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June 17, 2020 - Chandreyee Chakravarty

How to Mitigate Internal Fraud with Fraud Prevention Software for Financial Services

It’s easy to think that fraudulent activities like data breaches, unauthorized transactions, and account hacking only occur outside the walls of your financial organization. But the reality is that internal fraud is just as threatening, costing businesses as much as $50 billion per year in lost revenue and resources. 

Research indicates that small and medium-sized businesses account for 68% of all internal fraud cases. The median loss for an SME is about $290,000, while the average loss for a corporation totals more than $1.3 million. 

The main reason for internal theft: a lack of internal controls that can identify patterns and theft-related activities. This gap in defense can be filled by using fraud prevention software geared toward finding cases of internal fraud.

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What is Internal Fraud?

By definition, internal fraud is any activity performed by someone within an organization that results in a financial loss to that organization. This could take many forms, including: 

  • Unauthorized use of the company credit card
  • Intentionally not reporting transactions
  • Embezzling funds
  • Check kiting
  • Forgery
  • Bribes or kickbacks
  • Account takeovers
  • Misusing assets
  • Billing schemes

Though it’s common to think that most employees commit fraud out of greed, there are actually three core motivating factors that inspire fraudulent activities: pressurerationalization, and opportunity. 

When just one of these factors is present, the idea to commit fraud becomes more of a possibility. And while you can’t control the pressure or rationalization to commit fraud, you can take away opportunities to commit fraud through fraud prevention software. 

How Does Internal Fraud Occur?

For financial institutions, internal fraud often takes one or more of the following paths:

  • Theft from the bank’s customers
  • Breaches of policy
  • Procurement fraud
  • Trading fraud
  • Expenses & payroll (e.g. logging more hours than what were worked)

The most common type of internal fraud across industries is embezzlement. In many cases, embezzlement operations are successful because they divert small amounts of money over time, which makes detection more difficult. 

What’s more, an alarming study found that three out of four employees have admitted to stealing from their employer at least once. For employees who have stolen twice or more, that number drops by half.

The same study also found that one out of three business bankruptcies is caused by internal fraud. And given that the average time it takes to detect internal fraud is two years, making fraud detection a top priority isn’t an option.

Key Strategies in Mitigating Internal Fraud for Financial Services

Internal theft is a growing concern, but not many companies are taking the appropriate steps to address fraud and mitigate their risk. To properly address internal fraud, companies must be able to identify flaws in their current processes and understand what to look for to identify fraud schemes before they cause long-term financial damage. 

Let’s look at some strategies to reduce or prevent internal fraud in financial institutions.

Build Fraud Prevention into Your Hiring Process

Taking a KYC approach to hiring, it’s important to know your employees and their potential motivations to commit fraud. Look for common warning signs, such as checking their criminal history or financial issues.

Create a Positive Workplace Culture

When employees are generally satisfied with their work, there’s less incentive to commit fraud. A positive workplace culture can help motivate your employees to do what’s right. 

Develop Internal Controls

Smaller financial institutions are more likely to suffer from internal fraud due to having less oversight and fewer internal controls to detect fraud. One way to overcome this challenge is to have more oversight and accountability for each employee and allow multiple employees to share responsibilities instead of entrusting certain tasks to just one person.

How DataVisor is Combatting Internal Fraud Risks

DataVisor’s core product suite is designed to help financial institutions tackle internal fraud risks before they become serious financial mishaps. We’ve designed our products to look holistically at activities that could easily escape scrutiny from people or tools not designed to view large sets of data at scale. 

For example, one of the large banks we serve was able to identify suspicious coordinated activities using DataVisor tools. DataVisor detected large in-and-out transactions with new accounts totaling between $2-$4 million and affecting more than 80 customers. DataVisor determined the following: 

  • 100% of these transactions had large inbound transfers that were quickly transferred out
  • 80% had newly opened accounts
  • 40% of accounts were short-lived (opened and closed in less than one year)
  • 85% had bankrupted or frozen accounts

Individually, these activities may seem normal in a large financial institution. But by reviewing the big picture data on a larger scale, the bank was able to accurately identify internal fraud and take action. 

Here’s how other financial institutions are using DataVisor to mitigate the impact and occurrences of internal fraud:

dVector

dVector leverages unsupervised machine learning to detect suspicious network behaviors, such as coordinated money movements or trades. Users receive real-time fraud signals so that they can take a proactive approach instead of a reactive one.

dOps

dOps uses advanced rules to detect anomalous behaviors and unusual activities, such as a spike in transaction volume for a specific employee. Users can build their own rule sets to gain insight into fraudulent activities and patterns using AI and machine learning.

Knowledge Graph

DataVisor’s knowledge graph adds a graph-based investigation to internal fraud detection. Users can investigate complex cases and uncover sophisticated patterns (such as the large bank’s in-and-out transactions) and visualize multidimensional connections among entities, groups, and money flow.

Final Thoughts

No financial institution is immune to fraud, no matter how well you screen your employees. When you have strong internal controls in place, the opportunity for internal fraud shrinks. What’s more, employees may exercise better judgment when they know the risk of being caught in an internal fraud scheme is high. 

Stay ahead of financial fraud. Download the brief. 

about Chandreyee Chakravarty
Chandreyee is the Regional Head of Sales at Datavisor. She has held high-profile sales positions within the Identity Management and AI space over the last 20 years globally.
about Chandreyee Chakravarty
Chandreyee is the Regional Head of Sales at Datavisor. She has held high-profile sales positions within the Identity Management and AI space over the last 20 years globally.