When selecting fraud monitoring software, it’s essential to understand the types of fraud prevalent in your industry. This will help you to identify and implement adequate preventive measures.
Fraudsters exploit internal control weaknesses, positions, functions, or authorized access to gain an advantage. They often rationalize their behavior using the “fraud triangle” theory, which includes three elements: incentive/pressure, opportunity, and capability.
Targets of Fraud
We’re all familiar with stories of bogus vacation opportunities or fly-by-night home repair scams. However, these highly publicized crimes represent just a tiny fraction of the fraudulent schemes perpetrated every day. Virtually anyone can fall victim to fraud. Fraudsters will target individuals based on age, financial status, education, race, culture, gender, or geographic location.
In addition to the internal fraud committed by employees, external fraud can be caused by customers, vendors, or telemarketers. The losses from these types of schemes can be staggering. Some common examples include check fraud (estimated at $40 billion a year), credit card fraud, inventory theft, bribery, and corruption.
While it may seem counterintuitive, payments have become the most digitalized part of the banking industry and are a particularly lucrative target for fraudsters. As payments and other services move into the mobile sphere, there’s an ever-increasing need for real-time authentication across all channels. This push for agility forces banks and payment companies to reduce the number of verification steps and introduce automation, relying on machine learning algorithms and behavioral analytics.
As a result, the threat landscape is becoming increasingly complex and challenging to manage. Fortunately, advanced data analysis can provide the visibility needed to detect patterns of suspicious behavior, regardless of channel or product type. One of the things to consider in how to choose fraud detection software is that it can detect and prevent fraud attacks by correlating domain names, IP addresses, devices, and session behavior.
Types of Fraud
Fraud is any deception intended to steal money, goods, or services from another person. It is a non-violent theft crime involving fraudsters stealing credit card information or creating fake identities to make fraudulent purchases. Fraudsters use many tools to commit these crimes, from phishing scams and bogus health insurance claims to forging checks, counterfeiting cash, or engaging in payment fraud like promo abuse fraud or e-gift card fraud at checkout.
Many kinds of fraud can impact businesses, including asset misappropriation, bribery and corruption, and financial statement fraud. Each of these forms of fraud can damage a business in different ways, but they are all related to the intent to deceive for personal gain.
For example, asset misappropriation fraud involves employees taking company property without authorization for their benefit. This might include stealing inventory, falsifying invoices to divert funds from the company, or funneling money to a personal bank account. It could also involve employee payroll fraud like falsifying timesheets, issuing unauthorized bonuses, or paying fictitious employees.
Bribery and corruption fraud, on the other hand, involves schemes such as kickbacks, shell companies, and bribes to influence decision-making or manipulate costs or contracts. It can also include stealing customer data or intellectual property.
Occupational Fraudsters
Employees can perpetrate fraudulent activities at all levels of an organization.
Asset misappropriation, which includes stealing cash or supplies and fraudulent reimbursement claims or expense reporting, makes up the majority of occupational fraud cases (89%) and is typically not as costly as other types of fraud. Corruption, which includes kickbacks and bribes, is the second most common scheme, followed by financial statement fraud at 10% of incidents with median losses of $800,000.
Regarding occupational fraud perpetrators, factors include position within the company, department, age, education level, and whether the person acted alone or in conjunction with others. Generally speaking, those in senior management or executive positions are more likely to commit fraud than those in lower-level staff roles, with the median loss increasing with higher authority and access to company resources.
Behavioural Red Flags
Fraudsters come in many different types and are motivated by various factors. Some are opportunistic and seek any opportunity to steal money, goods, or services from your business. Others are more calculated and seek to manipulate financial markets. Still, others are simply corrupt and disregard morality or justice. No matter their motivation, the best way to protect your company from fraud is to be alert and recognize behavioral red flags.
Behavioral red flags include atypical spending behavior, unusual investments, and unexplained account activity. While these are not conclusive indicators that a particular employee is engaging in fraudulent activities, they should be taken seriously. It is also essential to consider an individual’s risk profile when assessing behavioral red flags. For example, if an employee is constantly first in and last out of the office, this could suggest they are using their time to commit fraud.
Other behavioral red flags include an employee’s age, gender, and occupation. Males commit a large percentage of reported fraud, while most fraudsters have no previous criminal record. Additionally, the median loss for those perpetrating fraud is significantly higher at the management and executive levels than at the staff levels. This is likely due to their fantastic opportunity to make more significant financial transactions.
