

The demographic characteristics of offenders who commit occupational fraud are similar to those who have been convicted of other forms of white-collar crime. For example, one study found that men committed slightly more than half of detected occupational frauds (Holtfreter 2005). The same research revealed that most offenders held employee-level positions, as opposed to managers or higher-level executives, were approximately 41 years old on average, and had greater than high school education. The results from this study are comparable to those reported by previous researchers studying white-collar crime in that the sample is best described as “middle class” (see e.g., Weisburd et al. 1991).

Motivation And Opportunity For Fraud

Early studies of white-collar crime identified non-shareable financial problems (e.g., involvement in gambling or other vices) as primary motivations for embezzlement and related offenses in the workplace (Cressey 1953). Many of the most well-known, early studies of fraud and other forms of white-collar crime were conducted when men made up the majority of the American work force. As a result, understanding of these offenses was based almost exclusively on the behavior of males. In perhaps the most comprehensive study on white-collar crime criminal careers, offender motivations mirrored those identified by Cressey, including alcohol addiction and a desire to finance higher education (Weisburd et al. 2001). Subsequent research found that women’s rationalizations differed from those of their male counterparts in that women were often motivated by caring for family members (e.g., to pay medical bills for a sick child) (Zietz 1981). More recent research confirms that opportunities to commit fraud are linked to the offender’s position within the organizational hierarchy (Holtfreter 2008a). In many large corporations, it is still the case that higher-level positions are held by men.

Victim Characteristics

The available data show that there is no set profile of a “typical” organization victimized by occupational fraud. The breakdown of victims in Holtfreter’s (2005) study of 1,142 organizations included privately held businesses (32.1 %), publicly traded companies (30.8 %), government agencies (24.8 %), and nonprofit organizations (11.2 %). Organizational victims ranged in size, including subcategories ranging from 1–99 employees (36.7 %), 100–999 employees (20.3 %), 1,000–9,999 employees (25.8 %) to 10,000 or more employees (17 %). Apart from the employing organization itself, there may also be other, external victims of occupational fraud. For example, some types of fraud (e.g., corruption) may extend to consumers who purchase products from publicly traded companies or private businesses. External victims of occupational fraud are difficult to identify, as they may not even be aware that they have been victimized. On average, it is estimated that organizational victims lose approximately 5 % of their annual revenues to occupational fraud. Factors that predict the amount of losses experienced may vary, depending on the organization (Holtfreter 2008b). To be sure, the type of organization itself may influence the amount lost to occupational fraud victimization, as does the available security measures (e.g., internal audits).

Victim Reporting

Despite the losses experienced by organizational victims of fraud, many organizations remain reluctant to take formal legal action against their perpetrators, and instead choose to handle the offending employees internally. In Holtfreter’s (2008a) study, initiating criminal proceedings against the offending employee was more likely among government agency victims. Both the age and education of the offender decreased the likelihood of reporting behavior. Although legal characteristics (e.g., criminal history and crime serious) are associated with legal decision making at later stages of criminal processing (e.g., sentencing), these factors did not appear to play a role in early-stage victim decisions. Among those victims who did not take legal action, fear of negative publicity was the primary reason cited, followed by reaching a private settlement, the perception that legal action was too costly, lack of evidence, and fear of a countersuit.

Future Research And Implications For Crime Prevention

Procedural Justice And Legitimacy

The research on fraud victimization of organizations suggests several directions for future research, as well as some important implications for crime prevention. In particular, more research on employee motivation for occupational fraud is needed. Although a variety of personal motivations outside the organization have been documented, additional research focusing on within-organizational factors would provide more direct insights for employers. For example, perceptions of unfair treatment and/or inequities in pay might contribute to employees’ beliefs that fraud victimization is justified (Greenberg 1990; 1993). Recent research confirmed that perceptions of fair treatment and organizational justice are associated with lower levels of misconduct in the workplace (Wolfe and Piquero 2011). Given that this study focused on just one government organization – a police department – it will be important for future research to replicate the findings in other organizational settings.

To help prevent fraud, organizations should examine the effectiveness of their existing control mechanisms, such as audits and other forms of security. Such steps are consistent with routine activity theory’s emphasis on target hardening and increasing the presence of capable guardians. To be more proactive in preventing fraud, organizations should also consider more aggressive hiring practices. Along those lines, careful background checks of employment histories, personal references, and criminal records should be implemented for all prospective employees (Holtfreter 2004).

Personal Fraud Victimization

Consumer Fraud Defined

Consumer fraud is a form of personal fraud victimization. Specifically, it consists of “intentional deception or attempted deception with the promise of goods, services, or other benefits that are non-existent, unnecessary, were never intended to be provided, or were grossly misrepresented” (Titus 2001:57). Although the nature of consumer fraud continues to evolve, there is evidence to suggest that this type of victimization has existed since biblical times (Holtfreter et al. 2005).

According to the Federal Trade Commission (FTC), nearly one-third of adults in the United States report being targeted by fraud perpetrators on an annual basis, resulting in 11.2 % of the population being victimized (Anderson 2004). The FTC estimates yearly financial losses to be $680 million. The median financial loss experienced by personal fraud victims is approximately $220 per victim (Anderson 2004). These losses far exceed those experienced by victims of common or serious “street” crime. Taken together, these alarming statistics necessitate a closer look at this growing problem.

Before identifying directions for crime prevention, key issues in the study of consumer fraud victimization are discussed. As noted previously, this research paper includes the nature of victimization, with special attention to context. Types of fraud and common methods of targeting are examined, followed by theory and research. In addition to financial losses, other outcomes of fraud victimization (e.g., consumer confidence, reporting behavior, and risk perceptions) are considered. This section concludes with a discussion of the implications for the prevention of consumer fraud victimization and the identification of avenues for future research.

Fraud Targeting

As noted above, contact between the victim and offender represents a necessary, but not sufficient, condition for personal fraud victimization to take place. In their attempts to target potential fraud victims, perpetrators use a variety of methods. Consumers are targeted via the same forms of media used by legitimate businesses. For example, while many transactions still occur face-to-face, technological advances have increased the nature and availability of ways to reach consumers. These include old standbys of telemarketing “cold calls,” and television infomercials, as well as via print media sources, such as mail, newspapers, periodical ads, and catalogs. As discussed below, the Internet has become a widely used mechanism for the perpetration of consumer fraud.

Internet Use And Fraud Targeting

More recently, the creation and expansion of the Internet has provided fraudsters with virtually unlimited opportunities to contact potential victims. Over 221 million Americans use the Internet on a daily basis. They do so for many reasons, such as sending e-mails, reading news, entertainment, and for financial purposes (e.g., to manage bank accounts or pay bills). Online shopping represents one of the most common forms of Internet activities. Although consumer fraud scams vary considerably, evidence indicates that perpetrators are increasingly using the Internet to approach their victims. According to the Federal Bureau of Investigation (2001), Internet fraud is: “any fraudulent scheme in which one or more components of the Internet, such as web sites, chat rooms, and e-mail, play a significant role in offering non-existent goods or services to consumers, communicating false or fraudulent representations about the schemes to consumers, or transmitting victims’ funds, access devices, or other items of value to the control of the scheme’s perpetrators.” Governmental and media sources indicate that reports of Internet fraud are on the rise. Fraud targeting and victimization online have only recently begun to be explored within the context of criminological theory.

Theory And Research

Routine Activity Theory

Cohen and Felson’s (1979) routine activity theory is one of the most prominent theoretical explanations for victimization. According to this perspective, aggregate changes in opportunity structures, combined with a lack of capable guardianship, will increase the convergence in time and space of motivated offenders and suitable targets. Early research in this tradition focused on the ways in which demographic variables increase risk of victimization. For example, in the context of street crime, males, minorities, and single people have higher risks of victimization. Subsequent studies have suggested that it is the behaviors of individuals, not demographics themselves, that put potential victims into contact with motivated offenders. Along these lines, deviant lifestyles that include activities such as drug use, prostitution, and other illegal behaviors increase exposure to victimization.

More recently, scholars have applied routine theory activity to the study of consumer fraud targeting and victimization (Holtfreter et al. 2008; Reisig et al. 2009; Pratt et al. 2010). Consistent with the theory, researchers have focused on identifying consumer behaviors that reflect “unguarded exposure.” The first test of this theory in a fraud context revealed that remotepurchasing activities (e.g., responding to telemarketers, purchasing items from the Internet, ordering products after seeing an infomercial, and ordering products through the mail) increase consumers’ risk of being targeted for fraud (Holtfreter et al. 2008). In this study, these activities did not, however, increase victimization. Rather, as discussed in more detail below, the relationship between routine activities and fraud victimization depends on targeted individuals’ levels of self-control.

Building on Holtfreter et al.’s (2008) research, Pratt et al. (2010) examined fraud targeting in an Internet-specific context. This study drew on routine activity theory and consumer behavior research to understand how personal characteristics and online routines increased consumers’ exposure to motivated offenders. The results indicated that the correlates of online fraud targeting differ from those regularly linked to street crime targeting. For example, young, minority males tend to be both targets and victims of violent crime. In comparison, individuals targeted by Internet fraud are younger and more educated.

Low Self-Control

Self-control remains one of the strongest known correlates of crime. In Gottfredson and Hirschi’s (1990) original formulation of self-control theory, they argued that individuals who lack self-control are more prone to engage in crime and a variety of crime-analogous acts. Those with low self-control are also shortsighted, impulsive, and tend to pursue their own self-interests without considering the potential consequences of their behavior. Schreck (1999) was the first to extend these ideas to the crime-analogous context of victimization. Along these lines, low self-control increases individuals’ risks of victimization. Following Schreck (1999), subsequent research demonstrated considerable support for self-control as a theory of vulnerability for a variety of crimes. Initial applications of self-control theory focused on street crime, where indicators of low self-control are more readily visible to would-be offenders (e.g., someone who appears to be drunk in public) (Schreck et al. 2002).

In the context of fraud victimization, signs of low self-control (e.g., financial risk-taking behavior) are not so easily observed. With this in mind, Holtfreter et al. (2008) examined the relationship between low self-control, routine activities, and consumer fraud victimization. As discussed previously, consumers’ routine activities increased their chances of being targeted by fraud perpetrators. Low self-control, on the other hand, did not influence targeting, which was expected in this particular victimization context.

Consumer Confidence

In addition to financial losses, fraud victimization may be associated with a variety of other, and potentially negative, life outcomes. Along these lines, researchers have also begun to examine the influence of fraud victimization on several unique outcomes. As is the case with any type of crime, it follows that the experience of fraud victimization may influence consumers’ attitudes toward the police and other legal authorities. Throughout the United States, criminal justice system authorities frequently rely on measures of confidence, support, and trust as indicators of organizational performance and legitimacy (Tyler 2001). Citizen levels of legitimacy are important because they are highly correlated with cooperation with the police and related outcomes (e.g., reporting crime). Reisig and Holtfreter’s (2007) study of 918 adult consumers in the state of Florida revealed that less than half of respondents had either “a great deal” or “quite a bit” of confidence in the ability of legal authorities to respond to consumer fraud victimization. This research also showed that younger consumers, the less educated, recent fraud victims, and financial risktakers all had lower levels of confidence. These results suggest that public awareness campaigns and fraud prevention efforts should target these particular consumer groups.

Risk Perceptions

Reisig et al.’s (2009) study of 573 adult Internet users showed that socially vulnerable individuals and those who were financially impulsive perceived higher levels of risk associated with making online credit card purchases. Those with higher perceived risk levels altered their behavior in two important ways: (1) by spending less time online and (2) making fewer online purchases. However, despite perceiving higher risks, financially impulsive Internet users did not engage in similar risk-reduction strategies. The results of this study suggest that efforts designed to educate Internet users about online fraud victimization may achieve limited success when it comes to reaching financially impulsive consumers. Accordingly, crime prevention measures that are designed to harden targets (e.g., increased Internet security, pop-up blocking software, web encryption, and the like) will arguably have a greater impact on the reduction of fraud victimization (Holtfreter and Holtfreter, 2006).

Reporting Behavior

Despite the dollar losses experienced by fraud victims, there is some evidence to suggest that this form of victimization remains underreported. This is a trend that mirrors that of organizational fraud victims. Copes et al. (2001) examined these issues in a telephone survey of 400 Nashville, Tennessee residents. This research indicated that victims with higher levels of education, and those who were victimized by strangers, were more likely to report their experiences to criminal justice authorities. Older individuals and those who were married were also more likely to report their victimizations. Finally, the amount of money lost was the strongest predictor of victim reporting behavior. Consistent with previous studies, the authors hypothesized that victim self-blame may contribute to underreporting. Unlike the victims of many other forms of crime, personal fraud victims may attribute the cause of their victimization to their own behaviors (e.g., trying to make money on an investment “opportunity”). In turn, the shame associated with self-blame may make victims reluctant to report.

Future Research And Implications For Crime Prevention

General And Specific Population Studies

General population studies continue to be important for a number of reasons (Holtfreter et al. 2006). For example, they are particularly well suited to criminological theory testing, and also permit researchers to calculate estimates of fraud targeting and fraud victimization rates. Perhaps even more importantly, they allow for the identification of consumer segments that may be most at risk for victimization, which is particularly beneficial when it comes to implementing strategies for public awareness and crime prevention. Moving beyond these steps, more in-depth studies of specific, at-risk populations are also useful. Research utilizing college student samples provides insight into crime prevention for this segment of the population. However, less is known about fraud targeting and fraud victimization at the other end of the age distribution: the elderly. While reports from popular media often suggest that fraud perpetrators aggressively target elderly consumers, the research to date has been mixed. To improve understanding of the nature and incidence of fraud targeting and victimization against the elderly, and to better guide crime prevention policy, more comprehensive studies of this population are needed.

Cross-Cultural Comparisons

With a few exceptions, the bulk of research on fraud victimization has been conducted in the United States. However, the international research to date tends to confirm many of the findings reported by American researchers. For example, both low self-control and routine activities have received empirical support in non-American countries (van Wilsem 2011; Van Wilsem in press). A recent study using data from 6,201 Dutch consumers found that people with low self-control had significantly higher risks of victimization (van Wilsem in press). In the same study, consumers who actively shopped online as well as those participating in online forums were also at greater risk of fraud victimization. In sum, these findings suggested an indirect relationship between low self-control and fraud victimization in that consumers with low self-control tend to be more involved in risky online activities. Another recent study authored by van Wilsem (2011) examined the links between online activities, offline activities, and different types of victimization. This survey of 6,896 Dutch residents in the general population found support for a reciprocal relationship between distinct routine activities and distinct forms of victimization. Put differently, the results suggested that it is possible for online routines to lead to traditional victimization, and for offline routines to lead to online victimization.

Given the global reach of this problem, this body of research could be extended by including fraud victims from multiple countries within the same study. Such comparative research would contribute to the growing support for a general, integrated theory of fraud targeting and fraud victimization based on self-control and routine activity frameworks.

Victim-Offender Overlap

A recent and promising trend in the fraud victimization literature is the examination of victim-offender overlap. This research suggests that a common underlying trait, low self-control, partially explains the overlap between fraud offending and victimization exposure. These findings are consistent with the research examining the relationship between low self-control and offending as a unique outcome, as well as studies supporting low self-control as a risk factor for victimization. Holtfreter et al. (2010b) study of college students found support for low self-control as a predictor of fraud offending, fraud victimization exposure, and the overlap between these two outcomes. Research by Holtfreter et al. (2010a) also confirmed a link between low self-control and fraud offending. In sum, individuals with low self-control tend to make impulsive decisions, engage in risky behaviors, and are more likely to act on opportunities promising quick returns for little investment. Future research should expand on this work by studying the relationships between low self-control, offending, and victimization in general population samples.

Victim-Offender Relationships

The available literature suggests that crimes of violence (e.g., assault) are most often perpetrated by offenders known to the victims. In comparison, the research suggests that the nature of many forms of fraud targeting and victimization (e.g., online fraud) does not require a personal relationship between victim and offender. Nonetheless, additional insights into the relationships between perpetrators, targets, and victims are clearly needed. Other forms of fraud victimization (e.g., credit card theft) may be more easily perpetrated by offenders who already have an established relationship with the victim (e.g., family members). Given that prior victimization is a risk factor for subsequent victimization, it is also possible that victims of violent crime may be at greater risk for fraud victimization. To be sure, additional research could shed light on these relationships. Future studies should attempt to identify the relationships between targets, victims, and offenders, and also consider whether other forms of victimization are linked to fraud.

Conclusion

It is clear that occupational fraud and consumer fraud result in significant financial losses to organizations, individuals, and in many instances, those who are not directly victimized by these offenses (e.g., the general public). The theoretically informed research literature on both forms of fraud victimization has advanced considerably in recent years, adding to our understanding of these crimes. As technology continues to advance, scholars, criminal justice system officials, and victim service providers, among others, will continue to face challenges as they study and respond to fraud victimization.

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