Each financial year, billions of dollars are spent on countering fraud and many more billions are lost due to frauds. Organizations invest in prevention, deterrence and detection of frauds and if a fraud is committed, more money is spent on investigations, insurances, legal and regulatory expenses. But the damage that frauds can do to the goodwill of a company is way bigger.
Detecting frauds is a tricky business. But before we get into that, let’s answer a few common questions about fraud.
Are frauds only an external risk?
The common mistake is to believe that parties unknown to the organization commit fraud. On the contrary, many infamous frauds have actually been perpetrated by inside guys. There are three types of frauds – Internal, External and Collusion. Most companies want to believe that their employees are honest and won’t be involved in fraudulent activities. Although pre-employment checks are a good practice, they can’t predict the future.
Who is responsible for preventing and detecting frauds?
Companies adopt different prescribed international standards and align themselves to these models. One such model is the three layer of defense (LOD). The first layer of defense is the employee himself. Employees need to understand the perils of risk and fraud. The second layer of defense is the operational risk team or any external audit (GIA) team. They provide additional protection to line functions by performing various checks and implementing risk control measures. The third layer is the group’s internal audit (GIA) or any other audit firms invited for such purposes. The third layer has the ultimate authority and assures the business on its risks and opportunities. Any breach found beyond these layers means trouble.
Can one incident or individual cause enough damage?
Over a period of time, we have seen how one individual or incident can bring down the goodwill of the company and even lead to its closure. The collapse of a leading bank in 1995 due to rogue trading done by an individual is one such example. Another such incident that that made international headlines was that of a hedge fund billionaire who got arrested and his company closed down by the federal department during 2011 for fraud. This one incident started a domino effect, bringing down many top business honchos.
Is Fraud different from operational risk, money laundering, etc.?
It is crucial to understand how fraud syndicates work. While companies have various departments, different goals and targets, for a fraudster there is just one aim – to swindle companies.
They use all existing options available and also invent new ways to attack businesses. They may launder the money using operational gaps and could use this for terrorist financing. It’s a vicious cycle that never stops.
What’s the future of fraud prevention?
Identifying and combating fraud is a continuous and evolving process. In the future, companies may include psychological clearance as part of their pre-employment checks and conduct even stronger background checks. But as anti-fraud measures evolve, so will the fraudsters.
Frauds can happen anywhere, anyhow and without prior intimation. It hits you the hardest when you are least prepared. Prevention is always better than cure; get all your controls and checks in place, be proactive, encourage positive risk attitude and most importantly, always be alert.