How Financial Services Can Mitigate Internal Fraud With Latest Technologies?
Tags: mitigateinternalfraud, reduceinternalfraud, github, technology
Published: 2021-09-06 10:16:35

Financial services face various fraudulent activities like data breaches, unauthorized transactions, and account takeover. But these attacks aren’t just external, there are internal threats that an organization has to be aware of. Internal fraud for financial services is just as threatening as external fraud. To put a number on it, financial institutions lose as much as $50 billion per year in terms of revenue and resources. 

According to research, small and medium-sized businesses account for 68% of all internal fraud cases. The average loss for a corporation totals around $1.3 million. The primary reason for internal theft can be several things. Lack of internal controls that can identify patterns and theft-related activities. The lack of defense of financial institutions for tackling fraud acts like a magnet for bad actors looking forward to accomplishing their illicit activities.

However, it is possible to fulfill the loophole in fraud by using fraud prevention software and technologies. Some technologies can help you mitigate both internal and external fraud all at once.

## What is Internal Fraud?

By its very definition, internal fraud is any activity performed by someone who’s a part of the organization. Any activity that causes financial harm to an organization and is done by an internal member can be considered internal fraud. Internal ID fraud can take many forms such as:

* Unauthorized use of business credit card
* Intentionally not reporting fraudulent transactions
* Money embezzlement
* Cheque kiting
* Forgery
* Bribes or Kickbacks
* Account takeover fraud
* Missing assets
* Billing schemes

Most organizations and individuals believe that employees commit illicit activities out of greed, but that’s not the only deciding factor. Employees can commit internal fraud because of several reasons like financial pressure, rationalization, and opportunity. 

Even if one of these factors is present for employees, the idea of committing fraud becomes more possible. It is almost impossible for businesses to control factors like pressure or rationalization, organizations can remove the other two factors by using the right technologies. With the ideal technology, you can take away the opportunity for employees to commit fraud using fraud prevention solutions. 

## How Does Internal Fraud Happen?

For financial institutions, internal fraud happens by using one or other following paths:

* Theft from bank’s customers
* Breaches of policy
* Procurement fraud
* Trading fraud
* Expenses & payroll (logging in more hours than an employee has worked)

The most common type of internal fraud across industries is money embezzlement. In many cases, money embezzlement operations are most successful because they steal or transfer more amounts of money with time. That’s one of the primary reasons why this type of fraud detection is more difficult. 

What makes it even worse for employers is that 3 out of every 4 employees have admitted to stealing from their employers at least once. For employees that have stolen more than once, the statistics dropdown. Another study conducted on financial institutions shows that 1 out of 3 business bankruptcies happen because they were too late to detect internal fraud. The average time taken by businesses to detect fraud is 2 years, that’s why making fraud detection a business’s primary priority isn’t an option. 

### How Organizations Can Detect & Prevent Fraud?

As losses happening due to fraud increase, companies need to develop and implement effective fraud detection programs. A key element of effective fraud detection and prevention programs, one of the major elements of fraud detection programs is by building fraud risk assessment. 

Fraud risk assessment examines the policies of an organization to identify the weaknesses of the business that can be exploited by employees, managers, vendors, or external threats. The fraud assessment team determines if the team members are aware of and practice these policies in their daily operations. Fraud risk assessment is broken down into multiple-element, and each element examines a specific part of the business function. The assessment team will identify and document the weakness and develop measures to prevent internal fraud.

**Fraud Prevention Checklist**

There are some things that businesses need to understand while creating a fraud prevention methodology. Here’s a fraud prevention checklist to keep an eye out on:

* Do employees understand what counts as a fraud?
* Do employees know where to seek advice when they’re faced with uncertain ethical decisions?
* Do all your employees know about the zero-tolerance policy of fraud?
* Have employees been taught how to communicate and concerns about potential threats?
* Is there an anonymous reporting channel that employees can use to hint businesses about potential internal threats?
* Do you rely on surprise audits in addition to scheduled audits to uncover frauds?
* Are your business performance goals achievable?
* Does your hiring procedure include a thorough background check?
* Are anonymous surveys conducted to assess employee morale?

#### Key Strategies in Mitigating Internal Fraud for Financial Services

Apart from the checklist above, there are other strategies that businesses can make use of to mitigate internal fraud. Internal fraud is a huge concern for businesses, but not all companies are taking the steps to detect and prevent fraud. To properly manage internal fraud, companies must be able to identify loopholes in their current processes and understand what to look for to identify fraud schemes before they cause huge financial losses for businesses. Here are some key strategies to reduce or prevent internal fraud for financial institutions:

1. **Make Fraud Prevention a Part of Your Hiring Process**: Including KYC into the hiring process of your hiring is vital to know your employees and their potential motivation to commit fraud. You can go through a number of processes to ensure you’re not hiring a potential risk factor.
2. **Create a Positive Culture**: If your employees are satisfied with the overall working experience and conditions, they have less intention to commit fraud and harm the business. By creating a positive work culture, you can help motivate your employees to stay true to the business and tip businesses about potential fraud.
3. **Third-Party Technologies**: One of the best ways to detect and eliminate fraud is by employing third-party technologies built for detecting and preventing fraud. Third-party technologies like [DIRO online document API](https://diro.io/online-document-verification/) can help in preventing internal fraud. With DIRO, businesses can enhance their KYC strategies as it verifies documents instantly and eliminates the use of forged and stolen documents. With the right combination of third-party technologies and human effort, businesses can enhance their fight against internal fraud.