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What is Control Fraud?

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  • Written By: Donn Saylor
  • Edited By: Lauren Fritsky
  • Images By: Lisa F. Young, Africa Studio, Innovated Captures, Igiss
  • Last Modified Date: 31 October 2016
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Control fraud is a type white-collar crime in which a high-level employee or employees of a business utilize the businesses for their own personal monetary gain. Ponzi schemes, the Enron scandal, and the savings and loan crisis of the 1980s and 1990s are the most obvious examples of control fraud. The theory behind this form of corporate crime marries criminology, economics, finance and several other disciplines.

The term "control fraud" was created by William K. Black, a lawyer, writer, and former bank regulator. The term may apply to the fraudulent act itself or to the person or people who have committed the fraudulent act. Black states that "individual control frauds cause greater losses than all other forms of property crime combined. They are financial super-predators."

The founding idea behind control fraud is that the chief executive officer (CEO) of a business is in a unique and advantageous position. This position permits the CEO to handle all of the checks and balances within the company, giving him or her free rein to remove them at will. Through carefully constructed hiring practices, in which the CEO hires accomplices to further safeguard the illegality of the money handling, the CEO is able to commit accounting fraud by falsifying documents and skimming money off the top.

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Once the records are falsified, it appears the business is making astronomical profits, which results in the rising of stock. While the public is investing its money in the company's stocks, however, those committing control fraud will cash in their own stock. This type of fraud takes money directly from shareholders, creditors, and consumers.

A Ponzi scheme is a type of control fraud in which a company pays return monies to individual investors, when, in reality, the money is not drawn from any existing profit but from other members or from the company itself. The Enron Scandal was another high-profile control fraud case that saw abnormal accounting procedures many considered fraudulent; this led to one of the largest bankruptcy cases in history. During the savings and loan crisis of the 1980s and 1990s, control fraud led to the failure of more than 700 banks in the United States alone.

Control fraud can also be committed by a government. A country's leader or leaders embezzle state or local funds and use them for the personal financial gain of government officials, their allies, and other members of the ruling class. This manner of control fraud turns the country into what is called a kleptocracy.

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