The incidence of fraud is growing, DebtSource is finding in its consulting business.
This unfortunate scenario is the product of a combination of factors: rising digital adoption rates; a poor economy; working from home in the aftermath of Covid-19; and economic pressures among consumers.
A recent report, Occupational Fraud: A Report to the Nations, by ACFP found that corporate finance heads estimate they lose 5% of revenue a year to fraud schemes. Fraud is an unending war that will only worsen with the ongoing consumer migration to digital channels.
Organisations face an upward struggle to detect and prevent fraud, even while they benefit in other respects from consumers migration to digital channels. That’s because wherever transactions occur, fraudsters are sure to follow, seeking out new vulnerabilities.
The A Report to the Nations reports the median loss caused by occupational fraud (that is, internal fraud) cases in the study was R2.7 million and of those 22% of losses were at least R18 million. It also found that the more senior the perpetrator the higher the average loss. The median loss among frauds committed by owner/executives was R9 million, considerably higher than the median loss of R2.4 million for frauds committed by managers and R1.4 million for frauds committed by other employees.
Frank Knight, CEO of Debtsource, explains that notwithstanding slight variations, trends in fraud schemes tend to be similar regardless of where the fraud occurred.
“The increasing trend to digitalisation creates an environment ever more conducive to fraud, and it is not just restricted to external perpetrators. Staff, both lower level and management are found to be involved.
“This is why the best advice I can give any business in detecting occupational fraud is that it is more likely to be exposed by a tip from a fellow employee than by any other method – 42% of all cases were detected by a tip according to the Report to the Nations, or three times more than the next most common method. In total, more than half of all tips come from employees.”
Common areas to be investigated within organisations are those of conflicts of interest, primarily among more senior management, and accepting of gifts. Business owners should always require staff to sign declarations of either, should monitor them and actually physically verify.
Other schemes include payment fraud involving a switch in bank accounts whereby employees change bank account details to divert funds either to their own bank account or to one related to them, sometimes involving subsidiary companies within a group as this less visible. Yet another involves fictitious transactions whereby the rendering of goods or services cannot ever be verified.
“Fraud typically involves the interaction between employees and customers,” Knight says. “To prevent those types of attacks, it is essential for a business to have good, solid data on every trading entity it is involved with and regular communication to uncover anything suspicious.”
Automation lies at the bottom of many fraudulent attacks. “It is a double-edged sword – while it streamlines the customer journey by off¬ering auto-fill and other conveniences, automation also makes it easier for external fraudsters to launch attacks, prompting higher attack volumes. Automated methodologies can do more harm more quickly, and for this reason any company’s credit policy must permit personal contact.”
The Buy Now Pay Later (BNPL) retail model is growing all over the world at a phenomenal rate – but it is also something that fraudsters love, warns Knight.
A 2022 LexisNexis Risk Solutions Fraud and Identity Trends report stated that: “The largest BNPL platforms reported a significant increase in fraud, primarily from new account creation, account takeovers and repayments with stolen credit cards.”
The same report found that fraud awareness was not growing at the same pace as increases in credit. “An increase in digital transaction activity also serves as a magnet for fraudsters, as data security awareness is not growing at the same speed as digital activities. Digital fraud attempts in financial services, for example, were up nearly 150%.”
The Report to the Nations report also found that fraud schemes can continue for months or even years before they’re detected – the median lasting 18 months before being caught.
Small businesses are the most at risk due to their poor controls: The Report to the Nations.shows they suffer disproportionately. It found that the smallest organisations in the study suffered a higher median loss than the overall median loss for fraud cases in the study “because they typically implement fewer anti-fraud controls than their larger counterparts, increasing their vulnerability to fraud”.
Some of the larger more sophisticated types of risk would typically involve external syndicates: cybercrime, ransomware, banking card fraud, and these can be both against individuals and against companies. These involve phishing to get personal information to perpetrate transactions or demands for money from innocent individuals. These also tend to increase during December, Knight concludes.