Controlling financial services fraud (2001)

In its broadest terms, fraud means obtaining something of value by deception. If fraud were described as an industry, it would clearly be one of the growth areas in the economy. It is also one of the least understood areas of the economy and, because fraud is often viewed as a victimless crime (when perpetrated against large organisations), it does not draw community reaction like other crimes. Similarly, fraud rarely attracts a coordinated political focus on measures designed to address the very serious losses that may result. One hardened criminal who served several periods of imprisonment for armed robbery offences was recently reported to have expressed an opinion to senior police that he wished he had understood earlier in his criminal career how easy it was to commit fraud. He now considers that fraud involves less trauma, the rewards are far greater, and the penalties substantially fewer than in other forms of crime. This paper addresses those forms of fraud that target the financial services sector and how this industry has responded, with some measure of success, to controlling this ever-increasing problem. Adam Graycar Director The financial services sector is one of the fastest changing areas in the business community. The combination of industry deregulation and the exploitation of new and emerging technologies has resulted in financial institutions having the ability to deliver a vast array of products and services with an increasing number of delivery channels. The benefits and flexibility now being provided to customers have, unfortunately, also been exploited by those seeking to gain an advantage through dishonest behaviour. New opportunities for fraud are emerging almost daily. In the financial services sector, the competitive demand for fast to market product development has introduced a major challenge in creating cost-effective and efficient controls which do not impede the need for flexibility in product features and delivery mechanisms. This challenge will continue to increase with the introduction of new and emerging technologies. The decision to engage in any business activity is invariably based on a cost-benefit analysis which aligns the relevant enterprise's business objectives with its appetite for risk. The business of controlling fraud risk is no different from other business risks in that the assessment will be based upon various known factors as well as a number of unknown elements. In order to manage fraud risk effectively, however, we must be able to track it and understand it. Unfortunately, the quantification and analysis of fraud is somewhat elusive. In 1997 it was estimated that the cost of fraud and misappropriation in Australia was between A$3 billion and A$3.5 billion per annum, which represented approximately one-third (2930%) of the cost of all crime categories (Walker 1997). Different industry sectors and institutions within sectors have, however, traditionally categorised financial losses under a number of headings to suit internal management reporting, and this has hindered the establishment of aggregated figures which would assist in identifying the magnitude and types of fraud losses that have occurred. Changes in business practices have occurred without consideration of loss categorisation. This, too, has also impeded the identification of losses incurred as a result of fraud. For example, within the financial services sector, it is only in the last two to three years that institutions have come to recognise the need to examine loan write-offs more thoroughly in order to identify those which clearly are fraud-based losses as opposed to genuine lending losses. As a result, institutions are often unable to say with certainty the extent to which they have been victimised through fraud or exactly what losses have been sustained. Nonetheless, fraud victimisation surveys have found that those in the financial services sector continue to experience fraud at rates generally greater than other business sectors. …