Protecting Yourself and Your Loved Ones From Financial Fraud

Kelly Richmond Pope is the Dr. Barry Jay Epstein endowed professor of forensic accounting at DePaul University and the author of the book Fool Me Once: Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry.

Pope joined Motley Fool producer Ricky Mulvey to discuss:

• How to talk to aging relatives about fraud.
• What your "gut feeling" can tell you about potential scams.
• What generative AI means for the future of fraud.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 26, 2023.

Kelly Richmond Pope: I'm sure that there were layers above her that were also responsible. That tone at the top is so important, and so I would like to see other people one, two, or three jobs ahead of her that are also charged, because I don't believe she was the mastermind, and I don't believe that we have found the mastermind behind the Wells Fargo scandal.

Chris Hill: I'm Chris Hill, and that's Kelly Richmond Pope, a professor of forensic accounting at DePaul University. She's also author of the brand-new book Fool Me Once: Scam, Stories, and Secrets from the Trillion-Dollar Fraud Industry. Ricky Mulvey caught up with Pope to talk about takeaways from the Wells Fargo account scandal, how to talk to older people in your family about potential scams, AI's role in the future of fraud, and what happens when college students try to cheat a forensic accounting professor.

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Ricky Mulvey: What do you say? I'm sure you interact with folks who say that "I'm not going to get caught in a scam; that's for people who aren't as smart as me."

Kelly Richmond Pope: Ironically, I don't hear that a ton because I think so many people realize now that it can happen to them, that they are, I think, more fearful and more likely to want to know how to protect themselves than to think, "I can outsmart somebody who is spending 24 hours a day trying to think about how to take money from me or how to impersonate me." There's somebody that's working to defraud us all the time. I don't meet a lot of people who think that, who say that. I hope there are not a lot of listeners who think that.

Ricky Mulvey: In your book, you mentioned that the AARP estimates that people over the age of 65 lose about $5 billion a year to fraud. A lot of that goes unreported because when someone is victimized by a fraud, they feel ashamed. They're embarrassed, they don't want to talk to anyone. What's your advice to someone who has an aging parent or grandparent, and they want to have the talk with them about how to avoid frauds and scams?

Kelly Richmond Pope: My advice is really to set up a monthly family business meeting where you are reviewing your bank statements, and that's something that we don't do a lot anymore especially as everything has become electronic, but the bank -- you can request that statement. You can download the PDF. Sit down with your parent, and review that monthly to just see what are the transactions. Not to say that someone has hacked into their account, but you want to pay attention to what your parent or loved one is paying into. Because sometimes, they could've gotten into a scam, and they are giving $5,000, $10,000 a month to something.

So you can notice that behavior because there's no one else that's going to notice those anomalies if it's not you. Spend the time to review that bank statement with them is my first piece of advice. Secondly, just making sure you have an open line of communication, because a lot of times as our parents get older, they do become defensive and they can become embarrassed by sharing that financial information. Hopefully, if you've established a culture of talking about money matters in your household, by the time your parent gets to the age that they need some assistance, those conversations are much easier.

Ricky Mulvey: Unfortunately, many of the conversations happen after the fact. One of the common scams is that a grandparent gets a text: "Hey, this is your grandchild. I'm in a lot of trouble, and I need you to wire me $3,000 to $10,000," let's say. After that happens, the grandparent can be defensive, ashamed, embarrassed. What about the post-fraud discussion? How do you open the door to have those conversations in an honest and open way?

Kelly Richmond Pope: When that situation happens, coming to the table with maybe your own personal fraud story or the fact that you could be vulnerable, too. I think the embarrassing part is, sometimes when we are "reprimanding" something, we make it seem as though we would never fall for that, but I think if we can empathize a little bit better to show our loved one how it could also happen to me, something almost similar did, I think it helps to have that conversation and put those controls in place post-fraud so that it doesn't happen again.

And then just saying, "If something ever comes to you that just seems odd -- stop, pause, and call me, because a long-lost grandchild, this shouldn't be the first time that you've heard of it." Do some fact-checking. Ask two people in your family or in your community: Does this make sense and how can I follow up? I think that failing to ask for help is the first mistake that the elderly can make.

Ricky Mulvey: One of the ways that many get caught in frauds and scams that you mention in your book is that we don't listen to our gut. What's the evidence that our gut is good at detecting frauds and scams?

Kelly Richmond Pope: Well, there's a lot of neuroscience research that talks about the gut being your second brain. If you think about it, we can all go back to a situation where we say it's our intuition or "something told me not to do this" and I didn't listen to it. So our gut is giving us cues -- often nonverbal cues -- but it's cues that are telling us danger, danger, danger. So when that heart is elevated, when you start sweating, when your thoughts are a little foggy, when you feel uncomfortable, you need to pay attention to all of those things, because your body is telling you something.

A lot of the fraud interviews that I've done -- whether it's been whistle-blowers, whether it's been victims, whether it's been perpetrators -- they all talk about this second brain, this seventh sense that's telling them I shouldn't have done it or I should whistle-blow sooner, or something told me not to pick up the phone and write that check. We all have it. We just tend to suppress it for whatever reason. It could be culturally, it could be age, it could be gender reasons -- who knows why we suppress that voice. But there's a lot of neuroscience research that talks about we do it often, and we shouldn't.

Ricky Mulvey: Sometimes that voice is awfully quiet. You highlight Bill Bailey, who is a financial advisor who was running a Ponzi scheme with client money. From the outside, it's easy to say, "Oh, well, couldn't you see the statements and know that this guy was running a scam or a fraud?" But in this case, why is it so difficult to tell that a financial advisor is actually running a fraud with your money?

Kelly Richmond Pope: The Bailey case was a tough one for me. I flew out to Asheville, North Carolina, to meet Mrs. West. When I met her she must have been late 70s, early 80s at the time. And when I tell you she did everything right -- she did all of her due diligence that she could possibly do. She checked out this financial advisor and the only red flag was the fact that the statements were on paper that seemed like a wedding invitation. That was it. So she thought that was odd, but didn't feel that she had the financial savviness to really question: Why does this statement seem very different than any other financial document that I've ever received? That was that gut feeling that something was wrong, but she suppressed it.

Because you sometimes feel like when you hire an expert, they know more than you, and so you give all of your power to that person. That's exactly what the West family did. That was a tough case because there was so little that they could have done and that second voice, that second brain, that gut feeling told her that something doesn't seem right, but it's not that big of a deal. I'm just going to let it go. I normally don't receive financial information on anything that looks like heavy card stock like this, but maybe he does his business a little bit different. She assumed the good in him, and you see what happened. You read the story in the book.

That was a tough case for me because, with that one, I even did some expert witness testimony in that case, trying to help the victims. But in the end, they lost. And there was not much they could do, but that one little thing, that one little red flag that's waving -- and maybe it's just waving really softly -- you've got to pay attention to it. Had Mrs. West done that, if she'd started asking just a few more questions, it would have started unraveling that Bailey was running this massive Ponzi scheme. Sometimes those red flags can be small and minor, but we still got to pay attention to them.

Ricky Mulvey: What are the questions that Ms. West should have been asking?

Kelly Richmond Pope: Well, when she received that first statement, I think she should have gone to Mr. Bailey and said, "This seems odd. I don't understand why this looks different than other financial matters that I've been involved in, this isn't my first rodeo." So she had been running her farm, she had been in financial transactions in the past. She could have approached him, or she could have asked someone else in the financial investment community, "Hey, take a look at this. I know, I'm not your client, but I could really use your help." She could have gone to AARP and put them on alert. She could have asked some people outside of the circle, but I think that she could have just asked Mr. Bailey a question first.

That might have made him a little nervous. He might have then said, "OK, she's going to start asking questions." Or she could have said, "Mr. Bailey, I'm a little concerned, so I'm going to bring in my son or daughter. I'm going to have another financial investment professional look at this," or "I had another financial professional look at this. I want to ask you why does this seem so different? Can you explain this to me?" And I think that initial question could have put him on his heels.

Ricky Mulvey: I think the common red flags of a financial advisor fraud scam [are] writing checks directly to the advisor and not a custodian, and then also advisors not explaining explicitly how they are paid to give investment advice. Were any of those present or were those unchecked?

Kelly Richmond Pope: Those weren't present in her case.

Ricky Mulvey: Wow.

Kelly Richmond Pope: That's why this one was a hard one. That was the only red flag that came out when I was doing the research for the case, when I was preparing for the expert witness testimony. None of those things that you just said were present in this case, which is, again, why it was so scary, because a lot of times ... there's another story in the book. It talks about a gentleman named Tom Hughes. And Tom Hughes was almost a stand-in CFO for entrepreneurs and bands -- people in the music industry. What Tom would do is he would tell his clients, "Hey, don't worry about writing the check to the IRS. Just write it to me and I'll handle it for you. Don't worry about all these things, just give me the money and I will distribute it as needed." And what did he do? He stole the money. You do see that happen. But in the Bailey case, the West case, that didn't happen, which is scary.

Ricky Mulvey: With the Tom Hughes case, that also seemed to be one where the fraud started at an extremely small scale -- a couple of hundred dollars in an account here, a couple of thousand dollars, and then he ends up taking advantage of folks who are far too busy to pay attention to their finances.

Kelly Richmond Pope: Absolutely. When you think about how fraud happens, especially when you think about it from the perpetrator's side -- and using Tom Hughes as an example: What he said in his interview to me was, although the amount was small, what it showed me was I can get away with things and people trust me. That was like a power that he realized that he had, and he knew that he can manipulate others this way. There are lessons to be learned, of course, on the victim's side, but there's also lessons that perpetrators learn along the way about their own behaviors and about their own privilege and their own powers in their business circle.

And that's what Tom used when he realized, "Hey, I can actually get away with things," it opened the door for him to take his trusting presence to other clients and steal and defraud them. It's a scary area, because we all trust somebody. I bet if we all closed our eyes right now, we can name five people that we unconditionally trust, and we don't ask them any of the top three questions we always need to ask, because once they've gotten over certain hurdles, we trust those people. Tom got over the certain hurdles with his clients. Bailey got over his hurdles with his clients. And then we give them everything. I can name people in my life that I trust unconditionally.

Ricky Mulvey: I want to turn to large frauds at publicly traded companies, because it seems that a lot of the frauds and scams that happen are against the company in a non-institutional way, where it's overstating expenses, hiring no-show jobs for work that isn't completed by someone who's trusted there. But you mention that financial statement fraud is extraordinarily difficult. As a forensic accountant, why is it so difficult for companies to lie on their financial statements?

Kelly Richmond Pope: I love accounting. I think everybody needs it. One thing you learn the first or second day in an accounting class, it's the accounting equation. And that is "assets equals liabilities plus stockholders' equity," and that's an equation that has to balance. When you think about when fraud happens, if you take something out, you got to be putting something back in to make that equation balance. So when fraud happens, something is out of balance. That means that there are some lies in those financial statements.

It takes a lot of effort to lie about a transaction. A lot of times, if you think about it, accounts on financial statements have to move in the same way. If you are selling a lot of widgets, that means that your cash needs to be going up and your widgets need to be going down. Well, what if widgets were staying steady but you're claiming that you're just killing it and making a ton of sales? Things have to make sense. There's this duality approach in accounting, and that's why I think financial statement fraud is so hard to execute for a very long time, because when you take something out, you've got to be putting something into that equation to make it balance.

Ricky Mulvey: I'm thinking back to the Crazy Eddie scandal in New York, when they were running fraud with their financial statements, and if you want to overstate inventory, it's extraordinarily difficult to do that for a long period of time -- to falsify receipts and to falsify sales. No matter what, it seems to create this treadmill that eventually runs out.

Kelly Richmond Pope: Exactly. That's a really great analogy. One of my claims to fame is doing my documentary, All the Queen's Horses, that talks about the largest municipal fraud in U.S. history. One of the things that always comes up in sessions with people is, how is it that no one noticed it? Because when we talk to accountants, you think about this accounting equation. What did the financial statements show? What did the income statements show?

You think about -- all of these statements talk to each other. The income statement talks to the balance sheet. The balance sheet talks to the statement of retained earnings. Statement of retained earnings and the balance sheet and the income statement talk to statement of cash flow. So all of those things are speaking the same language. If one of them has a lie or an error, that lie, it's a snowball effect. That's why I say it's hard to have it going on for a very long time.

In the case of my documentary, that fraud lasted over 20 years and you have to just scratch your head about how. But when there's one person that has absolute control over everything, especially the financial statements and communicating financial matters to a large group of people that tend to not care or know a lot about financial matters, it makes it easy. That's why I think everybody needs an accounting class.

Ricky Mulvey: I agree. For some background, this is the story of Rita Crundwell. She was a city employee and was living an extraordinarily lavish lifestyle that her colleagues didn't notice, where she had a horse farm and was using city funds to disperse into these private accounts that she was using and nobody was scratching under the surface for more than a decade.

Kelly Richmond Pope: Exactly right. This is the thing, going back to your earlier question and our comment about following your gut. People in the town thought it was odd. But they also felt like, "You know what? It's not my business. I don't have the evidence to think that she's doing anything wrong, so why would I automatically assume that?" And in fact, she was, but no one really followed back up. Like you said, no one was scratching the surface.

Ricky Mulvey: You've also written about Wells Fargo and the checking account scandal where, in many cases, lower-level employees and tellers, were creating fake checking and investing accounts for customers. I think it was in the millions. Recently, Wells Fargo former head of retail banking Carrie Tolstedt just pled guilty to a criminal charge of obstructing a bank examination. Someone in that scandal may be going to jail for up to 16 months. She's going to be fined $17 million. What was your take on this, the first high-ranking Wells Fargo executive to be criminally charged?

Kelly Richmond Pope: Someone has to be held responsible. Someone has to be held accountable. More than "someone" -- many someones. I think what concerns me is, I'm sure that there were layers above her that were also responsible. That tone at the top is so important. I would like to see other people one, two, or three jobs ahead of her that are also charged, because I don't believe she was the mastermind, and I don't believe that we have found the mastermind behind the Wells Fargo scandal.

So when I wrote about Wells Fargo, I was getting prepared for my annual "If you see something, say something" whistleblower lecture with my graduate students, and the Wells Fargo scandal was going on.

And I had this reflection. I was like, "How can I tell my students to say something if they see something when the CEO and the C-suite are the people that are mandating, 'Hey, by any means necessary, do what you need to do to make our numbers.' How do I pass that message on while the Wells Fargo chorus was in the background." That's really what inspired me to look further at that case. I had a blog on Forbes, and I wrote an article, "[Wells Fargo and] Millennial Whistle-blowing? What Do We Tell Them?" And all these whistleblowers started to write to me, and one of them was a Wells Fargo whistleblower, so that's how that story came out.

So when I hear that this woman could pay back millions in restitution and face a prison term -- again, I'm sure she played a role in the fraud, but I don't believe she's the only one. Where is everybody else? She is not the mastermind. Where are they, and how are they going to be held accountable?

Ricky Mulvey: What did that whistleblower tell you about the culture they encountered at work?

Kelly Richmond Pope: What she said was, it was a culture of "we need to make the numbers," and when she noticed things that didn't add up, like she noticed that there were addresses that had the same address as some of the bank branches. She noticed that some of the accounts had dummy numbers, things that just didn't make sense. And so she ran a report, and when she reported this, no one wanted to listen. Then days, weeks later, she was investigated. She started to receive harassment and bullying, and her regional manager said, "I didn't hire you to come here and make trouble."

So it wasn't a culture that supported or encouraged whistleblowing. What we have to learn from this is a lot of our cultures might be that way and we don't even realize it. Do we really encourage people to come forward and tell us really bad news? Probably not. She talked about a very stressful environment, and she didn't feel supported when she was coming in to say "Something seems wrong here." She thought she would be celebrated, but instead, she was ostracized, and that surprised her.

Ricky Mulvey: That's the case for many whistleblowers. I've heard you advocate for them. It's extremely difficult to be one. In the case of Wells Fargo, perhaps you're fired for tardiness. You're going to be harangued and harassed by your colleagues. You're going to be unheard. There's a lot of reasons to continue to go along with the system.

Kelly Richmond Pope: Well, this is the thing. What I did in the book is, I talk about that all whistleblowers aren't the same. There are different types of whistleblowers, and the reason I started talking this way is because, in my documentary, Kathe Swanson was the whistleblower in the Rita Crundwell case. She was a city clerk that reported to Rita that noticed the anomalies and reported it to the mayor. Kathe was never ostracized, never bullied. Kathe was an accidental whistleblower. She didn't set out to really look for something, she just stumbled upon it.

Now, the tough row that whistleblowers tend to have, that tough journey, I argue, are the vigilante whistleblowers. Those are the people that just fight for justice. It doesn't really have to have anything to do with them at all. They are blowing the whistle. If they see it's wrong, they're saying it. They are who we think of as snitches, rats, tattletales -- but we need them. The whistleblower experience, I believe, is not always the same. The noble whistleblower and the vigilante whistleblower -- two terms that I talk about in the book -- those have that negative whistleblower experience. Accidental whistleblowers, however, not so much, because they tend to be fixing a problem that no one else knew about and it does a public good, so they tend to be celebrated. I notice that with Kathe Swanson in her story and the fraud case in Dixon.

Ricky Mulvey: One question I have about noble whistleblowers is a story you tell in the book about stepping away from your class when there's a final going on, and many of them start cheating. A student texts you after the class to say, "Hey, people were sharing answers during the time you were away and I was pressured to share answers as well, although I didn't." What happens when you cheat in a class when a forensic accounting professional is your professor?

Kelly Richmond Pope: Well, this is what happens. Of course, I always believed that I created this environment where my students would come and tell me anything if something were happening. So when this student came forward and said that to me, what shocked me was: Why didn't I have 39 other students saying the same thing? Why did I only have one? What I did is I sent out an email and I said listen, hypothetically speaking, what if I told you there was a camera recording your actions when I left the room? Is there anything you want me to know before I look at the footage? Now started about saying hypothetically speaking, and in rolls the emails and the text messages.

"I didn't see anything." "I didn't say anything." "I kept my head down," "I didn't do anything," and I'm thinking to myself, "Oh my goodness, where were all of these people? They all should have said something." So my student noble whistleblower stepped outside of the group to let me know, "Hey, professor Pope, this isn't right, and I know that you're trying to create this environment here, so I'm going to tell you what really happened."

And the students attacked her. They were mad that she actually said something to me. She was attacked, she was bullied on LinkedIn for coming forward. That's the experience of a noble whistleblower, very similar to a vigilante whistleblower, but that's what happened in that case. I was shocked though.

Ricky Mulvey: Did she expose herself as the whistleblower?

Kelly Richmond Pope: No, this is the thing. So somehow, the perpetrator, the student cheater, was able to figure out who it was because apparently, that student must have only talked verbally to five people, and he must have gone back to every other person except this one student and determined it was her. I kept her anonymous -- like I never said, Jane Doe said that John Doe was cheating. I'd never said that, but he was able to figure it out. The student was able to figure it out.

Ricky Mulvey: I want to think about the future of fraud because I don't see this problem being stopped anytime soon, and in fact, growing. Generative AI is one space where I'm particularly concerned about the future of fraud. This idea that chatbots can create copywriting, marketing, coding. But one thing it may be able to do is create more personalized fraud messages. In your book, you conclude with this idea that one thing to remember is that fraud schemes don't really change. I think generative AI might change that.

Kelly Richmond Pope: This is the thing. The scheme won't change. How the scheme is executed may change. So we could use deepfakes and we can execute a scheme by using that, but check fraud, mail fraud, wire fraud, financial statement fraud -- those things, those schemes are going to stay the same. I think how they are executed are going to be very different. Because you think about identity theft. Identity theft is going to be made so much easier with the use of AI. I'm sure that someone could easily, based on every piece of information that has ever existed about Kelly Pope, create a profile that looks and sounds and talks and writes exactly like me, and go and execute transactions -- well, I'm a professor so it's a little bit different, but you understand what I'm saying.

I think it's going to allow others to execute fraud in a different way, similar to what you saw in the pandemic. As I watched the pandemic fraud just rise over time, what I was most interested in was who engaged in it. So many professional people engaged in the PPP loan fraud that you would never suspect. You would never think that an entrepreneur would lie about the number of employees he or she has, and receive millions and millions of dollars, and then go buy cars and go on vacations. You would never think that. But I think that the schemes were the same. It's how the schemes were executed and who was executing them is what changed, so I think that AI is going to change the execution of the fraud.

Ricky Mulvey: My mind didn't go to identity theft, and I appreciate you pointing that out. My thought was romance scams, where people are now paying for AI partners to be their girlfriend and boyfriend and in some cases, swearing off human relationships. If someone can build a profile on you, they can call you, they can text you, and it's completely done with these chatbots.

Kelly Richmond Pope: But this is the interesting thing, Ricky. When you think about that, how authentic is a relationship that you never can actually physically see a person? At some point, we can go to dinner. At some point, we should be able to go to the movies. Even if we are on another continent, we should be able to meet and see each other at some point. So I hear you. At some point though, there has to be an end. And so the romance scams, they're pretty much all the same if you think about it -- like, they all follow the same profile. You ask yourself, at what point does the perpetrator stop manipulating this person because you have to see them? There's a physical component of romance that should make that stop sooner, but it doesn't, and I don't understand it.

Ricky Mulvey: You would think so, and you point out one -- and forgive me for forgetting the name -- about a victim who engaged in a romance scam for years, often traveling outside of the country to go see this partner who never shows up, and continues to make trips.

Kelly Richmond Pope: How, right? Shouldn't that be one, two, three, four, five red flags, over and over and over again? What is it about our psychology that allows us to just say, "No, it's not a big deal"? Is it just our ongoing desire to want to trust and believe in something that is completely false? The romance scam has always been the scams I probably least understand because, at some point, you have to meet. Like, can you get married and never meet a person? Can you have a family and never meet these people? So they're red flags -- from outsider looking in, because I've never been inside of a romance scam, but outsider looking in, there are so many red flags there that you have to pay attention to.

It's funny. Just yesterday, I got an email from a woman who, her ex-husband was involved in a romance scam, but was manipulated by a woman -- a "psychic" -- who was able to take $1 million from him. It was this romance scam, and I'm just like, "How does that happen where you are giving $1 million to a person that you've never met?" And then when you try to meet them, they're like, "Oh, sorry, we couldn't meet today." How many times does that have to happen, and how many checks do you have to write, before you start paying attention to the red flags? I just don't understand it. I don't understand the psychology behind it -- on both sides, but more on the victim's side. I don't get it.

Ricky Mulvey: Victim's side is harder to understand. The perpetrator side, maybe a little bit easier. Joining us was Kelly Richmond Pope. She's the Barry Jay Epstein Endowed professor of forensic accounting at DePaul University. Her book is Fool Me Once: Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry. Thank you so much for spending time with us Fools and appreciate the conversation.

Kelly Richmond Pope: I love that you're called Fools. Then that might make you even like the book more since the word "Fool" is in the title. I love it.

Chris Hill: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.