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Transformation in Internal Fraud Prevention

By Deya Innab, Director, Product Management, EastNets

Fraud is continuing to evolve.  New trends in fraud continue to develop by creative fraudsters who invent new concepts with no limits. It’s very challenging to create Fraud preventive procedures, controls, regulations and systems.  It’s similar to creating a Viral Vaccine to a Virus that will morph and keep transforming to create new immunity lines.

Even the term Fraud has come to encompass many forms of misconduct. Although the legal definition of fraud is very specific for most people, the common usage is much broader and generally covers any attempt to deceive another party to gain a benefit. Financial Institution Fraud, Mobile Fraud, Health care fraud, identity theft, padded expense reports, mortgage fraud, theft of inventory by employees, manipulated financial statements, insider trading, etc. The range of possible fraud schemes is large, but at their core, all of these acts involve a violation of trust. It is this violation, perhaps even more than the resulting financial loss that makes such crimes so harmful.

One of the most critical and challenging Frauds Schema is the Internal Fraud, also Known as Occupational Fraud; “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets."

Different studies showed that more than 50% of frauds are committed by people already work within an organization and usually act alone. These frauds account for more than a half of the total fraud losses and only 1/3 of internal frauds is actually detected. It is known that the finance and insurance sector remains particularly vulnerable to frauds committed by external parties, typically involved credit cards, lending fraud and fake insurance claims. Nevertheless, the largest frauds where “inside jobs”; theft of cash, diversion of sales and cheque tampering were the main employee frauds by value.

Why do people Commit Fraud? 

There is no single reason behind fraud and any explanation of it needs to take account of various factors, and that is what makes it very difficult to prevent and or detect. A common model that brings together a number of different aspects is the Fraud Triangle. This model is built on the premise that fraud is likely to result from a combination of three factors: motivation, opportunity and rationalization.

Motivation is typically based on either greed or need. In terms of opportunity, fraud is more likely to happen in companies where there is a weak internal control system, poor security over company property, little fear of exposure and likelihood of detection, or unclear policies with regard to acceptable behavior. As for rationalization, some people may be able to rationalize fraudulent actions as: Necessary especially when done for business, Harmless because the victim is large enough to absorb the impact or Justified ‘because the victim deserved it’ or ‘because I was misused.’

Organizations have realized that Internal Fraud is a main driver in overall financial institution losses, it is emerging almost daily, it has a significant financial consequences and it is a driver for reputational damage. Because of all of this and more, organizations invest heavily in adopting Anti-Fraud Framework that provides a healthy environment. This Framework has to be continuously developing to compete with the daily emerging frauds world.

When we talk about establishing healthy Anti-Fraud Framework the Prevention should take precedence over Detection.  What we mean by Fraud Prevention is creating a work environment that values honesty. This includes hiring honest people, paying them competitively, treating them fairly, and providing a safe and secure workplace with strong internal controls.

For us to be able to have a preventive mechanism to minimize Internal Fraud, it is needed to understand the behaviors and the circumstances around the internal fraud cases and try to eliminate the leakage points. 

There are many reasons that allow Internal Fraud to Occur. Poor Internal Controls and the overriding of these controls are the main factors allowing major frauds to occur.

Early warnings or indicators of fraud can be thought of as ‘red flags.’ Unfortunately most of these relevant red flags are usually overlooked or ignored and this results in decreasing the number of reported frauds. This suggests that organizations should review fraud awareness training delivered to employees, so they can recognize red flags.

It was noticed that employees who committed fraud appear to have acted “almost” alone along the life cycle of reported cases.  This suggests controls, particularly segregation of duties. Collusion between two or more individual employees will reduce the possibilities of Internal Fraud.

The average time taken to detect a major fraud increased is very long, almost a year. And the time taken to uncover manager frauds is almost double the time to uncover the frauds committed by other employees. These trends are disturbing. Experience shows that the longer a fraud goes undetected, the larger the losses are likely to become, while recoveries are proportionately smaller. The delay in detection indicates that fraud risk management detection strategies require updating to ensure they are linked to current fraud risks applicable to the organization’s business.

What makes it even worse, the prospects of recovering monies lost to Fraud are poor, the cost of detecting and investigating Fraud cases are very high and reputational damage is an often-overlooked consequence of fraud. Certain major frauds have left long term scars on the reputations of the organizations involved. Add to that the continuous evolving of fraudster’s behaviors makes it a nightmare for all organization as there is no assurance that the adopted Framework will be sufficient 100% to cater for the daily emerging Frauds Behaviors.

Fraudsters, you need to think as one of them to be able to beat them!

Fraud Preventive Solutions

The fact that the regulations related to different schemas of Fraud are very limited makes the exercise of creating an effective and healthy Anti-Fraud platform very challenging.

When we look at Anti-Fraud solutions for financial institutions and corporates in the 80 countries that we serve, we look to build a solution that can be configured by building customized scenarios around the internal systems and processes for each organization to give strong Internal Control.

In addition, an integrated framework enables financial institutions to aggregate data and processes across fraud and AML silos to improve business insight and streamline operational efficiencies.

 

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