Insider Fraud - Should you be worried?

While it goes without saying that most staff in any organisation are honest and trustworthy, there is a growing awareness and concern about the very real threat posed by the few who act dishonestly to defraud their employer. Fraud in the workplace can lead to an organisation experiencing a substantial internal impact, financial losses and unquantifiable damage to reputation. Most importantly, insider fraud is increasingly one of the biggest concerns for employers: Deloitte’s 2007 Global Financial Services Security Survey found that 91% of the respondents (from a range of 169 major global financial institutions) were concerned about the risks arising internally.

Insider fraud can take many forms: from deception through to stealing customer data and selling it on to organised criminals. Even at recruitment stage, fraud can be a problem, with lies included in application forms or on CVs.

The Risk Advisory Group found that 1 in 4 CVs or application forms contained some form of material falsehood, from overstating of qualifications and responsibilities through to false employment histories. This is exacerbated by problems with obtaining references – some employers (including many public sector organizations) are no longer willing to provide any reference other than to confirm the dates that an individual was employed. For others, there can be a lack of ‘quality control’. Furthermore, in the current climate, the temptation to commit fraud - for example, by inflating expenses claims - is increased. BDO Stoy Hayward’s recent figures show that fraud committed by employees has risen to 11% of all fraud cases, compared with just 2.5% in the same period last year. This demonstrates the very real danger posed by the small handful of dishonest colleagues not only to their organisation and its customers or service users, but also to their friends and colleagues.”

A significant amount, around 40%, of the investigations taken up by the City of London Police’s Economic Crime Department involve insider fraud, which is up from 15% ten years ago. Their experience reveals that:

• insider fraud is seen by criminals as low risk and high reward
• the sentencing regime is not sufficiently punitive to be a real deterrent
• there is an increased involvement of organised crime
• changes in employment patterns, e.g. the growth in the use of temporary staff, and high staff turnover can lead to employees becoming senior more quickly than used to be the case, and this leads to added risk.

The Centre for Crime and Justice Studies found that 22% of people between 25 and 65 saw nothing wrong with ‘padding out’ an insurance claim, 60% would have been willing to defraud someone in a second-hand deal, and 10% would be willing to claim refunds for goods they had never had. A study by Deloitte Touche in 2006 found that the factor that has the most significant effect on a business is the behaviour of management and direct supervisors. It is therefore clear that the lead has to come from the top, with no double standards. A code of ethics must underpin all that a company does.

Close working relationships and improved communication with Human Resources departments in respect of internal fraud and theft policies are fundamental. The lack of prosecutions is partly due to some organizations quietly allowing a staff member to resign rather risking the potential adverse publicity of prosecution. CIFAS therefore concluded that there was a need for some formal guidance for Human Resources departments on internal fraud matters. This resulted in a best practice guide entitled Tackling Staff Fraud and Dishonesty: Managing and Mitigating the Risks produced jointly with the Charted Institute for Personnel and Development (CIPD). This can be downloaded form the CIPD website.

The recent insider fraud SocGen suffered from has demonstrated the crippling damaging effect it has to reputation, not only to the company, but to the industry. Price Waterhouse Coopers recent 4th biennial global economic crime survey, Economic crime: people, culture and controls found that economic crime is intractable because of the many kinds of fraud and the broad range of employees, including senior executives, who commit them. It concludes that companies cannot rely on fraud controls alone to detect and deter economic crime. Companies need to build loyalty to the organisation, give employees the confidence to do the right thing, and put in place clear sanctions for those who commit fraud, regardless of their position in the company. This shows the importance of the role of Human Resources in implementing the anti fraud culture in your business.

CIFAS’ own research indicated that one of the main reasons staff fraudsters who compromise customer or payroll data is to alleviate financial problems and pay off debts. The credit crunch only enhances this reason. This increasing motive draws comparison to the dark days of recession; staff committing fraud in order to stay employed. We have already seen in the news that high interest rates and the lack of liquidity in the markets have caused job losses in financial institutions. There will likely be increased psychological pressure on employees. Employees may be under greater personal financial stress and may also feel greater personal insecurity about their own future in their organisation.

There is another factor that can lead to staff fraud. How does one get a good annual review and a big bonus? The answer is to perform well. Therefore, a member of staff could commit fraud in order to show good performance. Examples of the kind of staff fraud offences committed to show good performance could include:

• False expenses submission
• False overtime submission
• False time sheet submission
• False sales submission
• Manipulated sales submission
• Manipulation of bonus/reward scheme

Quite simply, these are all fraud by false representation and theft. Obtaining or attempting to obtain monies in these ways so that one can pay the bills and stay in a job are all dishonest actions. We have already seen a rise in these staff fraud offences recorded on the CIFAS Staff Fraud Database.

According to KPMG Forensic, an economic slowdown this year could result in a rise in the emergence of corporate frauds.  This is from analysing twenty years of data from their Fraud Barometer. Following the last recession, substantial frauds such as the BCCI emerged. We have already seen the fraud committed at SocGen. Tightening economic conditions could see employees overstretched or given unrealistic targets. Such situations could cause increase the temptation to commit fraud. However, organisations will inevitably identify more frauds because, during these darker times, they are more likely to be rigorously scrupulous about their own business and accounts.

As we know by now, internal frauds are carried out by all levels of seniority. While senior managers are likely to be more careful, they are also in an influential position to inflict more damage. The same KPMG research showed that employees and management carry out broadly similar numbers of frauds. However, the values of frauds committed by management staff are much greater. Moreover, small and medium-sized businesses especially in manufacturing and transport businesses – often the owner or Manager – have taken to defrauding banks or other credit lenders. BDO Stoy Hayward’s fraud team reported that firms are tempted to “engage in invoice fraud” because lenders are less willing to provide business loans.

According to KPMG, staff fraud has hit UK banks by record levels recently and the situation is likely to worsen as the credit crunches further. Lower level employees accounted for more fraud than managers. Over half of the cases reported to the Fraud Barometer involve organised criminal gangs. Organised criminals infiltrate organisations or coerce employees by targeting them from outside through bribery and intimidation.

The measures CIFAS Members have taken to combat insider fraud are:

• the implementation of a corporate security policy and culture
• emphasis on security at vetting and induction stages
• training in how to challenge suspicious activity
• established reporting processes
• internal monitoring
• engagement with law enforcement.

In addition, it is important for all organisations to follow these guidelines:

• Always be aware that staff can “turn bad” so make the most of the opportunities offered by the induction process to set the tone, making clear that no element of dishonesty will be tolerated, introducing new staff to the investigators, making sure that staff in vulnerable areas are aware of the perils of coercion, and that they know how to react, and where to report any attempt at coercion.
• Where a member of staff is dismissed for dishonesty, this and the circumstances should be reported to all staff, so that everyone is aware of the consequences.
• Don’t restrict education about dishonesty/fraud to induction – keep the message fresh through regular training (preferably bespoke), videos, etc.
• When anything does go wrong, and someone does try to perpetrate an insider fraud (or succeeds in doing so), investigate how they did it, what went wrong, and work out the lessons that can be learned from it, to ensure that it doesn’t happen again.

“Companies need to recruit and train people in whom they have confidence and whom they can trust. It is confidence and trust that are real safeguards against fraud and disaster, and they can only be fostered and instilled on a sound ethical basis”

Sir Adrian Cadbury, Committee on the Financial Aspects of Corporate Governance, 2002

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