Lowering the Risk of Financial Fraud for Families of Wealth

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Glancing up from my desk on the 16^th floor of Geller’s headquarters, my gaze is instinctively drawn to the eye-catching property located literally across the street. Midtown Manhattan’s iconic Lipstick Building hides an ugly secret. For it was there where, as The New York Times put it, “Wealth went to vanish”. 

The red-granite oval edifice was once home to none other than Bernie L. Madoff Investment Securities. Hiding in plain sight while hoodwinking some of the world’s most sophisticated financiers, his decades long Ponzi scheme defrauded its investors out of a staggering $65 billion. The subject of a recent Netflix documentary, Madoff’s crimes are again part of the cultural conversation. For the thousands who lost their life savings, however, the wounds have never healed. 

Several studies, on both sides of the Atlantic, show that the wealthy are especially vulnerable to financial fraud. Experian and the United States Department of Justice jointly concluded that the affluent are 43% more likely to experience identity theft. A 2020 report on family offices revealed that 96% of those polled have experienced at least one cyber attack. And United Kingdom-based investment management company, Saltus, found those with assets of more than two million GBP are almost twice as likely to be defrauded as those with assets of under 500,000 GBP. In light of an understandable penchant for privacy among wealthy individuals and families alike, the true scope of these scams is, if anything, likely even more widespread than the data suggest.

The names may have changed from Madoff’s era, but bad actors continue to target the ultrawealthy. Newspapers reported that a corrupt wealth advisor swindled an Olympic gold medalist out of his entire $10 million retirement account. During the pandemic, an Illinois accountant was convicted of using forged authorizations, false account statements, and fraudulent loan documents to steal some $45 million from a prominent family. And in December 2022, a 74-year-old bookkeeper admitted to embezzling $29 million from a single family office (SFO) for whom she worked. 

That a seemingly squeaky clean septuagenarian has confessed to money laundering and is under FBI investigation provides redundant proof of the need for extreme vigilance. It also highlights the dangers ultra-high-net-worth (UHNW) individuals often unwittingly expose themselves to when employing a single individual as overseer of the family accounts.  

With her guilty plea still reverberating, we thought it would be timely to produce a primer on the importance of institutional-level internal controls to safeguard the assets of UHNW individuals and affluent families against unscrupulous behavior. Having a team of trusted experts on hand can help to substantially reduce risk and create peace of mind. 

Blind Spots to Beware: Red Flags That Increase the Risk of Fraud

My colleague Scott Bush, Geller’s Chief Client Officer, points out that in many instances families of significant wealth haven’t given due consideration to the scores of ways that fraud can happen. Consequently, they are forced to act after the fact, only taking action once an event has already occurred, which ends up costing the family significant funds. (In addition to any financial fallout, the betrayal of trust by a rogue employee can also inflict untold reputational damage and cause acute embarrassment for the family).

A toxic mix of factors often combines to create optimal conditions for financial fraud. Due to a sense of loyalty or noblesse oblige, families may place an outsized reliance on members of their inner circle, even as a staff member’s risk profile deteriorates dramatically. Ongoing monitoring of longtime employees might understandably atrophy over time. And the demands on the family’s attention are such that they simply might not have the bandwidth necessary to become fraud prevention experts and conduct continuous due diligence.  All these and other ingredients foster a ‘perfect storm’ where financial fraud is allowed to flourish. 

Building upon the work of earlier criminologists, accountancy professor Steve Albrecht is credited with popularizing the concept of the ‘Fraud Triangle’. This holds that three interlocking elements are necessary for fraud to take place. Namely: 1) Motive, 2) Opportunity, and 3) Rationalization. By removing opportunity, the one aspect that families can inherently control, risk is drastically reduced. 

There are several red flags to be aware of that raise the risk of financial fraud for UHNW individuals and affluent families. These include:

• Lax regulation and loose internal controls. An operating environment with few formalized procedures in place presents more opportunities for financial fraud.
• Lean staffing levels, which can give rise to situations where a single unscrupulous employee exerts undue influence over the family finances. 
• Minimal integration and oversight of crucial accounting and cash flow functions, with key business units operating as independent silos. 

Who Will Guard The Guards?: Apt Implementation of Financial Oversight and Due Diligence

“Quis custodiet ipsos custodes?” So goes the old Latin expression, which translates to “Who will guard the guards?” What was an insightful question in ancient Rome is one that wealthy families would do equally well to ask themselves in the Twenty-First Century. As their orbit expands, many families of growing wealth often underestimate the access that tangential third parties, tasked with handling highly sensitive financial information, can have.  

As such, conducting constant and exhaustive due diligence is an absolutely crucial aspect of proper fraud prevention. While the vast majority of those who serve wealthy families directly are not themselves disreputable, we know of examples where ancillary employees aren’t always as above reproach. 

Over time, it’s also not uncommon for staff who have worked with UHNW individuals for several years to develop a sense of entitlement and attempt to enrich themselves from the family fortune. In such instances, having rigorous oversight and vetting procedures in place can go a long way to reducing risk. Doing so takes more than mere blind faith, however. In the words of the Cold War maxim: ‘Trust, but verify’. 

These considerations are only expected to gain greater urgency given the generational wealth transfer now underway, with consulting firm Cerulli Associates projecting that an estimated $70 trillion will be bequeathed over the next 19 years. Such times of transition typically act as a catalyst and cause current contingencies to be reassessed. As this more tech-savvy demographic ascends, they are placing a premium on increased automation and ironclad controls by outsourcing to more of a financial concierge service model.

When it Comes to Controls, (Best) Practice Makes Perfect

As recent embezzlement cases demonstrate, it’s imperative that rigid controls are established to avoid a scenario that grants the fox jurisdiction over the henhouse. Under a multi-family office (MFO) structure, clients can benefit from being able to enlist a group of highly credentialed professionals, including auditing experts and certified fraud examiners. Such a structure, which we deploy at Geller, ensures an appropriate segregation of duties. 

These preventative mechanisms mean that no one single person has unchecked authority to move cash, record financial contracts in the general ledger, or otherwise approve transactions. Utilizing a separate preparer, reviewer, and approver guarantees a greater degree of safety and security. Additionally, clients often entrust us with Power of Attorney for the purpose of paying their bills quickly and efficiently. With this authority comes an additional layer of control that we employ, as a minimum of two senior executives are required to review any request to move money, sign checks, or initiate wire transfers. 

Besides prevention, any reputable personal CFO and white-glove financial concierge service also provides strict detection controls as a key component of best practices. Hence, in the unlikely event that an unauthorized transaction ever occurred, it would routinely be flagged as part of the month-end processes of bank account reconciliation and detailed general ledger review. This contrasts with some smaller family office structures, where a sole employee may have more opportunity to not merely move money, but also potentially cover their tracks in the accounting records. 

When outsourcing their financial and accounting services, many families of means will look to lessen the likelihood of key person risk by opting to instead work within a highly controlled environment. In such settings, redundancy is typically built in, and institutional memory such that the absence of any one individual won’t adversely impact security measures and overall client care.

The Importance of Robust Reporting Capabilities

“How did you go bankrupt?” “Two ways — gradually, then suddenly.” Ernest Hemmingway’s legendary line from the Roaring Twenties carries important lessons a century on. While fraud may sometimes appear to manifest almost overnight, in reality it is invariably accompanied by a steady drumbeat of warning signs. One way affluent families can preemptively guard against misconduct is by having robust reporting capabilities. 

In tandem with tight internal controls, comprehensive reporting allows MFOs to determine if any elements of their clients’ financial transactions are out of kilter, and act accordingly. Rather than paying invoices and processing paperwork in a rote and transactional manner, rigorous reporting provides for an extra layer of review, scrutiny, and fiduciary care. Performing ongoing comparisons and due diligence can catch any unexpected fluctuations or egregious increase in bills, and prompt additional investigation wherever warranted. 

Detailed reporting also has the added advantage of providing clients with a holistic view of their entire financials and performance, along with the ability to monitor developments over time and allow for any early warning signs that may exist to be proactively addressed. Such a bespoke approach goes beyond generating granular details and instead provides big picture insight and analysis into overall spending patterns and the like. These value-added elements can facilitate forward planning, aid decision making, and enhance overall peace of mind.

Staying a Step Ahead of Cyber Threats

In 1984, the same year Geller was founded, Apple’sMacintosh computer debuted, the CD-ROM launched, and Facebook founder Mark Zuckerberg was born. Suffice to say, over the subsequent 39 years we’ve worked with successive generations of clients to protect UHNW individuals and affluent families against a wide range of hitherto unimaginable tech threats. 

From ransomware to the dark web, cybercriminals now have access to a frighteningly large arsenal of techniques to target UHNW individuals and affluent families. Even so, approximately 

40% of family offices, and 38% of high-net-worth families, still don’t have a dedicated cybersecurity policy or plan in place. This despite the fact that, as cited earlier, the overwhelming majority have experienced a cyber attack. Specific areas of vulnerability include:

• Inadequate password management. Regrettably, the most common password worldwide in 2022 was ‘Password’, with ‘123456’ occupying second place. Such laxity presents particular problems in a Work-From-Home era with remote access on the rise. We continue to see gaps in the adoption of password management best practices among single family offices and high-net-worth individuals. 

• Online oversharing, often compounded by a generational divide. Being digital natives, the youngest offspring of founding families frequently underestimate the increased risk that comes with portability and accessing confidential information on open systems. In one infamous case, a billionaire computer company founder was forced to delete his teenage daughter’s Twitter account after she inadvertently compromised key security details on the platform. As the Silent Generation and their successors gradually give way to the social media generation, such threats are anticipated to increase.

• The sheer number of individuals working with, or for, wealthy individuals. Combined with a lack of policies in place to govern information access, this can create considerable challenges to gaining greater insight as to when a potential security breach has occurred.  

Having a team of in-house cyber security professionals who work in close collaboration with the family’s evolving needs is essential. Since security is only as strong as your weakest link, it’s also imperative to conduct a forensic third party risk assessment. And deploying secure document sharing sites, encrypted email platforms, and multi-layer approvals are all indispensable tools. Taken together, these and other control measures can help strike a balance between trust and transparency, enabling clients to stay connected but also protected.

A Tale as Old as Time

When asked why he robbed banks during the Great Depression, career criminal Willie Sutton reportedly replied, “Because that’s where the money is.” 

The methods may have evolved over the intervening nine decades, but unfortunately today’s UNHW individuals remain uniquely susceptible to fraud for much the same reason. 

Thankfully, by enlisting expert assistance and employing a series of practical countermeasures, there are ways to safeguard your legacy, sleep serenely at night and secure hard-earned assets for future generations.