The Fraud Triangle and Assessing Fraud Risk Management
The Fraud Triangle is a widely recognized tool designed to understand how and why fraud occurs. It explores the opportunity, rationalization, and incentive that explains the reason behind an individual’s motivation to commit the crime of fraud.
According to PwC’s Global Economic Crime and Fraud Survey 2022, 46% of surveyed organizations reported experiencing fraud, corruption or other economic crimes in the previous two years. Of those cases, 43% were due to an external perpetrator, 31% from an internal perpetrator, and 26% as a result of collusion between both external and internal individuals. Of those external perpetrators, more than a quarter (26%) were customers.
Fraud is a major risk to business revenue, and one which cost communication service providers (CSPs) USD22.18bil of direct fraud losses in 2021 according to the Risk and Assurance Group’s (RAG) revenue assurance, fraud management and cybersecurity (RAFMCS) survey.
Exploring the fraud triangle
The concept of the fraud triangle was first developed in 1953 by respected criminologist Dr John Cressey, and was adapted and modified several times in the decades following its development to create the most commonly referenced form that is seen today. It offers a qualitative method for assessing fraud risk management, understanding the landscape that can expose organizations to fraud.
Fraud comes in many forms, including that perpetuated against individuals such as telephone fraud addressed by our SCAMBlock solution. It also includes internal organization fraud where bad actors within a business exploit their position for personal gain, a key element of our own Fraud Management system. Finally, it includes external organizational fraud which could include vendors seeking to defraud enterprises, or bad actors seeking financial products through fraudulent information, addressed by elements such as application risk analysis in our Fraud Management portfolio of solutions.
- Opportunity. Opportunity in a fraud triangle is about the circumstances which allow for fraud to be perpetrated. Often this can be elements like poor risk management and fraud processes, ineffective or dated fraud management technologies, and weak internal controls that mean an enterprise offers poor defense against fraud.
- Incentive. Incentive speaks to the reason that motivates a bad actor to commit fraud. These incentives are naturally complex, and could vary from elements like financial hardship (external fraud) to significant internal pressure for results (internal fraud), or personal incentives such as a desire for wealth. An interesting quote from the original research has one perpetrator note “There was no need for it like there was this time.”
- Rationalization. Rationalization is the justification that a fraudster will employ for their actions. This could be things like a belief in a broken system that makes fraud a natural action, being stuck for finances in a way they see fraud as their only outlet, or poor management influence that creates a bad atmosphere. One respondent to the original survey noted “I thought it was dishonest then, but this time it did not seem dishonest at first.”
What’s fascinating about this research is that the question of ‘right’ and ‘wrong’ is such a dynamic question when it comes to fraud. That is something companies can address where possible with a positive internal atmosphere, transparent communication, and steps to reduce the incentive and rationalization of fraud.
According to Cressey’s original research, “many trust violators expressed the idea that they knew the behavior to be illegal and wrong at all times and that they merely kidded themselves into thinking that it was not illegal.” This shows no organization can truly eliminate the full incentive and rationalization for fraud, and indeed even where fraud is recognized as being illegal, there are many bad actors still willing to commit it. This challenging fraud landscape was a major motivator in our development of the SCAMBlock call blocker solution, designed to eliminate fraud before it impacts customers.
According to a review by the US’ Public Company Accounting Oversight Board, “Three conditions generally are present when fraud occurs. First, management or other employees have an incentive or are under pressure, which provides a reason to commit fraud. Second, circumstances exist—for example, the absence of controls, ineffective controls, or the ability of management to override controls—that provide an opportunity for a fraud to be perpetrated. Third, those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of ethical values that allow them to knowingly and intentionally commit a dishonest act.”
This analysis clearly highlights that eliminating the opportunity for fraud is the most direct intervention that organizations can make in seeking to reduce fraud losses. Reducing the exposure to fraud directly limits the losses that an enterprise could incur.
Neural Technologies’ Fraud Management Solution is designed to reduce the opportunity for fraud, whether that’s fraud protection for MSMEs or offering fraud protection for the high-growth mobile money market. We leverage our pioneering machine learning technologies to address fraud risks, and reduce opportunities for fraudsters, providing a flexible, scalable solution that not only addresses opportunity today, but evolves to identify and tackle emerging fraud risks.
The best way forward in fighting fraud
Commentators and analysts continue to argue over the full impact of the three distinct corners of the fraud triangle, but what’s clear is that companies with poor fraud controls and processes are far more likely to lose revenue, and indeed customers, than those who act to implement robust protection against fraud.
Implementing robust fraud controls with an adaptive fraud technology like those provided by Neural Technologies offers a path to reduce fraud exposure, and limit the opportunity for fraud that impacts both customers and your own bottom line.