I’m going to be adding a weekly fraud column for 2023. Frankly, I had about a dozen good examples without trying, so this should be fun.
Carlos Ghosn was the highly successful CEO of Renault and Nissan, two independent car makers who teamed up in an alliance driven by Ghosn to make both companies better. He ended up as the CEO of both companies at the same time. He is accused of overpaying himself by as much as $100 million.
Over Christmas I read Boundless: The Rise, Fall, and Escape of Carlos Ghosn by veteran Wall Street Journal writers Nick Kostov and Sean McClain. It has all the details. There is a smaller WSJ article here (subscription required). The book is absolutely worth a full read.
The nutshell version is that Ghosn is accused of manipulating how and what he was paid to hide the amount of his actual pay. Ghosn seemed to have wide latitude in controlling what he was paid, but disclosure of the size could be embarrassing in both France and Japan. Additionally, Nissan paid him in Yen and at one point a swing in currency values left a $20 million hole in his personal finances. Finally, he was required to report his pay to Japanese authorities (a new law at the time) and disclose it in financial statements. The disclosures did not reflect his actual pay and a number of intermediaries were used to hide payments. Kostov and McClain allege that payments to Ghosn were improperly funneled through suppliers. Additionally, there were properties and other items paid for by various Renault and Nissan organizations that may not have been appropriately authorized.
What makes this story even more interesting is that Ghosn was arrested in Japan, a country with a 99% conviction rate. Ghosn felt that he couldn’t get a fair trial in Japan and arranged to flee the country hidden in a box ostensibly designed for a large speaker or amplifier. Ghosn was spirited out of the country via private jet while hidden in the box. He fled to his native Lebanon, a country that doesn’t extradite its citizens. A BBC article here also has escape details.
Ghosn will probably never get his day in court, so there is no way to say definitively say exactly what he did or the extent of the fraud, but there are some lessons in here.
1). Fraud at the top is always more expensive than fraud from within an organization. $100 million is a lot of money. It’s hard to hide that much with garden variety AP or AR fraud. CEOs should still be subject to checks and balances.
2) Resentment over pay remains a key reason for fraud, even at the top.
Carlos Ghosn had been the world’s most prominent car man of the first two decades of the twenty-first century. To the astonishment of naysayers worldwide, he had forged two middling carmakers into a global powerhouse, the Renault-Nissan Alliance. But Ghosn never felt that he had been adequately compensated. Over the years, he had watched as people of lesser talent had made millions more than he did. It had grated on him to the point of obsession.— Boundless: The Rise, Fall, and Escape of Carlos Ghosn by Nick Kostov, Sean McLain
Since the financial crisis of 2008, he had started to take matters into his own hands, exploring numerous schemes to secretly pay himself what he thought he was worth. Ten years later, he had been ready to push through his last great act as an executive—a merger between the French and Japanese carmakers—before sailing off into the sunset aboard a 120-foot-long yacht. As part of the deal, he would be entitled to a massive payday, one that would enable him to retire as a very wealthy man.”
The fraud triangle is Opportunity, Incentive, and Rationalization. As CEO Ghosn had the opportunity, he was the CEO and had few checks on his pay. He had the incentive, oddities with his pay in multiple currencies created a $20 million hole in Ghosn’s personal finances. Finally, there was rationalization. he felt he was underpaid based on what he had accomplished.
This risk exists at multiple levels in every organization. Strong controls are a key defense and Boundless is must read.