Photograph courtesy of the writer
Innovation involves all issues, even to traditional ideas which have grounded complete professions for years or many years.
Amongst attorneys and compliance professionals, the traditional Fraud Triangle—with its three factors of strain, alternative, and rationalization—stands as a foundational idea to explain the traits current after fraud has occurred.
Nevertheless, the traditional Fraud Triangle yields restricted utility—and certainly does not likely even apply—in forward-looking conditions the place the third leg of rationalization is essentially absent.[1] Such conditions embrace ones adversarial in nature similar to advanced industrial disputes, investigations, and compliance issues the place no admission comes from the opposing facet, investigation topics, or counterparties in compliance due diligence and danger assessments. Certainly, in such conditions as a substitute of rationalization, one faces vehement denials. This leaves authorized and compliance professionals in search of to pierce by way of darkness in want of a extra appropriate and efficient guiding gentle.
The Fraud Diamond FrameworkSM builds upon the Fraud Triangle by innovating upon the Fraud Triangle’s “third leg” of rationalization. It does this by changing it with two issues primarily based on the writer’s many years of expertise: one thing nearly too good to be true and that comes at a vital time, and indicators of concealment. The three-pointed Fraud Triangle turns into a four-pointed Fraud Diamond, illustrated within the diagram under:
Let’s stroll by way of every level.
Stress
All the pieces begins with strain. That is the issue that motivates. Simplistically, it’s both want or greed. Stress in a enterprise or office surroundings is ever-present and dynamic.
What to search for? Adjustments in strain primarily based on current enterprise initiatives, actions, offers, and/or targets that will generate notably elevated ranges of strain above the norm. Examples might embrace: (1) a deal or transaction that should shut to ensure that a enterprise or a selected a part of it to outlive or obtain a liquidity occasion, (2) a brand new enterprise initiative that an organization—and the people driving it—must make profitable by attracting sure prospects or securing vital transactions, or (3) regulatory modifications that put restrictions on key prospects or gross sales channel, like in an export controls surroundings when a buyer or distributor will get placed on the Commerce Division’s “Entity Record.”
Alternative
Subsequent comes alternative—the flexibility to behave on the pressures felt.
What to search for? In sensible phrases inside a enterprise context, one must be able to convey materially false or deceptive data that turns into relied upon. Addressing the chance ingredient is the place an organization’s inner controls and compliance insurance policies and procedures come into play, with the purpose to stop a perceived alternative from being exploited within the first place.
One thing Virtually Too Good to be True…That Comes at a Vital Time
That is the primary a part of changing the traditional “rationalization” level.
What to search for? Miracles can and do occur. Companies naturally expertise ups and downs. Nevertheless, what to concentrate to are substantial boosts that come at a vital time for the enterprise. For instance, does a brand new buyer or income stream come proper when it’s vital to reaching success for the enterprise or explicit people inside it? Does it come at a time when managers stand to make or lose their compensation? Does it come at a time that relives strain on a enterprise underneath stress? Does it come at a time when a serious deal wants to shut?
The “nearly too good to be true” facet displays that regardless of the deal, transaction, new buyer, or new income stream could also be, it’s not one thing exterior the realm of chance. Certainly, it could be one thing that’s in any other case fairly regular. What’s vital is appreciating what affect it has, what occurred or has been occurring previous to its arrival, and why it comes when it does. The timing is vital.
Indicators of Concealment
That is the second a part of the innovation from the “rationalization” level.
What to search for? All fraud is hidden. So, search for any indications of—or makes an attempt to—masks materially vital components to the transaction or transactions. Is the counterparty not being totally clear about its enterprise or final useful possession within the due diligence part? Is there one thing that was completed to hide the true nature of the enterprise or sure transactions?
If one thing smells not fairly proper, then that may be a warning sign for potential fraud or compliance breakdowns, particularly when seen holistically with all factors on the Fraud Diamond FrameworkSM.
The client was a big U.S. multinational firm that acquired a non-public equity-backed portfolio firm.
Proper after deal closing, the newly acquired goal firm’s enterprise took a nostril dive.
The multinational couldn’t work out why. Each the goal firm’s financials and the multinational purchaser’s due diligence going into the acquisition had used a serious accounting agency. No points the place famous. The multinational purchaser sought assist from different exterior advisors, however they may not diagnose the problems both. The client felt it purchased a lemon and sought restoration of damages from the vendor by way of arbitration.
Right here’s how making use of the Fraud Diamond FrameworkSM make clear the matter and resulted in a considerable restoration for the customer.
Stress: By way of strain, the goal firm had been experiencing downward revenue margin pressures on its enterprise for a while. The founder/CEO wanted the sale of the corporate to realize a considerable payout, each for himself and his traders. No deal, no money.
Alternative: The goal firm founder/CEO maintained full management over all features of operations, together with finance and accounting.
One thing nearly too good to be true … at a vital time: This got here in two types. First, across the time when the personal fairness agency started in search of a purchaser, the goal firm reported a brand new income stream that had 100% margins. Whereas this may occasionally appear farfetched, it was theoretically potential for the corporate’s enterprise. Importantly, it had the impact of bolstering flagging margins which had been trending downward underneath strain. Second, within the vital interval within the M&A deal cycle between the tip of due diligence and deal closing, key transactions—purportedly with a serious buyer—had been recorded with money collected. These transactions made a vital affect by preserving the goal firm in optimistic web revenue territory and out of the purple. A flip to a web loss would have triggered materially opposed change provisions, inflicting a revaluation and even probably permitting the customer to stroll away.
Indicators of concealment: What was missed by the auditors and due diligence consultants revolved round one of the vital elementary features of any enterprise, money. Whereas they regarded to see that money was being collected on revenues, what all of them missed had been the sources of that money. The founder/CEO took any money collected and utilized it to the oldest excellent receivables throughout all prospects. Money was utilized from one buyer to alleviate getting older receivables from others. On this approach, the “magic” new 100% margin enterprise appeared actual. Lastly, for the transactions that saved the corporate from turning to a web loss proper earlier than deal shut, money got here in not from the purported main buyer however, upon investigation, from one of many founder/CEO’s personal different corporations.
Commerce compliance groups can also leverage the identical framework for danger assessments, due diligence, and investigations. Making use of the framework helps authorized and compliance groups prioritize and focus their assets on the areas of biggest danger. The next instance comes from a July 2025 company enforcement decision with the U.S. Division of Commerce’s Bureau of Trade & Safety and the U.S. Division of Justice that resulted in a complete penalty of $140 million.[2]
The important background was {that a} U.S. know-how firm had a buyer in China that was placed on the Commerce Division’s Entity Record, which resulted in a ban on shipments, with out a license, to that Chinese language buyer.
The U.S. firm’s native personnel in China then shifted the enterprise to a different purchaser to behave as a conduit to proceed the enterprise with the unique buyer. Subsequently, when this new purchaser itself was restricted, enterprise was shifted but once more to a different purchaser with the identical goal to proceed enterprise with the unique buyer.[3]
Listed below are details from the case seen by way of the Fraud Diamond FrameworkSM.
Stress: The U.S. tech firm’s native staff in China confronted dropping a serious buyer.
Alternative: A core duty for the native China staff was to determine new prospects, and on this case, new ones emerged to choose up the enterprise—and act as conduits for—the unique buyer.
One thing nearly too good to be true… at a vital time: The brand new entrance corporations got here on the scene proper upon the unique buyer being added to the Entity Record and the later restrictions on the primary entrance firm. Basically, when one door closed, a brand new white knight buyer appeared and re-opened the door.
Indicators of concealment: The indicators listed below are primarily “purple flags” that ought to have prompted additional due diligence and embrace (however usually are not restricted to): (1) carefully matching addresses, (2) the identify of the unique buyer in Chinese language used subsequent to the identify of the primary entrance firm, (3) and native technical personnel ostensibly speaking with the “new” buyer’s representatives through the unique buyer’s e-mail area identify.
Within the new period of “excessive likelihood” enforcement, making use of the Fraud Diamond FrameworkSM in export controls compliance danger assessments and due diligence can show to be a useful device to keep away from compliance pitfalls and mitigate enforcement danger.[4]
- In a world pushed by accelerating change and uncertainty, fraud—in all shapes and types from advanced industrial disputes to regulatory compliance breakdowns—is on the rise. These conditions are usually adversarial in nature, with no rationalization or admission from the opposite facet or perpetrators usually forthcoming. This makes the traditional Fraud Triangle inapplicable in these settings.
- New progressive instruments and methods are wanted to mitigate danger throughout the enterprise to guard the corporate, its officers and administrators, and authorized and compliance groups, in addition to the corporate’s backside line and shareholder worth. The Fraud Diamond FrameworkSM supplies an progressive and versatile strategy to assist fill this want.
- The Fraud Diamond FrameworkSM equips authorized & compliance groups to focus their consideration and assets on the best areas of danger and extra successfully mitigate them.
- Within the occasion an organization does face a potential fraud state of affairs—similar to in an M&A deal or a industrial transaction gone unhealthy—the Fraud Diamond FrameworkSM will help convey readability to the case which may then translate to a bigger restoration (or alternatively, mitigation or avoidance) of considerable potential damages.
[1] The aim of this text is to not criticize or detract from the worth of the traditional Fraud Triangle. It was developed in very particular—and completely different—situations, i.e., interviews of convicted embezzlers in jail. Accordingly, it was retrospective by design and the embezzlers had on a regular basis on the earth to rationalize their actions. See Affiliation of Licensed Fraud Examiners, “Fraud Examiners Handbook,” Vol. II, p. 4.233 (2021 version).
[2] For additional case data, see: Brent Carlson, “From Peanuts to Elephant-Sized Penalties: A Recent Have a look at Current U.S. Export Controls Enforcement Developments & Future Traits,” NYU PCCE Weblog (Oct. 31, 2025).
[3] For extra on “entity shifting,” see: Brent Carlson, “When Loopholes Create Legal responsibility Pitfalls: A Recent Have a look at Export Controls,” NYU PCCE Weblog (Aug. 25, 2023).
[4] For extra on the brand new period “excessive likelihood” enforcement of U.S. export controls, see: Michael Huneke and Brent Carlson “Anticipating the second of fact: easy methods to put together for ‘excessive likelihood’ catch-all enforcement,” Dow Jones WorldECR #142, (July-Aug 2025).
Brent Carlson is the founding father of Purple Flags Rising Options LLC and co-host of the Purple Flags Rising podcast.
The views, opinions and positions expressed inside all posts are these of the writer(s) alone and don’t characterize these of the Program on Company Compliance and Enforcement (PCCE) or of the New York College College of Regulation. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this website and won’t be liable any errors, omissions or representations. The copyright of this content material belongs to the writer(s) and any legal responsibility on the subject of infringement of mental property rights stays with the writer(s).
Photograph courtesy of the writer
Innovation involves all issues, even to traditional ideas which have grounded complete professions for years or many years.
Amongst attorneys and compliance professionals, the traditional Fraud Triangle—with its three factors of strain, alternative, and rationalization—stands as a foundational idea to explain the traits current after fraud has occurred.
Nevertheless, the traditional Fraud Triangle yields restricted utility—and certainly does not likely even apply—in forward-looking conditions the place the third leg of rationalization is essentially absent.[1] Such conditions embrace ones adversarial in nature similar to advanced industrial disputes, investigations, and compliance issues the place no admission comes from the opposing facet, investigation topics, or counterparties in compliance due diligence and danger assessments. Certainly, in such conditions as a substitute of rationalization, one faces vehement denials. This leaves authorized and compliance professionals in search of to pierce by way of darkness in want of a extra appropriate and efficient guiding gentle.
The Fraud Diamond FrameworkSM builds upon the Fraud Triangle by innovating upon the Fraud Triangle’s “third leg” of rationalization. It does this by changing it with two issues primarily based on the writer’s many years of expertise: one thing nearly too good to be true and that comes at a vital time, and indicators of concealment. The three-pointed Fraud Triangle turns into a four-pointed Fraud Diamond, illustrated within the diagram under:
Let’s stroll by way of every level.
Stress
All the pieces begins with strain. That is the issue that motivates. Simplistically, it’s both want or greed. Stress in a enterprise or office surroundings is ever-present and dynamic.
What to search for? Adjustments in strain primarily based on current enterprise initiatives, actions, offers, and/or targets that will generate notably elevated ranges of strain above the norm. Examples might embrace: (1) a deal or transaction that should shut to ensure that a enterprise or a selected a part of it to outlive or obtain a liquidity occasion, (2) a brand new enterprise initiative that an organization—and the people driving it—must make profitable by attracting sure prospects or securing vital transactions, or (3) regulatory modifications that put restrictions on key prospects or gross sales channel, like in an export controls surroundings when a buyer or distributor will get placed on the Commerce Division’s “Entity Record.”
Alternative
Subsequent comes alternative—the flexibility to behave on the pressures felt.
What to search for? In sensible phrases inside a enterprise context, one must be able to convey materially false or deceptive data that turns into relied upon. Addressing the chance ingredient is the place an organization’s inner controls and compliance insurance policies and procedures come into play, with the purpose to stop a perceived alternative from being exploited within the first place.
One thing Virtually Too Good to be True…That Comes at a Vital Time
That is the primary a part of changing the traditional “rationalization” level.
What to search for? Miracles can and do occur. Companies naturally expertise ups and downs. Nevertheless, what to concentrate to are substantial boosts that come at a vital time for the enterprise. For instance, does a brand new buyer or income stream come proper when it’s vital to reaching success for the enterprise or explicit people inside it? Does it come at a time when managers stand to make or lose their compensation? Does it come at a time that relives strain on a enterprise underneath stress? Does it come at a time when a serious deal wants to shut?
The “nearly too good to be true” facet displays that regardless of the deal, transaction, new buyer, or new income stream could also be, it’s not one thing exterior the realm of chance. Certainly, it could be one thing that’s in any other case fairly regular. What’s vital is appreciating what affect it has, what occurred or has been occurring previous to its arrival, and why it comes when it does. The timing is vital.
Indicators of Concealment
That is the second a part of the innovation from the “rationalization” level.
What to search for? All fraud is hidden. So, search for any indications of—or makes an attempt to—masks materially vital components to the transaction or transactions. Is the counterparty not being totally clear about its enterprise or final useful possession within the due diligence part? Is there one thing that was completed to hide the true nature of the enterprise or sure transactions?
If one thing smells not fairly proper, then that may be a warning sign for potential fraud or compliance breakdowns, particularly when seen holistically with all factors on the Fraud Diamond FrameworkSM.
The client was a big U.S. multinational firm that acquired a non-public equity-backed portfolio firm.
Proper after deal closing, the newly acquired goal firm’s enterprise took a nostril dive.
The multinational couldn’t work out why. Each the goal firm’s financials and the multinational purchaser’s due diligence going into the acquisition had used a serious accounting agency. No points the place famous. The multinational purchaser sought assist from different exterior advisors, however they may not diagnose the problems both. The client felt it purchased a lemon and sought restoration of damages from the vendor by way of arbitration.
Right here’s how making use of the Fraud Diamond FrameworkSM make clear the matter and resulted in a considerable restoration for the customer.
Stress: By way of strain, the goal firm had been experiencing downward revenue margin pressures on its enterprise for a while. The founder/CEO wanted the sale of the corporate to realize a considerable payout, each for himself and his traders. No deal, no money.
Alternative: The goal firm founder/CEO maintained full management over all features of operations, together with finance and accounting.
One thing nearly too good to be true … at a vital time: This got here in two types. First, across the time when the personal fairness agency started in search of a purchaser, the goal firm reported a brand new income stream that had 100% margins. Whereas this may occasionally appear farfetched, it was theoretically potential for the corporate’s enterprise. Importantly, it had the impact of bolstering flagging margins which had been trending downward underneath strain. Second, within the vital interval within the M&A deal cycle between the tip of due diligence and deal closing, key transactions—purportedly with a serious buyer—had been recorded with money collected. These transactions made a vital affect by preserving the goal firm in optimistic web revenue territory and out of the purple. A flip to a web loss would have triggered materially opposed change provisions, inflicting a revaluation and even probably permitting the customer to stroll away.
Indicators of concealment: What was missed by the auditors and due diligence consultants revolved round one of the vital elementary features of any enterprise, money. Whereas they regarded to see that money was being collected on revenues, what all of them missed had been the sources of that money. The founder/CEO took any money collected and utilized it to the oldest excellent receivables throughout all prospects. Money was utilized from one buyer to alleviate getting older receivables from others. On this approach, the “magic” new 100% margin enterprise appeared actual. Lastly, for the transactions that saved the corporate from turning to a web loss proper earlier than deal shut, money got here in not from the purported main buyer however, upon investigation, from one of many founder/CEO’s personal different corporations.
Commerce compliance groups can also leverage the identical framework for danger assessments, due diligence, and investigations. Making use of the framework helps authorized and compliance groups prioritize and focus their assets on the areas of biggest danger. The next instance comes from a July 2025 company enforcement decision with the U.S. Division of Commerce’s Bureau of Trade & Safety and the U.S. Division of Justice that resulted in a complete penalty of $140 million.[2]
The important background was {that a} U.S. know-how firm had a buyer in China that was placed on the Commerce Division’s Entity Record, which resulted in a ban on shipments, with out a license, to that Chinese language buyer.
The U.S. firm’s native personnel in China then shifted the enterprise to a different purchaser to behave as a conduit to proceed the enterprise with the unique buyer. Subsequently, when this new purchaser itself was restricted, enterprise was shifted but once more to a different purchaser with the identical goal to proceed enterprise with the unique buyer.[3]
Listed below are details from the case seen by way of the Fraud Diamond FrameworkSM.
Stress: The U.S. tech firm’s native staff in China confronted dropping a serious buyer.
Alternative: A core duty for the native China staff was to determine new prospects, and on this case, new ones emerged to choose up the enterprise—and act as conduits for—the unique buyer.
One thing nearly too good to be true… at a vital time: The brand new entrance corporations got here on the scene proper upon the unique buyer being added to the Entity Record and the later restrictions on the primary entrance firm. Basically, when one door closed, a brand new white knight buyer appeared and re-opened the door.
Indicators of concealment: The indicators listed below are primarily “purple flags” that ought to have prompted additional due diligence and embrace (however usually are not restricted to): (1) carefully matching addresses, (2) the identify of the unique buyer in Chinese language used subsequent to the identify of the primary entrance firm, (3) and native technical personnel ostensibly speaking with the “new” buyer’s representatives through the unique buyer’s e-mail area identify.
Within the new period of “excessive likelihood” enforcement, making use of the Fraud Diamond FrameworkSM in export controls compliance danger assessments and due diligence can show to be a useful device to keep away from compliance pitfalls and mitigate enforcement danger.[4]
- In a world pushed by accelerating change and uncertainty, fraud—in all shapes and types from advanced industrial disputes to regulatory compliance breakdowns—is on the rise. These conditions are usually adversarial in nature, with no rationalization or admission from the opposite facet or perpetrators usually forthcoming. This makes the traditional Fraud Triangle inapplicable in these settings.
- New progressive instruments and methods are wanted to mitigate danger throughout the enterprise to guard the corporate, its officers and administrators, and authorized and compliance groups, in addition to the corporate’s backside line and shareholder worth. The Fraud Diamond FrameworkSM supplies an progressive and versatile strategy to assist fill this want.
- The Fraud Diamond FrameworkSM equips authorized & compliance groups to focus their consideration and assets on the best areas of danger and extra successfully mitigate them.
- Within the occasion an organization does face a potential fraud state of affairs—similar to in an M&A deal or a industrial transaction gone unhealthy—the Fraud Diamond FrameworkSM will help convey readability to the case which may then translate to a bigger restoration (or alternatively, mitigation or avoidance) of considerable potential damages.
[1] The aim of this text is to not criticize or detract from the worth of the traditional Fraud Triangle. It was developed in very particular—and completely different—situations, i.e., interviews of convicted embezzlers in jail. Accordingly, it was retrospective by design and the embezzlers had on a regular basis on the earth to rationalize their actions. See Affiliation of Licensed Fraud Examiners, “Fraud Examiners Handbook,” Vol. II, p. 4.233 (2021 version).
[2] For additional case data, see: Brent Carlson, “From Peanuts to Elephant-Sized Penalties: A Recent Have a look at Current U.S. Export Controls Enforcement Developments & Future Traits,” NYU PCCE Weblog (Oct. 31, 2025).
[3] For extra on “entity shifting,” see: Brent Carlson, “When Loopholes Create Legal responsibility Pitfalls: A Recent Have a look at Export Controls,” NYU PCCE Weblog (Aug. 25, 2023).
[4] For extra on the brand new period “excessive likelihood” enforcement of U.S. export controls, see: Michael Huneke and Brent Carlson “Anticipating the second of fact: easy methods to put together for ‘excessive likelihood’ catch-all enforcement,” Dow Jones WorldECR #142, (July-Aug 2025).
Brent Carlson is the founding father of Purple Flags Rising Options LLC and co-host of the Purple Flags Rising podcast.
The views, opinions and positions expressed inside all posts are these of the writer(s) alone and don’t characterize these of the Program on Company Compliance and Enforcement (PCCE) or of the New York College College of Regulation. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this website and won’t be liable any errors, omissions or representations. The copyright of this content material belongs to the writer(s) and any legal responsibility on the subject of infringement of mental property rights stays with the writer(s).
