The challenge for institutions to create fraud preventive procedures, controls and regulations is ongoing as creative fraudsters regularly invent new methods.

It’s similar to creating a vaccine that morphs to create new immunity lines.

Even the word “fraud” now encompasses many forms of misconduct. While the legal definition is specific for most people, the common usage is much broader and generally covers any attempt to deceive another party for a benefit.

The range of possible fraud schemes is large: 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.

At the core, all of these acts involve a violation of trust.

One of the most critical and challenging fraud schemes involves internal fraud - also known as occupational fraud. This involves the use of one’s occupation for personal gain through the deliberate misuse or misapplication of the employee’s organization’s resources or assets.

More than 50 percent of fraud acts are committed by people within an organization, studies have shown. They often act alone. Such acts account for more than half of the total fraud losses. Just 33 percent of internal fraud, it’s estimated, is actually detected.

The finance and insurance sectors remain particularly vulnerable to fraud by external parties, often involving credit cards, lending fraud and fake insurance claims. 

There is no single reason why fraud is committed. Any explanation must consider many factors, which is what makes it difficult to prevent and detect. A common model uniting many aspects is the “Fraud Triangle” - 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. 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 realize that internal fraud is a main driver in overall financial institution losses. It occurs almost daily, has significant financial consequences and is a driver for reputational damage. As a result, organizations invest heavily in adopting an anti-fraud framework that provides a healthy environment. This framework has to be always developing to compete with the daily emerging fraud worlds.

When we talk about building a healthy anti-fraud framework, prevention should take precedence over detection. This means creating a work environment that values honesty – including hiring honest people, paying them competitively, treating them fairly and providing a safe and secure workplace with strong internal controls.

To have a preventive mechanism to minimize internal fraud, it is necessary to understand the behaviors and the circumstances around the internal fraud cases and try to eliminate the leakage points. 

Poor internal controls and the overriding of these controls are the main factors leading to internal fraud.

Early warning signs of fraud are usually ignored, resulting in lowering the number of reported frauds. This suggests that organizations should review fraud awareness training for employees.

The average time needed to detect major fraud seems to be rising, anecdotal evidence suggests. Experience shows that the longer fraud goes undetected, the larger the loss. 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 worse, the prospects of recovering funds lost to fraud are poor. The cost of detecting and investigating fraud cases are high and reputational damage is an often-overlooked consequence.

Certain major frauds have left long-term scars on the reputations of the organizations involved.

Fraud Preventive Solutions

The fact that the regulations related to different fraud schemes are limited makes the exercise of creating an effective and healthy anti-fraud platform challenging.

When we look at anti-fraud solutions for financial institutions and corporates in the 80 countries that we serve, we want to build a solution that can be configured by building customized scenarios around the internal systems and processes for each organization to provide strong internal controls.

An integrated framework allows financial institutions to aggregate data and processes across fraud and various silos to improve business insight and streamline operational efficiencies.

The key, of course, is to ensure fraud prevention tools are evolving faster than the schemes conjured up by fraudsters. 

Deya Innab is director, product manager at EastNets, a provider of anti-money laundering, fraud prevention and payment services with more than 1,000 customers in 120 countries.   


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