Ethics/Business

51C A S E S T U D Y

Published online in Wiley Online Library (wileyonlinelibrary.com)

© 2014 Wiley Periodicals, Inc. • DOI: 10.1002/tie.21676

Correspondence to: Ana Paula Paulino da Costa, Economic Research Institute Foundation (FIPE), São Paulo, Brazil, apcosta@fi pe.org.br

Corporate Frauds as

Criminal Business

Models: An Exploratory

Study

I n t r o d u c t i o n

C orporate frauds are traumatic events that affect

investors, customers, and other stakeholders.

Over the past two decades, scandals involving

corporate frauds have become a prominent subject in

the media. The biggest and most widely discussed cases

In this article, we report on the fi ndings of an exploratory, interpretive study of a notorious corporate

fraud that occurred in Brazil from 1989 to 2005. We examine the process by which this scheme was

created as well as how it was maintained for all those years. Our analysis covers both the substan-

tive aspects (the actions fraud agents effectively perform) and the symbolic aspects (the resources

of impression management that they use). We suggest that under certain circumstances, corporate

frauds may be understood as the result of implementation of a criminal business model that focuses

on a niche market of risk takers or greed investors, uses aggressive commercial practices and offers

exclusivity, promotes the organization’s image and personality cult of the entrepreneur, operates a

management model that combines centralized control with fragmented systems, and uses complex

fraudulent practices. This perspective allows us to understand the phenomenon of corporate fraud

from a systemic point of view. We also suggest directions for future research and theory development

on corporate frauds. © 2014 Wiley Periodicals, Inc.

By

Thomaz Wood Jr.

Ana Paula Paulino da Costa

have occurred in North American companies like Enron,

Global Crossing, WorldCom, and Bernard L. Madoff

Investment Securities. However, major corporate frauds

have also occurred in other countries, for example, the

Anglo Irish Bank in the Republic of Ireland, Nortel

in Canada, and Parmalat in Italy. Brazil, an emerging

country in which we carried out our research, has also

52 C A S E S T U D Y

Thunderbird International Business Review Vol. 57, No. 1 January/February 2015 DOI: 10.1002/tie

We carried out an exploratory, interpretive study of

a corporate fraud case that occurred in Brazil between

1989 and 2005: the Banco Santos case. This case was

chosen because of its notoriety, its duration, its impact on

customers, and its widely available legal and journalistic

documentation.

The rest of the article is organized in the following

way: First, we present the theoretical fundamentals of our

study. Second, we describe our methods of information

collection and analysis. Third, we present the case and

comment on it. Fourth, we explain the criminal business

model and illustrate it with the Banco Santos case, as well

as two other notorious cases: Madoff and Enron. Finally,

we offer suggestions for future research.

T h e o r y

Defi nition of Corporate Fraud

Fraud, generally speaking, is any cunning act in bad faith,

with the intention of deceiving another. Jamal, Johnson,

and Berryman (1995) observed that corporate fraud

occurs when the fraud agents identify an opportunity,

make successive decisions with the aim of obtaining illicit

advantages, and manage the mise-en-scène (the symbolic

actions carried out to make fraud feasible) to conceal

such decisions and their effects.

We find some common characteristics in the litera-

ture on fraud that help define the phenomenon: (1) the

motivation of the fraudsters, which may be associated

with a predisposition (see, e.g., Baucus, 1994); (2) the

presence of available targets (see, e.g., Moura, 2007); (3)

the nonexistence or insufficiency of internal or external

controls (see, e.g., Cohen & Felson, 1979); and (4) social

disorganization or the loss of social and moral values (see,

e.g., Belkaoui & Picur, 2000; Schnatterly, 2003). It is worth

noticing that some definitions of corporate fraud include

those against the company, committed by employees.

However, this kind of fraud is not the focus of our study.

Based on these definitions and common characteris-

tics found in the literature, we define corporate fraud as:

A series of illicit acts carried out in a conscious way by

members of the top management of an organization,

who use the processes and systems of the organization

and of management in a deceptive way with the aim

of serving their own interests and prejudicing third

parties.

The Evolution of Literature on Corporate Fraud

An important milestone in the development of literature

on corporate fraud was the work of Baucus (1994), who

recorded a significant number of corporate frauds,

prominent among which are the cases of the agribusiness

company Boi Gordo, the luxury-goods retailer Daslu, the

construction company Encol, and the banks Econômico

and PanAmericano.

The persistence and impact of corporate fraud, specif-

ically, and corruption, in general, have led to an increase

in interest in the phenomenon among researchers (see

Ashforth, Gioia, Robinson, & Treviño, 2008; Brown &

Cloque, 2011). In the field of organization studies, fraud

research has focused on the question of why fraud occurs (e.g., Hill, Kelley, Agle, Hitt, & Hoskisson, 1992; Schnat-

terly, 2003). However, there are still few studies that deal

with the question of how fraud occurs (Ashforth et al., 2008). To address this latter question, it is necessary to

analyze corporate fraud from a systemic perspective, view-

ing it as the result of coordinated actions.

The purpose of this study is to contribute to the

understanding of the phenomenon of corporate fraud.

We seek to understand how fraud is committed within

an inherently (and intentionally) criminal enterprise.

In doing so, we intentionally give emphasis to internal

issues, albeit recognizing that external variables, such

as lack of effective control by government agencies, also

allow fraud agents to implement and maintain their

scams. We argue that corporate frauds may be, under

certain circumstances, understood as the result of imple-

mentation of a criminal business model.

We intentionally give emphasis to internal issues, albeit recognizing that external variables, such as lack of effective control by government agencies, also allow fraud agents to imple- ment and maintain their scams.

Corporate Frauds as Criminal Business Models: An Exploratory Study 53

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 1 January/February 2015

to the same evolutive line. The first model provides

an understanding of the origins of fraud by emphasiz-

ing the factors that precede it. The two later models

help with an understanding of how meanings (sym-

bolic resources) for fraudulent practices (substantive

resources) are created.

Starting from a procedural point of view, we propose

that corporate fraud occurs because of certain preceding

conditions (which have already been explored in litera-

ture) coupled with the actions of fraud agents, which fol-

low three stages. The first stage is the conception of the

fraud, which comprises identifying an opportunity for

illicit gain and identifying the substantive and symbolic

resources needed for carrying out the intended fraud.

The second stage is the introduction of the fraudulent

scheme, which consists of mobilizing substantive and

symbolic resources and neutralizing control systems.

The third stage is the maintenance of the fraudulent

scheme, which involves administering it and managing

both impression and image, the latter a process directed

at both internal and external publics (see Alvesson, 1990;

Boorstin, 1962; Giacalone & Rosenfeld, 1991).

In corporate frauds, the managers who constitute

the fraud agents have more information about their

companies and their business practices than do the vic-

tims of the illicit processes; they are therefore able to

identified three groups of situational factors that precede

fraud: pressure, opportunity, and predisposition to fraud.

Pressure is the result of the industry, the legal and regula-

tory environment, and the organizational characteristics.

Opportunity comes from the competitive environment,

the legal and regulatory environment, and the organiza-

tional characteristics. Predisposition is the result of the

characteristics of the environment and, once again, of

the organization. Despite its usefulness in systematizing

the factors that lead to fraud, this theoretical formulation

appears to us to be insufficient for helping address the

process by which fraud occurs. In fact, the Baucus model

deals only with the antecedents of fraud, making it suit-

able for use only in determining why fraud occurs.

The work of MacLean (2008), based on a fraud

investigation into the sales of a life insurance company,

further developed the model of Baucus (1994). MacLean

observed that the premise of the “model of corporate

illegality” is that individuals, when faced with the vari-

ables of pressure, opportunity, and a predisposition to

fraud, make a decision to commit or not to commit fraud.

But, MacLean pointed out, the influence of individu-

als’ cognitive interpretive frames was missing from the

Baucus model. MacLean therefore introduced a moderat-

ing variable that is related to the culture of the organiza-

tion. In doing so, he endowed his model with the logic

of symbolic interactionism, in which deviating behavior

is socially constructed and rooted deep in the organiza-

tional culture, or more precisely, in the frames shared

by the professionals within a particular organizational

environment. Although this refinement did advance our

understanding of the phenomenon of fraud, it still leaves

the scientific formulation insufficient to explain how

fraud occurs.

We then looked to the work of Misangyi, Weaver, and

Elms (2008), which sought to explain the systemic cor-

ruption logic that occurred in Bosnia-Herzegovina. This

objective demanded an understanding of the substantive

and symbolic resources used in both the virtuous and the

vicious logic. The study concluded that such resources were

similar. What differentiated one logic from another was

the way in which meanings were attributed to substantive

resources. By detailing the question of cognitive processes

and shared schemas, Misangyi et al. (2008) went further

along the investigational trail that had been initially laid by

MacLean (2008). Their focus was still the same as that of

previous authors: to explain why fraud occurs. However, in

exploring the symbolic dimension, they carved a promis-

ing trail for explaining how fraud occurs.

We can view the work of Baucus (1994), MacLean

(2008), and of Misangyi et al. (2008) as contributions

In corporate frauds, the managers who constitute the fraud agents have more information about their companies and their business practices than do the vic- tims of the illicit processes; they are therefore able to take advantage of these circumstances.

54 C A S E S T U D Y

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Furthermore, the company was commented upon in

the media both before the fraud was discovered (when

it was presented as a success story) and after (when it

was presented as a corporate scandal). As a result, our

investigation had access to a comprehensive list of docu-

ments. The document base we analyzed comprised 24

documents from the judicial branch; 1 document from

the Securities and Exchange Commission; 4 pieces of

legislation; 222 articles from newspapers, magazines, and

electronic media; 1 dissertation; and 9 publicity videos.

The data collection process was based on a constant

comparison procedure wherein the next group of data

and sources were determined by the analysis of the last

group. Important documents accessed by key terms

emerged from this process. At first, the key terms “Banco

Santos” and “Edemar Cid Ferreira” gave access to relevant

legal documents, some less important pieces of legisla-

tion, and many media materials, including institutional

videos. Then the use of the term “Alsace Lorraine,”—a

company in the Banco Santos group found in media

material—gave access to the bankruptcy sentence and the

prosecution document, which was fundamental to under-

standing the case and chronologically organizing all the

material. The main events and actions were organized in

order to display the sequence of facts and the substantive

symbolic resources used by fraudsters.

We also followed the principles of “theoretical satu-

ration” (Glaser & Strauss, 1979). The data collection

stopped when there was enough consistent material to

ensure the trustworthiness of data, and new data did not

provide any substantial different knowledge and just con-

firmed the previous analysis. The constant comparison

of data from different sources allowed structuring a story

more consistently. As this story was taking form, it was

possible to separate substantive resources and symbolic

ones. Some of them were present during the entire pro-

cess, while some were modified along the way.

From this analysis, the process of fraud emerged with

its phases and components, and then symbolic issues

were organized to explain how each identified symbolic

resource was used, for what purpose, and what each was

hiding. The emerged fraud process revealed how context

was prepared for fraud, internally and externally. Some

information was not considered if it did not add compre-

hension to the process or if there was not strong evidence

of its existence from other materials or sources.

Information Interpretation

Analysis procedures and data treatment were adapted

from Strauss and Corbin (2008). Interpretation was

take advantage of these circumstances (Hsien & Tsai,

2005). In order for the scheme to function, the victims,

specifically, and interest groups (e.g., the media, control

bodies, suppliers), generally, have to be unaware of the

asymmetry of information that exists between the parties.

The victims need to believe they have all the information

necessary for a correct assessment of the business, so

the asymmetry must be camouflaged by the image pro-

jected by the company through impression management

( Westphal & Graebner, 2010).

M e t h o d s

In the previous section, we presented a definition of

corporate fraud and briefly reported the evolution of the

literature dealing with the theme. In this section we pres-

ent our investigation approach, the criteria adopted for

choosing the case, and the methods used for collecting

and analyzing the information.

Investigational Approach and Choice of Case

This work is an exploratory, interpretive case study based

on an extensive analysis of documents. More specifi-

cally, we may classify this as an “instrumental case study”

(Stake, 1994, p. 237), since, through the case, we hope to

provide insight into the issue of corporate fraud. Accord-

ing to Glaser and Strauss (1979), a case study can gener-

ate general conceptual categories or properties. George

and Bennett (2005) name “configurative idiographic

cases” those that may be used in subsequent studies for

theory development, even if, by themselves, they do not

contribute directly to theory. In sum, in this article we

do not aim to develop a theory of corporate fraud, since

we cannot generalize after a single case, but we intend to

present ideas to be tested more systematically in future

studies.

In research based on case studies, the choice of case

is a fundamental issue. In this work, we adopt the crite-

ria suggested by Eisenhardt (1989) and Phillips and Di

Domenico (2009). We chose the Banco Santos case for

the following reasons: (1) because of its notoriety, size,

and impact; (2) to meet the requirements of our theoreti-

cal definition of fraud; (3) to involve the use of substan-

tive and symbolic actions, which constituted part of the

focus of our investigation; and (4) because a vast amount

of information and a large number of documents relating

to the case are available for analysis.

Information Collection

The case chosen was widely investigated by the relevant

supervisory bodies and was the target of many lawsuits.

Corporate Frauds as Criminal Business Models: An Exploratory Study 55

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founder of Banco Santos himself and by his secretary,

family members, friends, and other illegal “straw per-

sons,” used only as a front.

In 1998, Banco Santos also started operating invest-

ment funds. By 2004 it had 82 such funds (Comissão de

Valores Mobiliários, 2008). It also became an important

intermediary for funds coming from the Brazilian Devel-

opment Bank (BNDES), the state economic and social

development bank.

Banco Santos gave loans at lower cost than did its

competitors, and it offered special financing condi-

tions to companies that were experiencing financial

difficulties. It also promised its clients a return that was

above the usual levels in the market (Consultor Jurídico,

2005). As a result the bank attracted investors with

greater risk propensity.

Commercial Strategy and Impression Management

To enter and grow in a competitive market, Banco Santos

adopted a niche strategy, seeking to serve companies and

private individuals with high purchasing power. To do

so it developed personalized and sophisticated services

in addition to the extraordinary business conditions it

offered for investments and loans. It also sought to create

and consolidate an image of competence and serious-

ness. Within this niche, Banco Santos started attracting

particularly those companies that were in financial dif-

ficulty and that would find it hard to raise funds in other

banks.

Central to this effort was the figure of Edemar Cid

Ferreira himself, who used public relations to systemati-

cally promote his image as a sophisticated businessman

and patron of the arts. Banco Santos was a great patron

of the arts, and Cid Ferreira presided over the São Paulo

Art Biennial, the most important art exhibition in Brazil,

from 1992 to 1997 (Cypriano, 2004). When Banco Santos

was operating, the entrepreneur acquired a notable per-

sonal collection of paintings and sculptures.

One of Cid Ferreira’s companies, BrasilConnects,

which was created to organize cultural events, had a

collection of 12,000 works of art and a team of special-

ists for each type of work (Carvalho, 2004a). Over the

four-year period it was operational, the company held 49

exhibitions in 12 countries, with the support of 80 Brazil-

ian and international sponsors. Such initiatives reached

an audience of 80 million people in Brazil and abroad

and provided impressive spontaneous media coverage

(Ferreira, 2004). BrasilConnects also produced extraor-

dinary events, such as exhibitions in the Forbidden City

in China and in the Vatican (Carvalho, 2004c; Trevisan,

2004).

based on two methods: document analysis (Bardin, 1977)

and discourse analysis (Phillips & Di Domenico, 2009).

Document analyses were conducted to reorganize infor-

mation in order to describe facts and resources used in

the fraud. We identified symbolic resources (e.g., ratio-

nalization and socialization processes) and substantive

ones (e.g., product and incentive systems). Discourse

analysis identified how meanings were modified through

theses resources. We described how internal and external

context were prepared for fraud and identified elements

used in impression management. Substantive actions

were identified mainly from legal documents. Symbolic

actions were identified mainly from the texts produced

by media.

C a s e S t u d y

In this section, we present and comment on the corpo-

rate fraud that occurred at Banco Santos. We describe the

company, its history, and the fraudulent scheme.

The Company and Its Strategy

Banco Santos was founded in 1989. Formally, the com-

pany was part of the financial arm of organizations

belonging to entrepreneur Edemar Cid Ferreira. The 19

companies in this business group were placed in two con-

trolling holding companies, one of which was a financial

holding company (Procid Participações) and the other

a nonfinancial holding company (Procid Investimentos)

(Comissão de Valores Mobiliários, 2008).

From 1998 onward, other companies were created

that were directly or indirectly related to Banco Santos,

resulting in a system that, according to federal police

investigations, comprised 225 companies (Prestes, 2009).

This system was created and maintained to facilitate the

deflection of funds and was formally headed up by the

We described how internal and external context were prepared for fraud and identified elements used in impression management.

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customers to borrow a greater amount than they needed

from the state development bank and to invest the differ-

ence in Banco Santos (or related companies) securities.

In fact, the remuneration system encouraged not only

these deals, which were used to back the bank’s yield, but

also those that allowed the frauds to occur, thus promot-

ing a socialization process by co-optation (Ashforth &

Anand, 2003). Internally, all operations were considered

legitimate, the reciprocity operation being viewed as a

tacit agreement between the client and the bank.

The Frauds in Banco Santos

The main fraud committed by Banco Santos consisted

of deflecting investor funds to companies controlled

by the institution itself, with some of those companies

being merely a front, known as paper companies. Such

deflections led to a lack of cover in the bank, and this

was concealed through illicit accounting procedures

that simulated the existence of the necessary guaran-

tee (Comissão de Valores Mobiliários, 2008; Consultor

Jurídico, 2005).

The scheme functioned like a pyramid or Ponzi

scheme, with withdrawals being covered by funds from new

fundraising sources. At the same time, the bank’s offshore

companies were laundering money by facilitating the ille-

gal transfer of funds abroad. These companies, located in

tax havens, were not obliged to reveal information about

their shareholders, their partnerships, or their finances

(De Sanctis, 2009). The operation of the fraudulent system

Such initiatives helped establish an image of sophis-

tication, refinement, and boldness for the entrepreneur

and the company. At the same time as the international

exhibitions, Cid Ferreira opened an office in China and

made approaches to India and Russia as he sought to

develop business in all BRIC group countries—Brazil,

Russia, India, and China (Barros, 2004a, 2004b, 2004c).

It is relevant to note that before founding Banco

Santos, Edemar Cid Ferreira was involved in cases relating

to the bankruptcy of companies and deflection of public

moneys, and he was denounced by the press for his rela-

tions with corrupt politicians in the federal government

(see Carvalho, 2004b). However, he was never punished

and, as a well-known Brazilian journalist declared, “after

he became a patron of the arts, sommelier, a celebrity in

the social columns, everything was swept under the car-

pet” (Nassif, 2004, p. B3).

Organizational Model and Impression Management

Internally, Edemar Cid Ferreira introduced a manage-

ment system that supported his criminal business model

while at the same time creating the illusion, for most of

his employees, of a legitimate, competent, and innovative

organization. The management system was both central-

ized and fragmented. Only a small group of executives

had a complete view of the operations. Managers had

no autonomy to make decisions or change procedures.

Banco Santos had a code of ethics and a compliance

department, but its operations and internal controls were

segmented (Comissão de Valores Mobiliários, 2008),

which prevented employees from perceiving the frauds.

The fraudulent scheme used the usual processes and

systems of a financial institution, perverted in such a way

as to allow the frauds and to conceal them. One of the

“creative” resources used by the organization was to buy

securities based on the risk classification supplied by rat-

ing agencies, which evaluated a portfolio as a whole and

not its securities individually. Thus, its fund company

used to buy securities of Banco Santos based on bank’s

portfolio evaluation. As a result, Banco Santos obtained

the legitimization it desired, thus concealing the real

condition of its portfolio.

To attract highly qualified staff, Banco Santos had an

aggressive remuneration policy, which paid salaries and

gave prizes that were higher than those of the market. As

a result, it attracted talent and strengthened its image as

a strong and aggressive institution (Banco Santos, 2008;

Comissão de Valores Mobiliários, 2008). Exceptional

prizes, including luxury cars, were given to employees

who closed reciprocity deals when relending BNDES

funds (Carvalho, 2005). These deals involved inducing

One of the “creative” resources used by the organi- zation was to buy securities based on the risk classifi- cation supplied by rating agencies, which evaluated a portfolio as a whole and not its securities individually.

Corporate Frauds as Criminal Business Models: An Exploratory Study 57

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The bankruptcy of Banco Santos in September 2005

generated a loss of R$3.4 billion (approximately US$2.4

billion in 2013 values) for some 2,000 direct creditors,

including 54 pension funds, 15 foreign banks, 97 city

administrations, and the BNDES (Comissão de Valores

Mobiliários, 2008; Consultor Jurídico, 2005). The case

was investigated by the Central Bank, the Securities and

Exchange Commission (Comissão de Valores Mobil-

iários, 2008), the Federal Revenue Service, the Ministry

of Finance, the São Paulo Civil Police, the Federal Police

(Tavares, 2010), and the Courts (Banco Santos, 2005a,

2005b, 2008; Consultor Jurídico, 2005; JusBrasil, 2009)

in various lawsuits. Edemar Cid Ferreira was found guilty

of crimes against the financial system, money launder-

ing, organized crime, fraudulent management, and con-

spiracy (“Ex-banqueiro,” 2006; “STF Concede Habeas

Corpus,” 2006).

C r i m i n a l B u s i n e s s M o d e l

In the previous section, we presented the case of

corporate fraud at Banco Santos. In this section, we

propose an analytical model to better understand it.

Complementarily, we discuss the licit and illicit cycles

of activities carried out at Banco Santos, and show how

symbolic actions were put into practice to hide fraudu-

lent practices.

included two groups of companies: one group deflected

money and transferred currency abroad illegally, and the

other repatriated and laundered the money.

Moreover, when granting loans, the bank demanded

“reciprocity”: part of the money received by the client had

to be invested in the bonds of group companies (most

of them just paper companies) and in investment funds

managed by the group’s stockbroker. This condition was

normally accepted by the client companies, especially

those that were unable to obtain loans from other banks

because of their weak financial situation. Moreover, this

procedure was presented and accepted as part of doing

business with Banco Santos.

Bankruptcy

In December 2003, after analyzing Banco Santos’s port-

folio and evaluating its risk profile, Fitch Ratings lowered

the bank’s rating (Comissão de Valores Mobiliários,

2008). In 2004, the Brazilian Central Bank and Trevisan,

an audit company, indicated problems with the credit risk

rating, and in the same year the BNDES reduced its loans

for relending.

In parallel, the Sao Paulo Civil Police found infor-

mation incriminating Banco Santos for laundering and

evading money. This information was forwarded to the

Brazilian Federal Police. When the Brazilian Federal Police

started investigating the Banco Santos group, the Brazil-

ian Central Bank, which had accepted unusual operations

without questions until that moment, started to ask Banco

Santos for some changes in operation and command.

In response to this situation, which made it dif-

ficult to raise new capital and threatened the fraudu-

lent scheme, the bank intensified its illegal operations,

attempting to generate cash where it was needed to cover

the gaps created by the deflection of funds. The objec-

tive was to avoid an asset deterioration that would justify

intervention. During that same period, which preceded

the bankruptcy, Edemar Cid Ferreira also stepped up his

art buying and built a huge mansion in an upscale neigh-

borhood of the city of São Paulo.

In the second half of 2004, the local press treated

the problems being faced by the bank in a discreet way,

always emphasizing the bank’s positive image (e.g.,

Beraba, 2004; Gradilone, 2004). At the end of 2004, the

bank announced drastic changes in its business strategy,

indicating that it was opening a retail bank and creating

another investment fund. Both initiatives were aimed at

customers with incomes considerably lower than those of

the bank’s traditional customer base. In fact, the objective

was to keep the fraudulent system operating by feeding it

with new funds.

The image of Cid Ferreira as a sophisticated person and benefactor of the arts helped attract wealthy cli- ents for Banco Santos. By the same token, the man- agement model adopted at Banco Santos hid its fraud- ulent practices.

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fraud cases: Enron and Madoff. Like the Banco Santos

case, these were cases of corporate fraud that lasted for

many years, deceiving investors, media, regulatory agen-

cies, the US Securities and Exchange Commission (SEC),

and the Internal Revenue Service.

1. Identification of and focus on a market niche of risk takers or greed clients. At Banco Santos, this niche was made up of high-income clients and companies, including

those with financial problems that were not being

served by other banks. At Madoff, Bernard Madoff

created a separate investment advisory business that

targeted a select group of rich and invited investors

(Gregoriou & Lhabitant, 2009). Enron focused on an

audience looking for exceptional performance in an

unknown and deregulated market (see Boje, Rosile,

Durant, & Luhman, 2004).

2. Use of aggressive commercial practices and offer of exclusivity. Banco Santos offered exceptional conditions for both

investors and borrowers and access to BNDES funds

through political connections. It also offered addi-

tional sophisticated services for wealthy clients. Madoff

promised returns that were exceptional, totally safe

(see Gregoriou & Lhabitant, 2009; US SEC, 2009),

and steady for a long time despite market volatility

(Markopolos, 2010). Enron made “creative” use of

Understanding the Fraud as a Criminal Business Model

Figure 1 is a diagram of the criminal business model of

Banco Santos. The five central components—focus on

market niche, image of organization and entrepreneur,

management model, fraudulent practices, and aggressive

commercial practices—reinforce each other, forming a

coherent and cohesive whole that was capable of main-

taining the fraudulent scheme for a long period of time.

For instance, the image of Cid Ferreira as a sophisti-

cated person and benefactor of the arts helped attract

wealthy clients for Banco Santos. By the same token,

the management model adopted at Banco Santos hid its

fraudulent practices. Clustered around these five central

components, we identified 17 secondary elements. These

secondary elements are activities, processes, and charac-

teristics designed to support the five central components.

The criminal business model at Banco Santos can

be seen as a refined scam, developed and implemented

over the years. Its complexity, sophistication, and internal

coherence help understand why it was possible for Cid

Ferreira to sustain the fraud for so many years.

In the following discussion of the five central com-

ponents of the criminal business model, in addition to

Banco Santos we mention two other notorious corporate

FIGURE 1 Criminal Business Model

FOCUS ON

MARKET NICHE

IMAGE OF

ORGANIZATION

AND

ENTREPRENEUR

AGGRESSIVE

COMMERCIAL

PRACTICES

MANAGEMENT

MODEL

FRAUDULENT

PRACTICES

High-income

clients and

companies

Serving clients

with financial

problems Exceptional

conditions for

granting loans

Exceptional

conditions for

remunerating

investments

Access to

BNDES funds

Reciprocity

operations

Illicit

operations

with offshore

companies

Money

laundering and

illegal transfers

abroad

Accounting

frauds Use of third

parties as

executives in

paper

Centralization of decision-making

process

Fragmentation

of systems and

working

processes

Aggressive

remuneration

package to

attract talent

Sponsorship of

exhibitions

and cultural

events

Promotion of

international

business

Doing business

with major

clients

Use of cutting-

edge technology

with

partnerships

Corporate Frauds as Criminal Business Models: An Exploratory Study 59

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 1 January/February 2015

Licit and Illicit Cycles

The fraud at Banco Santos was characterized by coex-

istence within the organization of both licit and illicit

cycles. The licit cycle consisted of winning over and

serving companies and high-income clients that were

attracted by the strong and sophisticated image of Banco

Santos and Edemar Cid Ferreira, and by the exceptional

investment returns and loan conditions offered. Opera-

tions with the BNDES, high-profile clients, and partner-

ships with major information technology companies cast

the organization as respectable and reliable.

The illicit cycle consisted of using countless fraudu-

lent practices, conceived and executed by the chief exec-

utive himself and a small group of top managers. Such

practices were concealed by the complexity of the organi-

zation and by the combination of a centralized decision-

making process with fragmented systems and procedures.

Until the first events shook the credibility of Banco

Santos and led to its bankruptcy, the licit cycle, which

was reinforced by the use of impression management

techniques directed toward both internal and external

publics, masked the illicit cycle. Some doubtful and

risky internal practices were seen as “business-as-usual”

for a strategically aggressive, competent, and innovative

organization.

special purpose entities (SPEs) to cover its fraudulent

operations.

3. Building of the organization’s image and personality cult of the entrepreneur. At Banco Santos this occurred mainly through sponsorship of cultural events and

art exhibitions, promotion of international busi-

ness, and business dealings with major companies.

Madoff’s strategy to attract clients included project-

ing an image of himself as an expert, genius, and

sophisticated gentleman with good relationships that

should give him privileged knowledge about market

functioning and trends. Enron promoted its execu-

tives as “the smartest guys,” able to innovate and gain

fortunes.

4. A management model that combined centralized control with fragmented systems. Banco Santos centralized all major decisions at the top, while keeping fragmented sys-

tems and processes in its different companies so that

its own middle-level managers could not figure out

what was going on. Madoff did not execute any trans-

actions at all for his clients; therefore, he did not need

a team but a few people, mainly relatives, who central-

ized communications and forged false documents.

Working processes were decentralized as he operated

by many feeder funds, refusing to give detailed infor-

mation about his portfolio and strategy (Gregoriou

& Lhabitant, 2009; Markopolos, 2010). Similarly, at

Enron the major decisions were centralized in the top

management and processes were fragmented in many

companies (Boje et al., 2004).

5. Use of various complex fraudulent practices. At Banco Santos these practices included deflection of clients’

money, accounting fraud, illegal transfer of cur-

rency abroad, money laundering, and various other

illicit operations. At Madoff these practices included

false registration and extraction of trades, accounting

fraud, illegal activity of investment advisory, and false

testimony (US SEC, 2009). Enron falsified pricing,

simulated operations and trades among its companies

to legitimate business and volume of trades, pro-

duced mise-en-scène of trading operations in order

to impress the media, and corrupted ratings agencies

(Boje et al., 2004).

Evidently, Figure 1, as presented here, cannot be

completely applied to other cases, as it seeks to represent

solely Banco Santos’s case. However, similarities with

other corporate fraud cases, such as those mentioned

above, may be more than coincidence. The development

of the criminal business model, in order to make it gener-

alizable, must be the object of future research.

Until the first events shook the credibility of Banco Santos and led to its bank- ruptcy, the licit cycle, which was reinforced by the use of impression management techniques directed toward both internal and external publics, masked the illicit cycle.

60 C A S E S T U D Y

Thunderbird International Business Review Vol. 57, No. 1 January/February 2015 DOI: 10.1002/tie

However, cases like the one reported in this article

may bring lessons for firms willing to enter the Brazilian

market. There is a saying that “Brazil is not for beginners”

(see Wood & Caldas, 2002). Foreign firms entering Brazil

must pay attention to the complex set of rules and inef-

ficient punishment system for corporate frauds. Foreign

firms must also be aware of local competitors, who have

expertise on how to take advantage of their understand-

ing of the peculiarities of the local business environment,

including those companies that take advantage of politi-

cal connections with the government and those that use

unethical or fraudulent business practices.

We carried out this case study with the objective

of contributing to an understanding of the phenom-

enon of corporate fraud. We analyzed both the substan-

tive and the symbolic aspects of the case and suggested

that under certain circumstances, corporate frauds may

be understood as the result of a criminal business

model—that is, a rational scheme that defines how the

organization captures, creates, and distributes wealth (see

Baden-Fuller & Morgan, 2010).

As case researchers, we do not claim that our find-

ings are applicable to other fraud cases (George & Ben-

nett, 2005). However, we expect that this article provides

insights into the issue of corporate fraud, to be tested in

future studies.

In terms of theory development, we believe that

future research, involving multiple cases, should address

two main questions. The first question is, what makes

a criminal business model sustainable? One could, for

instance, assume time as a dependent variable and con-

duct multiple case studies to better understand how dif-

ferent independent variables affect it, such as image and

reputation, centralization of decision making, fragmenta-

tion of systems and processes, and organizational culture

(greed, ambition, and aggressiveness). The second ques-

tion is, what makes a criminal business model difficult

Substantive and Symbolic Actions

The fraud at Banco Santos occurred right from the

conception of the company and continued until its

bankruptcy. It even intensified toward the end. Its suc-

cess for so long can be attributed to a synthesis between

substantive actions and symbolic actions, a situation

that was well orchestrated by the company’s top execu-

tive. The image of the bold and visionary entrepreneur,

allied with that of a strong, legitimate, and profitable

business, attracted investors and neutralized any critical

views of the company’s activities. Table 1 summarizes

the substantive and symbolic actions carried out by

Banco Santos.

C o n c l u s i o n

Brazil, like the United States and other countries, has

witnessed a number of high-profile corporate fraud

cases in the past 20 years. Several of the most notorious

Brazilian cases occurred in the financial sector (with

the banks Econômico, Nacional, Noroeste, Santos, and

PanAmericano) and in the agribusiness sector (Gallus,

Boi Gordo, and Avestruz Master). One may hypothesize

that these two economic sectors were, for some time,

more vulnerable to frauds. However, vulnerability was

not directly related to these sectors themselves, but to the

lack of regulation and control of financial investments

in its business environment. In all these cases, fraudsters

implemented their scams in a business environment that

was complex and insufficiently controlled. They knew

how to deceive clients and regulators, building custom-

ers’ confidence through the use of symbolic resources

and impression management techniques that highlighted

extraordinary competences and exclusivity. In the past

five years, improvements in the Brazilian regulatory and

control systems made frauds like those mentioned above

less frequent.

TABLE 1 Fraudulent Actions and Impression Management

Fraudulent Actions Impression Management

• Simulation of profi table operations by means of transfers between associated companies

• Simulation of loans, with defl ection of funds and illegal transfers of currency to offshore companies

• Defl ection of funds by buying securities from a paper company • Use of relending funds from the BNDES for “reciprocity” operations • Accounting frauds, with improper risk classifi cation, improper regis-

tration of companies, and settlement of doubtful credits with funds from offshore companies

• Use of third parties as the front executives of paper companies

• Construction of the businessman’s image as a visionary, sophisticated, and competent achiever

• Construction of the bank’s image as strong, imposing, and agile • Construction of the image of employees as a special, sophisticated, and

reliable group • Use of cutting-edge technology to provide an air of sophistication and

agility to the business • Construction of “partnerships” with major global companies, such as Dell

and Microsoft • Celebration of a client portfolio with 300 of the 500 biggest companies

operating in Brazil

Corporate Frauds as Criminal Business Models: An Exploratory Study 61

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 1 January/February 2015

Thomaz Wood Jr. is a full professor at FGV-EAESP. His research interests include business transformation and organizational change. Further research focuses on the development of the creative industries in Brazil.

Ana Paula Paulino da Costa is a lecturer at BSP Business School Sao Paulo and researcher at FIPE - Fundação Instituto de Pesquisas Econômicas. Her research interest is mainly on corporate fraud. Other interests include strategic performance measurement and fi nancial statements, including public accounting.

to detect? One could, for instance, study the effect of

multiple variables, such as opacity of information, com-

plexity of the scam, image and reputation, and the use of

symbolic resources.

In terms of contribution to the practice, we believe

that future research should address the question

of how to prevent the implementation of criminal

business models. One could, for instance, seek better

understanding of fraudulent practices used by fraud

agents, such as those we observed at Banco Santos,

Madoff, and Enron. One could also seek information

on how different countries establish and implement

guidelines and policies regarding fraud and how effec-

tive they prove to be. For instance, it is well known that

the financial industry in Brazil is subject to a regulatory

system that is more rigid than that in the United States.

In both cases, however, fraud agents were capable of

identifying gaps and operating for long periods at

the very boundaries of the law. In the United States,

despite receiving various complaints about Madoff, the

SEC was not capable of uncovering the fraud. Simi-

larly, in Brazil, despite investigating Banco Santos for

several years, the Central Bank was unable to identify

any irregularities.

We hope that this exploratory study may serve

as encouragement for other researchers interested in

exploring the gaps in knowledge of the subject, help

develop better theories on corporate fraud, and improve

prevention and control systems in such a way as to

restrain the actions of fraud agents.

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