Fraud Risk and Family Wealth: What Every Ultra-High-Net-Worth Family Should Know

For years, the sleek curves of Midtown Manhattan’s Lipstick Building concealed one of the greatest financial frauds in history. As The New York Times put it, “wealth went to vanish” here. Inside that red-granite landmark, Bernie Madoff quietly operated a $65 billion Ponzi scheme, hiding in plain sight, just floors above unwitting investors.

Studies indicate that affluent individuals are particularly susceptible to financial fraud. A joint study by Experian and the U.S. Department of Justice found that affluent Americans are 43% more likely to experience identity theft compared to the general population.¹ Additionally, a 2024 Deloitte report revealed that 43% of family offices worldwide have suffered a cyberattack in the past two years, with North American family offices reporting the highest incidence at 57%.²​ In light of an understandable desire for privacy among wealthy individuals and families, the true scope of these scams may be even more widespread than the data suggests.

The names may have changed from Madoff’s era, but bad actors continue to target the ultrawealthy. 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.³ And in December 2022, a 74-year-old bookkeeper admitted to embezzling $29 million from a single-family office (SFO) for whom she worked.⁴

That a seemingly squeaky-clean septuagenarian has confessed to money laundering and is under FBI investigation provides 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 that, we are pleased to present this 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.

Watching for Red Flags

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. In addition to any financial fallout, the betrayal of trust by a rogue employee can cause anger, hurt and embarrassment.

A toxic mix of factors often creates the ideal conditions for financial fraud. Out of loyalty or a sense of noblesse oblige, families may place too much trust in members of their inner circle, even as a staff member’s risk profile quietly deteriorates. Oversight of long-serving employees can understandably weaken over time, and with so many competing demands, families may simply lack the bandwidth to conduct ongoing due diligence. Together, these dynamics can create a “perfect storm” in which financial fraud is allowed to take root and thrive.

Criminologists have developed a concept known as the “Fraud Triangle.”⁵ This holds that three interlocking elements are necessary for fraud to take place. Namely:

1. Motive: A financial need, personal pressure, or external stressor that drives someone to seek illicit gain.
2. Opportunity: A perceived opening or weakness in oversight that allows the fraud to be carried out.
3. Rationalization: The internal justification that allows the perpetrator to view their actions as acceptable or deserved.

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. This can give rise to situations where a single unscrupulous employee exerts undue influence over the family finances.
• Minimal integration and oversight. No central view of crucial accounting and cash flow functions, with key business units operating as independent silos.

Who Will Guard the Guards?

It’s a question first posed in ancient Rome, but one that families of wealth would do well to ask today. As a family’s orbit expands, so too does the number of individuals with access to highly sensitive financial information. And it’s often the least scrutinized third parties who pose the greatest risk.

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

Over time, it’s 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 from Baby Boomers to their offspring. Times of transition typically act as a catalyst and cause current contingencies to be reassessed. As a 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.

Keeping Control

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.

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 offers a greater degree of safety and security. You may also entrust your team with power of attorney for the purpose of paying your bills quickly and efficiently.

With this authority comes an additional layer of control. For example, your team may require a minimum of two senior professionals 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 there is institutional memory in place, so that the absence of any one individual won’t adversely impact security measures and overall client care.

Robust Reporting

“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 an unexpected fluctuation or egregious increase in bills, and prompt additional investigation.

Detailed reporting also has the 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 considers granular detail, big picture insight and analysis of overall patterns. These value-added elements can facilitate forward planning, aid decision making and enhance confidence.

Staying Ahead of Cyber Threats

In 1984, the Macintosh computer debuted, the CD-ROM launched, and Facebook founder Mark Zuckerberg was born. In the years since then, 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 still don’t have a dedicated cybersecurity policy⁶—despite the fact that, as cited earlier, most have already experienced a cyber-attack. Specific areas of vulnerability include:

• Inadequate password management. Regrettably, the world’s number-one password choice remains “123456,” with “Password” landing in fourth place.⁷ Such laxity presents particular problems in a work-from-home era with remote access on the rise.
• Online oversharing. Being digital natives, the youngest offspring of founding families frequently underestimate the increased risk from sharing 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.⁸
• A greater number of people working 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. 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 decades, but unfortunately today’s UHNW 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 wealth, secure hard-earned assets for future generations and sleep well at night.

¹ https://www.irisidentityprotection.com/blog/reasons-why-high-net-worth-mean-greater-fraud
² https://www.deloitte.com/au/en/services/deloitte-private/about/family-office-cybersecurity-report.html
³ https://www.foxbusiness.com/lifestyle/illinois-accountant-fraud-scheme-sentence-guilty-plea-chicago-blackhawks-stars-wire-fraud
⁴ https://versustexas.com/criminal-defense-attorney-dallas/embezzlement/
⁵ https://www.ebsco.com/research-starters/law/fraud-triangle
⁶ https://advisors.ubs.com/mediahandler/media/644831/RAPID_GFOreport_DWN.pdf
⁷ https://nordpass.com/most-common-passwords-list/
⁸ https://www.royalgazette.com/technology/business/article/20120815/oversharing-prompts-shutdown-of-dell-daughters-twitter-account/

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