Financial fraud by the numbers
In a June 2016 Gallup poll, 72 percent of respondents said they had “very little” or only “some” confidence in banks.1 This lack of confidence lives alongside recent headlines—including major fraud schemes revealed at Deutsche Bank this summer—and the fact that the financial services industry is the most affected sector in the world when it comes to occupational fraud.
Financial institutions account for 16.8% of all occupational fraud worldwide, with a median loss of $192,000 per case.2 Longer running, complex schemes can cost organizations much more—overall, 23% of fraud cases in 2015 caused losses of $1 million or more.3
What does a fraudster looks like, and how do they commit their crimes? How do you prevent fraud from happening at your organization? And how can you strengthen an already robust anti-fraud program?
Profile of a fraudster
One of the most difficult tasks any organization faces is identifying and preventing potential cases of fraud. This is especially challenging because the majority of employees who commit fraud are first-time offenders with no record of criminal activity, or even termination at a previous employer.
The 2016 report from the Association of Certified Fraud Examiners (ACFE) reveals a few commonalities between fraudsters:4
- 3% of fraudsters had no criminal background
- Men committed 69% of frauds and women committed 31%
- More than half of fraudsters were between the ages of 31 and 45
- 3% of fraudsters were an employee, 31% worked as a manager and 20% operated at the executive/owner level
Employees who committed fraud displayed certain behaviors during their schemes. The ACFE reported these top red flags:5
- Living beyond means – 45.8%
- Financial difficulties – 30.0%
- Unusually close association with vendor/customer – 20.1%
- Control issues, unwillingness to share duties – 15.3%
These figures give us a general sense of who commits fraud and why. But in all cases, the most pressing question remains: how do you prevent the fraud from happening?
Preventing fraud: A two-pronged approach
As a proactive plan for preventing fraud, we recommend focusing time and energy on two distinct facets of your operations: leadership tone and internal controls.
Leadership tone
The Board of Directors and senior management are in a powerful position to prevent fraud. By fostering a culture of zero-tolerance for fraud at the top of an organization, you can diminish opportunity for employees to consider, and attempt, fraud.
It is crucial to start at the top. Not only does this send a message to the rest of the company, but in the United States, frauds committed at the executive level had a median loss of $500,000 per case, compared to a median loss of $54,000 when a lower level employee perpetrated the fraud.6
A specific action plan for the Board of Directors is outlined in our free white paper on financial institution fraud.
Internal controls
Every financial institution uses internal controls in its daily operations. Yet over half of all frauds could be prevented if internal controls were implemented or more strongly enforced.7
The importance of internal controls cannot be overstated. Every organization should closely examine its internal controls and determine where they can be strengthened – even financial institutions with strong anti-fraud measures in place.
The experts at BerryDunn have created a checklist of the top 10 internal controls for financial institutions, available in our white paper on preventing fraud. This is a list that we encourage every financial leader to read. By strengthening your foundation, your company will be in a powerful place to prevent fraud.
Read more to prevent fraud
Employees are your greatest strength and number one resource. Taking a proactive, positive approach to fraud-prevention maintains the value employees bring to a financial institution, while focusing on realistic measures to discourage fraud.
In our free whitepaper on preventing financial institution fraud, we take a deeper look at how to successfully implement a strong anti-fraud plan.
Commit to strengthening fraud prevention and you will instill confidence in your Board, employees, customers and the general public. It’s a good investment for any financial institution.
1http://www.gallup.com/poll/1597/confidence-institutions.aspx 2-7Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, The Association of Certified Fraud Examiners, p. 34-35