A correlation between gambling and fraud?

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Tracy L. Coenen

Employee fraud always has a “cause.” The “cause” is the motive, desire, or need that is being filled by the theft from one’s employer. A need doesn’t have to be a true need in order for fraud to occur, but can be a perceived need on the part of the thief. One common impetus for fraud is an addiction. Addictions are expensive, and the money has to come from somewhere. The employer is sometimes the logical answer to the problem.

But addictions aren’t limited to drugs, alcohol, and similar vices. They can and do include gambling, and the news is full of incidents of fraud with a gambling connection. A known addiction can be a red flag of fraud, meaning that the addicted employee is statistically more likely to commit fraud and therefore usually merits further monitoring.

Defining Gambling Addiction

People didn’t talk much about gambling addictions in the old days. They may not have even realized it existed. But just like a chemical addiction such as alcohol or drugs, it has now been found that gambling can cause changes in the brain that can become addictive.

An addiction is typically something that causes disruption in a major area of one’s life, such as psychological problems, incompetence at work, stress in a personal relationship, and the like. Gambling was not seen as an addiction for a long time because its symptoms are often hidden. Even today, some are reluctant to call gambling an addiction, and instead refer to it as “problem gambling.”

Problem gamblers have an increasing preoccupation with gambling. This is typically exhibited by a “need” to gamble more often and with greater amounts of money. When they try to stop, they often exhibit restlessness and irritability. Gambling sometimes begins to control their lives, even in the face of serious negative consequences.

The Connection to Fraud

As the obsession with gambling grows, a gambler needs new sources of money to continue on. Gambling can become a very expensive habit very quickly, especially if the gambler in the mode where she or he needs to gamble larger amounts more frequently to get the gambling high.

It is no secret that casinos are in business to make money, and in fact, they make large sums of money from gamblers. The odds are not in favor of the addict, and the addict’s money can quickly dwindle.

It is not uncommon for a gambler to forgo life’s necessities in favor of using the money to gamble. Addicted gamblers are frequently seen “chasing” their losses, which means that following monetary losses, they return in an attempt to win back the money. Many gamblers have an irrational belief that they will win big to wipe out all past losses.

But the winner is almost always the casino, and most gamblers can’t finance a problem like this into infinity. That’s where fraud, forgery, and embezzlement come in. Theft from the employer is seen as a viable option, and many gamblers believe strongly that they will eventually win that big jackpot. An employee who steals from a company to finance gambling often believes that she or he will use future winnings to pay back the company.

The cost of gambling to society as a whole can be great. A 1998 study by the National Gambling Impact Study Commission found that gambling causes $5 billion in annual losses to society. That was almost 10 years ago, and the figure most certainly is larger now.

Gambling and the need to fund the habit is linked to crime. A report by Oregon’s Department of Human Services stated that of the 1,700 gamblers who received publicly funded treatment in Oregon in 2005-06, 23 percent admitted to committing crimes to get gambling money. It is estimated that 74,000 adults in Oregon can be considered “problem gamblers,” which is about 2.7 percent of the adult population. If that 23 percent crime rate applies to the larger population of 74,000 adult gamblers, you can imagine what a problem this has become.

Fraud and Gambling in the Real World

I don’t have to do a study to know that gambling and fraud are related to one another. In the last few years, I’ve worked on an increasing number of cases with a perpetrator who had a gambling problem. In almost every case, no one knew that the employee was addicted to gambling. At best, bosses and co-workers knew the perpetrator as an “occasional” gambler who would hit a casino once or twice a month, to their knowledge.

The vast majority of these fraud perpetrators had almost no money to their names when the fraud was discovered. No home equity. No cars owned free and clear. No savings. Everything they had and everything they stole went to gambling.

On occasion, there is a case where a gambler has some home equity or other assets that may be available for the victim company to recover. But it’s not often that this happens. Even when there are some assets, there are often other creditors standing in line for those funds.

In one case, the perpetrator offered the victim company home equity that amounted to less than 10 percent of the amount stolen. The company’s owner was insulted and appalled, and said there was no way she’d accept such a small sum in full settlement of all claims against the perpetrator. Yet at the end of the day, she accepted that small amount because the alternative was to get nothing at all from this perpetrator who was going to prison.

How do companies protect themselves from this problem? It’s difficult. Unlike other addictions, gamblers often do not show any outward signs of problems. Whereas alcoholics and drug abusers may show up at work with physical signs of the addiction, gamblers are more often able to hide any traces of a problem.

With little to no signs of the addiction, it will be difficult for companies to be aware of potential problem employees. Yet if management does see a sign or hear a report of an employee being a regular gambler, it is important to pay attention to this information and supervise the employee a little more closely.

Tracy L. Coenen, CPA, MBA, CFE, is the president of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. Coenen can be reached at [email protected] or 414-727-2361.