Episode 148: Scam Alert! – Tom Wheelwright & Dr. Kelly Richmond Pope

Announcer:

This is the WealthAbility Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

So how do you avoid getting scammed? How do you avoid getting scammed in an investment? How do you avoid getting scammed in your business? How do you avoid fraud, whether intentional or unintentional?

Today we have an expert to talk to us, Kelly Richmond Pope who wrote the book, Fool Me Once. And we’re going to talk about, actually have a conversation about, what are some things we can do to avoid being scammed? Why do people scam us in the first place? Why are we so susceptible to being scammed? The challenge is is that we have FTX, we’ve got this day, we had Bernie Madoff before FTX. We’ve got all sorts of fraud going on. I see it almost every day, unfortunately. And Kelly is really a forensic accountant, an expert in this.

But Kelly, welcome to the show, WealthAbility Show, and thanks so much for being with us. And if you would, give us a little of your background.

Kelly Richmond Pope:

Sure. Thanks for having me, first of all. I’m excited to join. By way of background, I’m an accounting professor at DePaul University in Chicago, and I started studying white collar crime and fraud actually in my PhD program. At the time, I was interested in ethical decision-making of accounting students and where their decision-making went wrong, or how their ethical decisions compare to other professions.

So I started going into the area of fraud because I felt like if you ask anybody, “Raise your hand if you’re ethical,” the whole room raises their hand. But then when you start going into different scenarios, people can rationalize why it’s okay to cut corners or not follow the rules that are established. So I started telling myself, this area of fraud is actually a little more interesting to me because it’s the absence of ethics, and it’s how we as human beings justify what we want. And I became fascinated in that.

So I started going around the country and doing these on-camera interviews with white collar felons, whistleblowers, and victims of fraud, really as a way to learn, because I wanted to understand from the inside how things break down. So I did that for several years. And then turned all those interviews into my first documentary called Crossing the Line: Ordinary People Committing Extraordinary Crimes. So that circulated around higher education institutions around the world.

And then stumbled into this crazy fraud story that happened in Dixon, Illinois, about a city comptroller who embezzled $53.7 million over 20 years. And I turned that into a documentary called All the Queen’s Horses. And so if you’re looking for a great documentary, I suggest you check it out. It’s on Amazon Prime now.

And then I decided there’s one more project in me, and that led me to the book Fool Me Once: Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry.

So that’s a little bit of background. That’s my whole life in 90 seconds.

Tom Wheelwright:

I love it. I love it. Thanks so much for sharing that. And there’s a lot to unpack just in what you said there. I’d kind of like to start with, there would be no fraud if people didn’t allow themselves to be scammed. So what is it, let’s just start right there, why are we so susceptible to fraud? And it seems like it’s accelerated. Is it just a matter of greed? Is a matter of we’re not paying attention? What are some of the things that lead to us opening ourselves up to fraud?

Kelly Richmond Pope:

Sure. So not that I am doing any victim shaming, I want to preface what I’m going to say. But in your opening and you talked about Madoff and you talked about FTX, and even when you think about Elizabeth Holmes, there’s something that all of those investors had in common. And that was, we are attracted to this insane return that doesn’t make any sense. And we’re attracted to that.

And so when you think about that profile of being attracted to something that is clearly an outlier, you open yourself up to a lot of things when you’re willing to accept something that just seems odd.

And so take Bernie Madoff, his returns were outlandish in comparison to the market, and there were a few people that did win, the early ones. They did receive those significant returns, and you were attracted to that. So you almost have to turn the mirror on yourself and say, “What is it about me that attracts me to this outlandish thing? Because maybe I could just get a piece of it.”

You think about Elizabeth Holmes, just her profile. Her profile alone. For all intents and purposes, Elizabeth Holmes was a high school student. And not a known genius, but a high school student who created a technology that all you needed to do was a drop of blood from your finger to run tons and tons of test. If it were that easy, don’t you think one of the Nobel Prize winners would’ve figured that out by now? So just think about what is attracting us to these outlandish kinds of results.

And so I opened by saying, I don’t want to do any kind of victim blaming, but I do want to do some victim reflection. And what is it about us that makes us want to believe what doesn’t seem on the surface to make any sense?

Tom Wheelwright:

Yeah. So it seems to me like you’ve got a couple of different groups here. You’ve got the early adopters. And those people, and we can get into this later, but I think a lot of the fraudsters didn’t start out as fraudsters. They actually started out being legitimate opportunities and they were legitimately investing people’s money and they were getting good returns. And then they just had a big year, or something like that. And then people go, “Wow.” So the early adopters, they got in. I want to get in on that.

How much do you think this whole FOMO, fear of missing out, plays on us when we get into things we shouldn’t be getting into? And it could even be something like in 2006 it was real estate. And they weren’t scams. It was just we weren’t smart enough. People weren’t smart enough to actually do it. They didn’t have the education. It’s that too good to be true. What causes that fear of missing out mentality?

Kelly Richmond Pope:

I think that there’s this idea that, I want a piece of what they got. And so I do think we do have a fear of missing out, but we all want to win. And if you think about where we’ve gone in society, 50 years ago people’s wealth and their success was not on display as it is now. We didn’t have social media. We didn’t think that wealth could happen overnight. We believed that wealth came from, roll up your sleeves, hard work, and it takes time.

Now, fast-forward to where we are now, we believe wealth is instant. We believe that success can happen overnight. So I think it may be a little bit of fear of missing out, but this belief now that success is faster, that growth is quick, that returns are much higher. And so if you saw it for just one person or for one business, you think it could be good for you.

So I think that we’ve had just a mentality shift that I don’t know that it’s a good shift in the right direction, but this idea of things taking time, we just don’t see that as much I think as we used to.

I’m an accounting professor, and something that we’re noticing is a decline in the number of students that want to major in accounting that sit for the CPA exam. And some of that decline I believe is the length of time it takes to study, to prepare, to move up the ranks in an accounting firm, whether you’re the Big Four or regional or even smaller, it takes time.

And so now we’re in this, “I’m going to give you 60 seconds and if I don’t get what I need today or quickly, I’m not for it. I’m not going to stick with it.” So I think we’ve just had such a mentality shift that so many of us are willing to engage or try to engage to push that envelope, because what if I win and I don’t get caught? There is a chance, a high probability that could happen, so I’m willing to roll a die to see what happens.

Tom Wheelwright:

So instant gratification, basically.

Kelly Richmond Pope:

Instant.

Tom Wheelwright:

We’re looking for the magic pill, so we can [inaudible 00:09:46] the magic pill.

Kelly Richmond Pope:

Yeah.

Tom Wheelwright:

I see it all the time, because my profession’s in the tax world. So I see people want, “Tell me how to eliminate my taxes. Tell me how to reduce my taxes.” And I said, “I can show you how to do that. It will take you five years, but we can get there if you want to. You have to make some changes in your life, but we can get there. We can get there legally.” But people want the magic, okay, I want the instant… What can I do right now? Not what can I do over the next five years.

So let’s kind of shift now. Let’s shift to the perpetrators. So the perpetrators of the fraud. Now, you talk about the difference between the intentional fraudster and kind of almost the unintentional fraudster.

So let’s start with I think the easy one, which is the intentional fraudster. So they’re really out to get the money. They know they’re doing it, they know what they’re after. If you watch Ben Affleck in The Accountant, he knew what he was doing, right? So he was intentional. So how do you protect yourself against those people?

Kelly Richmond Pope:

So I think with the intentional perpetrators, because they know the system so well, you need two things. One, you need to make sure all of your internal controls are always working and checking on those. And you really need scenario-based training so that you can understand how people would actually respond in a situation. For example, and this is a completely non-financial accounting standards example, but say for instance someone gives you too much change back in the store. Does this person say something? Do they not? Does this person say, “Hey, that’s their mistake. They should have figured it out. They gave me an extra 20 instead of a 5. I’m taking it.” They tells you something about a person. It really does.

And so I think that when you can figure out nuances of people’s personalities, that gives you insight into how they would perform or respond in different areas. I don’t think enough of our training does that. A lot of our training is check the box training. Did you read the code of conduct? Check the box. And that’s not really getting to the psyche of people, and I think you need to understand that better. So that’s why we have to make sure we have sound internal controls to really protect people. Not the organization, but we need to protect ourselves from ourselves.

Tom Wheelwright:

Okay. So let’s go ahead and get into internal controls, because a lot of people don’t know what that means. A lot of investors have no idea what that means because they don’t have a business, they’re investors. And then you have business owners that have never had internal controls. I run into them every day. So let’s talk about what internal controls mean. And let’s start with a business setting, that’s one-

Kelly Richmond Pope:

So I used a more formal term, but let’s sort of break it down to just understanding, an internal control is something as simple as opening your mail. Say for instance you have an assistant or someone that’s a barrier between the mail and you, and that person knows that you never pay attention to any of the bills, you don’t read your bank statements, you read nothing, because you expect that one person to do everything and tell you the information. You then have made that person a very powerful person. And a control, something that you’re doing internally, is showing that person that you’re paying attention.

So internal controls don’t always have to be as sophisticated as I think we talk about them. You don’t always have to be a CPA or an auditor to really know how to protect your organization. An internal control could be when I hire someone or when they leave the company, I need to make sure that every piece of access they had to anything financial is cut off. A lot of us don’t do that. Those are simple internal controls that we often don’t think about because we think about them being something far more formal, far more expensive, than I think they actually are. So it’s just a control to protect your organization.

And I would argue that even the smallest of businesses has controls, they’re just not calling them that. They’re just not calling them internal controls. If you are a small business and you don’t accept a personal check, that’s an internal control, because you feel that someone could write a bad check. Or you might decide that when I take on a new client, I need to do three reference checks on past clients or past customers, that’s an internal control.

So I think these organizations, small to medium, have them, they’re just not calling them that. But it’s things that we do to protect our organizations and protect our people inside of our organizations.

Tom Wheelwright:

So we need to do things, for example, separation of duties would be the obvious one, right? We’re opening the mail instead of our assistant opening the mail, so we’ve got some check on that just to check and balance. So that’s pretty simple stuff.

So a lot of the fraud is being committed by computer, right now. It’s emails and stuff like that. Can you talk about how to prevent being susceptible to that kind of fraud?

Kelly Richmond Pope:

Sure. How to not be susceptible to almost any kind of fraud is slowing down. Busyness I think is the one thing that helps any kind of fraud happen. Because, we talked about the mail example, the reason why you’re not checking the mail is because running in 15 different directions. Slow down. Take five things off the list so you can pay attention to how your business is running.

So I think that when we think about email, when we think about the way that cyber crimes happen and you get this strange email or strange voicemail, look at it. Slow down. Look at the email. Read the tone. If it’s coming from a person that is always mean and they send this most friendliest email ever, the hairs on the back of your neck should stand up because you know this person. So there’s typically red flags that we are not paying attention to, and they’re often non-technical, they’re often very emotional. And we just suppress that emotion, and we shouldn’t.

So to be an accountant and to be a CPA and to not hear me say, “You need to run a metric. You need to do a financial analysis.” I’m not going to take it to that level, because a lot of it is behavioral things that we are just suppressing and those red flags are staring us right in the face.

When I get a strange emails from a family member that might be stranded somewhere and they need some money, First of all, do I even have this family member? Do I know of some… I slow down and I start asking myself, there are things in here that don’t make sense. And so I think just slowing down and looking at the facts helps a lot.

There was Barbara Corcoran from Shark Tank. I remember reading an article in CNBC a couple of years back where she received an email where she was supposed to wire some money somewhere. Her assistant received the email, and it was Barbara, but it wasn’t Barbara, asking a wire to be made. And they made it. And the email had a wrong address, but it was one thing off that was suspicious if you looked at it closely. The tone of the email really didn’t match the way Barbara sounded, but the assistant didn’t feel as though she could push back and ask. She didn’t want to appear that she didn’t know.

So fear of missing out, we may need to come up with a new one, fear of looking stupid. What would that be? What would that acronym be? Because when you think about a point that you just made about people starting out in a legitimate business, a lot of us, especially in the investment community, you’re taking in people’s money and you’re helping it grow. And you might have five great years and you’ve made your client’s money grow, and then there’s a market downturn. And how many of us feel comfortable with admitting failure? So this idea of, I lost something, and owning that and saying that is very, very hard for many of us.

If you’re not an athlete, because athletes I think are a programed to understand loss, wins and losses. Outside of being an athlete, if you’re just a regular person walking down the street, failure doesn’t feel good, and it’s not something that we talk about.

And so in the investment community, and a lot of the victims that I’ve interviewed over the years, have talked about their investment professional not telling them when things were bad. And that’s a tough conversation to have with someone.

Tom Wheelwright:

Let’s say you’re in an organization, you’re in a business, it could be a nonprofit organization, it doesn’t matter because fraud happens everywhere, how do you create that culture where you allow people to make mistakes and to admit those mistakes? I mean, to me, that’s a cultural issue.

Hey, if you like financial education the way I do, you’re going to love Buck Joffrey’s podcast. Buck’s a friend of mine, he’s a client of mine, he’s a former board certified surgeon, and he’s turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That’s who he’s geared towards. So if you’re a high paid professional, you’re going, “Look, I’d like to do something different with my money than what I’m doing. I’d like to get financially educated. I’d like to take control of my money and my life and my taxes,” I would love to recommend Buck Joffrey’s podcast, which is called Wealth Formula Podcast with Buck Joffrey.

I hope you join Buck on this adventure of a lifetime.

Kelly Richmond Pope:

It is a cultural issue, Tom, and we just are not a society where we really believe that. We only want the wins, we only celebrate the highlights. And especially in the age of social media, we only celebrate the wins. That’s what we celebrate. We do not celebrate failure. So I do not know how you create that culture, because of just how we think. Maybe you start a newsletter like the Growth Newsletter, and you talk about people’s low points, and then there’s another piece of that where you show where they’ve grown from that. We’re just not a society where we do that.

Tom Wheelwright:

So here’s an example. So a typical saying is, failure is not an option. And yet you have Elon Musk, who’s probably the best failure in the world, who says, his quote is, “Failure is the only option.” We have to fail. We have to fail because if we don’t fail, we can’t progress. And so he’s actually established that, that failure is good. Failure is a good thing somehow.

Kelly Richmond Pope:

But think about this. Think about the execution of that. We have performance reviews, so we are evaluating people every six months, every 12 months. And if 80% of that was about all the things that you failed on, you wouldn’t have a job much longer. So I hear you, but how do we operationalize that? I hear you, sometimes there’s really great soundbites out in the universe, but then how do we actually do that? How does that apply?

Tom Wheelwright:

Well, let me give you an example. So we have a rule in our business, and our business is, don’t share a problem without a solution. I’m okay with problems. You share your problems all day long, but don’t give me your problem. I don’t want your problem. What I want is, “Okay, here’s the problem.” I want you to admit, “Look, there’s a problem.” But at the same time, “Okay, so here’s how I would solve it.”

So I’m writing a new book, so you’ll relate to this just launching your new book. I turned it over of course to staff to say, “Okay, go through this and do these charts and do this and do this.” And they come back and they say, “Well, you’re inconsistent here.” And they stopped. And I’m going, “Okay, so if I’m inconsistent there, what would you do? Okay, so what’s next?” And to me that’s part of that culture is, it’s okay to make a mistake, it’s just not okay to leave the mistake a mistake.

It’s like Buckminster Fuller, the great genius of the 20th century said, “A mistake is not at a sin until it’s not admitted.” Once it’s admitted, it’s fine. You have to admit that mistake.

I do think that’s an issue we have, and I think we create that culture within our organization. And we might even create that culture within ourselves, or within our clients, and so forth.

So let’s shift a little bit to what I call the unintentional or the evolutional fraudster. Because I think that’s the worst one, just because it’s not obvious, and so how do you see when something has become fraudulent?

Let me tell you a story. I know you’ve got all these stories in your book. So I had a client a number of years ago, and they had a bookkeeper. I always tell people, the two people are most likely to steal from you or your partner and your bookkeeper. And the bookkeeper had been their friend for 25 years, never had an issue. But as we know, when it comes to fraud, it’s motive and opportunity. You got to have both motive and opportunity. And you can never control motive.

Well, what happened was is this bookkeeper, her husband went ill. And so what she did was she goes, “I don’t want to ask for money.” So she was too ashamed to ask for money. But what she noticed is she’d made some mistakes in the past and they’d never been caught. And so she said, “You know what? These people, they have a lot of money. I’m just going to borrow it.” And I don’t know if you’ve seen this, but I see this a lot where she started by borrowing and she paid it back.

And then she noticed, well, nothing happens. Because I want to get to this, because you mentioned this early on. We start justifying and she started justifying. She goes, “Well, they didn’t even miss it. And they don’t really pay me very much, and I may have 25 years, I’m due.” And so she started keeping it.

Well, they didn’t find it until it was a half a million dollars. And at that point, now her life’s destroyed because, I mean, these were some of her best friends that she was doing bookkeeping for. They don’t trust her.

And so how do you watch that? How do you deal with that, what I call, unintentional fraudster?

Kelly Richmond Pope:

Well, first I want to give you some origin of why I even single out these other two categories, which is accidental perpetrators and righteous perpetrators. The reason for creating these categories is because so many of us do not identify as intentional perpetrators. We don’t see ourselves that way. We don’t see ourselves anything like Bernard Madoff or Ken Lay from Enron. We don’t see ourselves like that. But we can see ourselves following the boss’s orders. We can see ourselves trying to use our power and privilege within an organization to help someone outside of our organization. And so that’s why I first wanted to open this perpetrator category up, to where you could actually see yourself there.

So how we prevent it is I think being mindful of the environments that we create, that we work in. So if you have no concern of how the money is made or who your clients are or who your customers are, all you care about is the money, then you’ve then created an environment that breeds a certain type of person. And so you need to be mindful of that.

And so you’ve mentioned it before, but I think we don’t spend enough time really understanding our culture, and understanding how our culture can dominate and hurt so many aspects of all the good that we may have in our organization. So culture is king. Some people say cash is king, culture is actually king.

Tom Wheelwright:

Yeah, I totally agree. And then you have people that, they start out… Bernie Madoff may have started out legitimate. I’m guessing he probably did. And then he saw, wow, people are trusting me.

And I actually had a friend who is currently serving time in federal prison for a Ponzi scheme. And what happened was is he was taking investors’ money, he was doing legitimate work. But like you said, it was the fear of looking stupid. I like that.

Kelly Richmond Pope:

Fear of looking stupid.

Tom Wheelwright:

It almost sounds like fools, right? I kind of like that, FOLS. Fear of looking stupid.

And that’s what happened. He didn’t want to admit his mistake, and so what he did was he goes, “Well, I’ve got new money coming in. I’ll just pay these old people.” That’s the definition of a Ponzi scheme, new money paying the old people. And so that’s what he did until it stopped working because eventually that runs out. Ran out for Bernie Madoff, it runs out for everybody eventually.

Kelly Richmond Pope:

You know what’s interesting, as you were talking though, so many of us, we live our lives almost Ponzi like.

Tom Wheelwright:

Yeah. We do.

Kelly Richmond Pope:

Think about how we live with credit cards. I mean, we always are living to pay back. So we all sort of live this way.

Tom Wheelwright:

That’s a good point. We should start calling credit cards Ponzi schemes.

Kelly Richmond Pope:

They are.

Tom Wheelwright:

They’re just personal Ponzi schemes.

Kelly Richmond Pope:

They’re personal Ponzi schemes, Tom, let me tell you.

Tom Wheelwright:

I think that is a perfect way to put it.

Kelly Richmond Pope:

There’s a lot of ideas coming in this podcast today. First we have a new acronym called FOLS, fear of looking stupid. That’s the first one. And personal Ponzi schemes. Think about it. Think about it. That’s what a credit card allows us to do.

Tom Wheelwright:

Yeah, it makes it easy.

Kelly Richmond Pope:

It makes it easy.

Tom Wheelwright:

As you said, we don’t have the internal controls. So we don’t have the internal controls on our finances, right?

Kelly Richmond Pope:

That’s right.

Tom Wheelwright:

And then we’ve got this fear of looking stupid, so we’ve got to keep up with our neighbors. They’re so successful, we have to be like them. So not only do I fear of looking stupid, fear of missing out on the social side of it. So it’s-

Kelly Richmond Pope:

Yeah. Think about some of the tough conversations professionally that we often don’t have. You think about, doctors and lawyers have tough conversations with people all the time. Especially doctors. They have tough conversations, whether they’re delivering bad news. But as a financial professional, how frequently do we want to sit down or have to sit down and say, “You know what? I’ve lost you $50,000. I’ve lost you a million dollars this year. And I’m so sorry. I didn’t mean to. I was doing my best, but I’ve lost you money.” Do we really want to have that conversation? Are we really trained to have that conversation? So we want to fix it.

And something that one of my righteous perpetrators in my book, as I’ve learned through her, is smart people are hired to fix problems. Like you said, what’s the solution? I’m not going to come to you with a problem. I’m going to come to you with a problem and the solution. And so that’s what I’m going to come to to my client. I’m not going to tell you I failed at something. I’m going to give you a solve. And so that solve could be fraudulent, but it could be a solve. It could be a Ponzi scheme. It could be, “I can make your money back by taking this investor’s money and giving you back and fixing you. Now I’ve created this other problem over here, but I’m going to fix that later.”

So it’s this vicious cycle that a highly ethical person can find themselves in. And that’s why I wanted to create those two other categories so people could see themselves there.

Tom Wheelwright:

Interesting. So I want to just touch on one other type of perpetrator here, and this is actually somebody who doesn’t know that they’re perpetrating a fraud, because they’re not perpetrating the fraud, their partner is. And let me give you an example. So I’ve got two good examples.

One, I had good friends, and they were promoting, it’s a real estate, but everything they wanted to do was right. They were educating their investors, they were doing everything right. They had a partner who was actually fixing up the homes for the investments. Well, the partner wasn’t doing it. And they didn’t know they weren’t doing it, and they kept asking and they didn’t get that information. Sure enough, next thing they know literally the FBI is knocking on their door, and they’ve got all these complaints. “I put all this money into this home and it’s not being done. I’m not getting the answers. What’s going on?” And so they’re actually caught up. They literally were promoting somebody else who was committing the fraud. So that’s one example.

I have a current one, actually right now, that I’m aware of. And I actually literally warn clients away from this, and I want to talk about how to warn people away from things. But this was a… It had really too good to be true tax benefits. I read the tax opinion, which I disagreed with. And it was in the energy business. And the returns just seemed, oh, they were so good. And actually people who’d gotten these returns convinced other people to get in, fear of missing out. And it turned out that the person who was doing all the promotion, they didn’t know. They literally didn’t know that their partner who was actually supposed to be doing the work, it was just a complete Ponzi scheme for them. They were a complete fraudster. They were an intentional fraudster, but here you have an unintentional, who’s actually trying to do something good, that’s promoting an intentional fraudster.

Kelly Richmond Pope:

So my question to you, for both stories, how do you not know what your partner’s doing?

Tom Wheelwright:

There you go. That’s the question.

Kelly Richmond Pope:

How do you not know? Because it’s your partner. So again, are you too busy? What questions are you asking? What information are you asking? What are you reviewing? How do you not know what your partner’s doing? And if you don’t know, why are they your partner? Just do it on your own. If you’re that in the dark… That was what I was thinking as you were sharing the story. I’m like, how do you not know what your partner’s doing?

Tom Wheelwright:

Well, on top of that, here’s actually what the red flag was to me, when a client brought this to me and said, “What do you think?” And I said, “So find out about this, this, and this.” Due diligence. And they said, “Well, they won’t tell us. It’s a trade secret.” I said, Run away. If they say it’s a trade secret, they’re not going to tell their investors how they’re doing it. Run as fast as you can.” And they did. Fortunately they did, but somebody else didn’t.

Kelly Richmond Pope:

Good for them.

Tom Wheelwright:

I mean, lots of other people put… I mean, I know somebody put a million dollars into this. I mean, it’s gone.

Kelly Richmond Pope:

Think about this too, Tom. We can take this even bigger. Going back to Elizabeth Holmes, how in the world did she sign a deal with Walgreens? Walgreens.

Tom Wheelwright:

Walgreens.

Kelly Richmond Pope:

How did the Walgreens executive, legal counsel, compliance counsel, how did all of them-

Tom Wheelwright:

They’re smart people.

Kelly Richmond Pope:

Smart people that you would think do all of their due diligence, and they sign off and let this fake technology be in stores for actual customers to use, and it doesn’t work. How does that happen?

Tom Wheelwright:

So what do you think? How does that happen?

Kelly Richmond Pope:

I think that the way it happens is, there is this halo executive, a halo startup founder, that we have instilled so much power in them that whatever they say goes, and we don’t want to push back because they have so much buy-in from so many other people that when you do push back, you then take the heat and you don’t want to do that. And that’s who Elizabeth Holmes became. She befriended the right people, so then she had this sort of armor around her that made her untouchable.

Tom Wheelwright:

We have a similar issue with Sam Bankman-Fried, right?

Kelly Richmond Pope:

Absolutely. If you get in with the right people and get the right endorsers, you can do whatever you want. And that’s a problem. It’s sort of how in our society now, we just uplift celebrities in a way that really once you get a certain buy-in, you’re golden. And so the internal controls go out the door. We don’t care anymore because you have the right endorsements.

And I think that that’s what happened with Holmes. That’s what happened with Bankman-Fried. The right people, enough of the right people endorsed those individuals, where we were just like, “Well, they did it. They said it was okay. I don’t need to do any checking.” And that’s the problem.

Tom Wheelwright:

So I’ve heard two just brilliant things here. First of all, slow down. Slow down.

Kelly Richmond Pope:

Slow down.

Tom Wheelwright:

Slow down. Pay attention to it. Take your time with it.

Second of all, outlier returns. It’s either an outlier… It’s like, “Okay, I can lose 50 pounds in three months if I take this drug.” I’m just going, “Okay. Yeah, all right. So should we maybe get five years of testing and approvals and all that kind of stuff before we even think about putting that in our bodies?” But we’re looking for that… It’s the magic pill. It’s the diet pill, right?

Kelly Richmond Pope:

We’re looking for the quickest way, and that’s where we are.

Tom Wheelwright:

Okay. So if it’s an outlier return… Which they’re out there. I mean, let’s face it, they’re out there. I mean, if you invest-

Kelly Richmond Pope:

But they’re far and few between. They’re far and few between.

Tom Wheelwright:

They are. They’re very rare. They’re very rare. But if you invest in Tesla when it was $400 a share, it is now worth several thousands of dollars a share for that [inaudible 00:38:00]. And that was an outlier.

Kelly Richmond Pope:

And that’s if you had the insight. If you had that early insight to even believe that what he was talking about would even be where it is today. That takes insight. And a lot of us just were too risk averse to do that.

Tom Wheelwright:

Right. Okay, so that’s the interesting thing. So how do you go, we’re too risk averse, and yet we take mammoth risks. Is that the risk reward that we go, “Well, the reward is so big that I’m willing to take that risk?”

Kelly Richmond Pope:

Yeah. I do think that if the reward is big enough, we will take the risk. A lot of times I think the reward is not large enough, so we are able to stay risk averse. But my goodness, if the reward is big enough.

You think about all the fraud that happened during the pandemic. What was most interesting to me about the fraud during the pandemic were the new players. It was the business owners, the doctors, the nurses. The people that you would never think would ever engage.

Tom Wheelwright:

And it’s still going on. I see it every day in the Employee Retention Credit. This is going to be the biggest fraud in the history of the federal government, is the Employee Retention Credit. And it’s on television. So here’s my thought, if it made it to television, you’ve got to be really, really careful.

Kelly Richmond Pope:

Sure. You’re right. You’re right. But the new players, the people that were willing to say, “The likelihood of me getting caught is so slim. The controls are so lax. I know I only have three employees, but maybe just maybe I could say I have 30, because the more employees I say I have, the more money I’m going to get. And so I’m just going to try and see what happens.” And you heard that there are a couple of people that did it and they were successful. I’m willing to try it too. So I think if the reward is high enough, we become less risk averse and then just risk crazy. So I think there’s a spectrum that we just jumped to the other end on.

Tom Wheelwright:

You make a good point on fear of getting caught, because of course I see this every day in the tax world. So I mean, if you have a contractor come to your house and they say, “It’s $120 if you give me a credit card or a check and it’s a hundred dollars if you give me cash.” Okay, well they are committing tax fraud. That’s tax fraud. You can go to prison for that. They’re going, “My risk of getting caught is so low.” So the risk of getting caught versus the risk of the reward, I mean, that’s inversely proportionate, right?

Kelly Richmond Pope:

But this is what’s interesting, Tom, about the example that you gave. Most people, I would say a hundred percent of the population would not know that’s tax fraud. They would not think that they just committed tax fraud by saying, A or B. “If you give me A, it’s this, but if you give me B, I’m going to lower it and make it this.” Most people won’t think that that’s tax fraud. They wouldn’t think that.

Tom Wheelwright:

Even though they’re not reporting it.

Now, here’s the other one I get. So, “I don’t have to claim the income if it’s under $600.” And I’m going, it’s not how it works. They don’t have to report it to you. They’re don’t have to report you if it’s under $600, but you still have to claim it. It’s taxable to you. And yet I hear this from people that, you’re a smart person, how are you thinking that this is okay?

Kelly Richmond Pope:

And that’s a good one because I think when the situation doesn’t mirror itself, that’s when I think the confusion comes. So if they don’t have to report it, but you still have to claim it, then you have an imbalance there. So I think that that’s where the confusion comes. If they don’t have to report it, then I don’t have to report it. That’s sort of how we think. But it’s a seesaw, and we know what happens with a seesaw. If one person jumps off, the other… It’s a seesaw, and I think that that’s where the confusion comes in.

Tom Wheelwright:

Interesting. Interesting. All right, so just two or three things other than what we’ve talked about. Any other advice for investors and business owners when it comes to avoiding or catching fraud before it gets too far?

Kelly Richmond Pope:

My advice would be, one, to make sure you have some type of established policy. And we talked about the buzzword of internal controls, but just make sure you have a process in place. No process breeds fraud, and everybody sees it. Your potential investors see it. The organized crime unit see it. Everyone sees it when you don’t have a process. So just know, put a process in place. It doesn’t have to be complex, but it needs to be something. There are a lot of advisors, retired partners from accounting firms. There’s lots of people that can help you learn a process or understand a process. So that would be my first advice, is put a process in place.

And then test your process. Ask your organization, “Hey, I’m starting this new process. Just want to know, if you were trying to defraud this organization, how could you? What would you do? It’s a safe space. This is a no judgment zone. But I just want to creatively think about the loopholes that are in our organization. And you are on the ground, you see it. What would you do?” And then you’re going to find all of the.openings, all of your exposures that you need to plug up. So test your system.

So first, put a process in place, but then test it. And so hack your own system. Ask people, “If you were trying to take money out of this, what would you do?” Is it set up a fake vendor? There are things that people will tell you, if they feel safe with you, they will tell you.

And so the last thing I would say is, truly understand your culture, because like we said earlier, culture is king. And people aren’t going to tell you anything if they don’t trust you. If they think the culture is weak, they will disconnect, and the last thing you want is your star employee to disconnect.

Tom Wheelwright:

I love it. I love it. So the book is Fool Me Once. It’s great. We’ll just leave it at that. Fool Me Once, you can find it… So Kelly Richmond Pope is the author, and has joined us today. Thank you so much, Kelly. Besides the book, where could they find more out about your work and what you’re doing?

Kelly Richmond Pope:

Sure. So I talk a lot on social, so on LinkedIn. So connect on LinkedIn. I’d love to connect with you. I post a lot there. My website is kellyrichmondpope.com. And on that website, there’s a game. So if you go to the website, go to game, there’s a game you can play that’ll tell you what type of perpetrator or whistleblower would you ever be, and it relates back to the book.

Tom Wheelwright:

I like that.

Kelly Richmond Pope:

And yeah, check out the documentary, All the Queen’s horses, and you’ll see… I’m in it a little bit. I’m one of the commentators. But mainly on social. So LinkedIn. I love LinkedIn and the content that I learn on LinkedIn and the connections that we make there. So that’s where I am. So find me there.

Tom Wheelwright:

Awesome. Thank you. And thanks everybody for listening. Remember any time that you give somebody your money or somebody has access to your money, you have potential of losing that money either unintentionally or intentionally through fraud. And it’s not always the evil perpetrator. It is a lot of times, as Kelly mentions in her book, it’s people that are either righteous perpetrators, you call them righteous perpetrators, and what was the other one you call, unintentional perpetrators?

Kelly Richmond Pope:

So intentional perpetrators, accidental perpetrators, and righteous perpetrators.

Tom Wheelwright:

There you go. There you go. So just remember. And when you do that, when you’re really paying attention, and just like we say at WealthAbility, what happens is, you want to make more money, but most of all you don’t want to lose money. As Warren Buffet says, “The key to investing is don’t lose money.” And preventing yourself from getting involved in fraudulent schemes and Ponzi schemes or in having unintentional or intentional, accidental or intentional fraudsters at your office, that’s how we always make more money. And the reality is that when we understand how to make money, it turns out we also pay less tax.

We’ll see everyone next time.

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