The Inside Job: How internal fraud continues to thrive

Luke Taylor
Author: Luke Taylor CCO & Deputy CEO
Date: 31st October 2016
Categories: Technology, Financial, Banking, Telecoms, Fraud protection, Optimus, Neural Technologies, Wells Fargo, ACFE, Safaricom, Internal Fraud

Admit it. We’ve all ‘borrowed’ a pen from the stationery cupboard, or a roll of Sellotape from the office at Christmastime never to return them. Will we face a lengthy prison sentence and criminal record? Probably not. After all it’s just a pen…right? According to a survey by Banner Business Services in the UK, stolen office supplies cost British companies £2 billion per year. What’s more, over two-thirds of the respondents freely admitted to stealing from their workplace. In America, over 50% of workers admit to “borrowing” - and then never returning - from the office (a.k.a. stealing). But what happens when it’s not ‘just a pen’?

The Association of Certified Fraud Examiners (ACFE) Report to the Nations on Occupational Fraud and Abuse highlight that a typical organisation will lose about 5% of revenue to fraud citing the longer a fraud lasts before it is detected, the more the victim organisation losses.

But if you search the internet, you will not find long lists of cases or news article on the subject. Why? Mostly because of the assumption that it would create bad publicity and impact the corporation’s professional standing. The Association of Certified Fraud Examiners say over 40% of the respondents of their recent survey did not take legal action against the perpetrators, preferring to not highlight their issues in fear of reputational damage.

Having said that, there are success stories. In Africa, our customer Safaricom undertakes an almost annual purge of staff caught committing internal fraud, and dismissed 217 employees between 2012 and 2015. These people were not stealing pens, however, there was evidence of asset misappropriation, fraudulent expense claims and corruption. For Safaricom this is a positive step to provide their consumers with confidence that they take the issue seriously.

So what can companies do to mitigate against, identify and/or act upon internal theft?

From our own experience, in emerging regions where there is a greater diversity of wealth, internal fraudsters will assist their friends and family to receive free services by switching subscribers from pre-paid to post-paid accounts, so that they need never pay. The fraud, however, rarely stops there.  Increasingly, criminals bribe or incentivise employees to provide information, access to technology, processes and logistics that will assist them in defrauding the operator. 

This could include gaining access to pin numbers for pre-paid top up vouchers, gaining access to confidential information to inappropriately acquire handsets, services and more, or colluding with dealers and agents to defraud mobile operators of remittance fees or purchase goods through illegitimate means. Unfortunately for the fraudsters the more you commit these crimes, the more likely you are to get caught, but some may get away with defrauding their employers of thousands or hundreds of thousands of dollars before they are found out.

Of course fraud is not just limited to low paid employees seeing a route to make some money. Senior management can suffer from greed too and may perpetrate similar frauds, usually with higher values and with more dramatic effect. ACFE estimate average losses of $65,000 for an employee and over $700,000 for an executive. Procurement fraud, expenses fraud, financial fraud, bribery, corruption are all areas of temptation.

At a basic level, companies can protect themselves by completing thorough background checks on all potential employees as part of the recruitment procedure, implementing strict processes, ensuring governance and educating staff. By enforcing aspects such as a minimum two week holiday period each year, employers can usually catch some of these fraudsters. Some fraudsters are simply recognised by spending their ill-gotten gains and flaunting them in the workplace – new cars, luxury holidays, expensive clothes, jewellery, and all of that ilk.

In large organisations, however, systems play an important role in detecting these behaviours and flagging them up to fraud detection teams.   Companies need to rely on their vast majority of honest employees to ‘whistleblow’ on their peers. Many organisations in certain geographies have such processes and internal forensics departments in place to try and manage the challenges from internal threats. ACFE state that twice as much fraud is perpetrated within corporations that lack anti-fraud controls.

Technology can complement process and governance, assist to automate analysis, and identify and validate between legitimate and fraud aspects such as Benford's Law. Benford's law, also called the first-digit law, is an observation about the frequency distribution of leading digits in many real-life sets of numerical data. Used in areas like expenses, both fraud and procurement fraud anomalies based on human behavior can be recognised. Monitoring staff habits, which terminals they use, for how long, which customers are they interfacing with and how frequently, as well as looking at their working patterns (extended or unusual periods of out of hours work) will all assist in identifying fraud.

Internal fraud will never be eradicated – it will only increase and become more advanced and complicated as technologies, working environments, distributed workforces, outsourced workforces, mobile working and more all become the norm.

Last month, federal regulators in the USA said Wells Fargo (WFC) employees secretly created millions of unauthorised bank and credit card accounts for many years, without their customers knowing it. The fake accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money. Where does this fraud lie in the context of occupational fraud and abuse...? Corporate, Senior Management, Employees...

Take a look at the The Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse. You be surprised about the issues being faced today.