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Insider fraud detection and prevention

With the entire banking world going through tremendous re-creation pains, it's no big surprise that fraud issues abound. One of the most worrisome is that of occupational fraud, also commonly known as insider fraud.

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The Association of Certified Fraud Examiners defines this as: "The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets."

The more we automate, the more difficult it becomes for managers and supervisors to visually identify fraudulent activity when it occurs; subtle keystrokes can set into motion a fraudulent acquisition of a financial institution's assets. Although there are software programs that monitor and analyze transaction data to identify those patterns of electronic activity that raise suspicion of fraud, their expense puts them out of reach for many financial institutions.

So what can banks and other financial firms do to detect insider fraud without the aid of technology to tell them what and who to look at based on the analysis of the activity employees initiate? It all comes down to good old-fashioned people management: knowing your staff and recognizing the changes in an individual's personal behavior and circumstances that may indicate when an employee is "in trouble" and at risk of committing fraud.

Most people cannot help reflecting their mental and emotional reactions in their behaviors. When people are doing something they know to be wrong, the fear of being caught in the act, being forced to do something they do not want to do, or experiencing the guilt of doing something contrary to their moral beliefs will create noticeable changes their actions.

However, a manager shouldn't automatically conclude that a particular behavior indicates insider fraud. There are many personal situations that may result in these behaviors without them being fraud related; not everyone facing physical or mental health, family or financial issues will turn to fraud. Most financial institutions have programs to help employees with these serious personal issues, but not all employees are aware they exist. An astute manager or supervisor can really make a difference in an employee's life.

But the following behaviors and situations also can be indicators that an employee has been inappropriately using company resources.

Changes in emotional behavior

Job-related anger: In these tough economic times, many people are losing their jobs, having their hours cut, being asked to do more work for the same -- or less -- pay, and losing benefits. Add this to other job-related issues, such as being passed over for a promotion, being reclassified to a lower salary grade due to the sale, merger or reorganization of the employer, or seeing a friend lose their job, and we find these are all situations that may help someone justify taking revenge on an employer. Initial anger at disappointment is understandable; remaining on the job but carrying that anger is a warning.

Personality changes: Everyone has their own personality. Some people are bubbly and outgoing by nature, some are shy, others tend to sullenness; everyone is unique and they have their personal patterns of what is "normal behavior" for them. When there is a noticeable change in a person's personality -- e.g. the cheerful person becomes quiet and subdued; the quiet person suddenly becomes loud or giddy -- there is reason for heightened concern.

Deflecting attention: The best defense is a good offense; someone who makes it a point to continually call attention to what everyone else is doing wrong is often just trying to redirect attention from their improper behaviors.

Lifestyle changes

Living beyond their means: Buying a Jaguar, flashing expensive jewelry, a sudden upgrade of wardrobe or expensive toys for the kids on a $30,000 a year salary may be an indication of "other sources of income." Yes, it could be they married money, inherited from a rich relative or won the lottery, but it could also be something else and that's what a manager needs to investigate.

Evidence of financial problems: There are numerous indications that an employee may be vulnerable to temptation from outsiders to do something he or she shouldn't for extra money. They include: a sudden downward shift in lifestyle; receiving calls at work that disturb them greatly; frequently asking for advances on their salaries; moving to a less desirable area of town from where they have lived in the past; and always asking for overtime.

Addictions: We are all well aware of addictions that result in the need for increasing amounts of money: alcohol, drugs, gambling and sex. Another addiction, common in people involved in fraud, is shopping for clothes, collectibles, art, vehicles, etc. They all create a desperation that can lead an employee into criminal acts.

Signs of abuse

Physical abuse: Employees who show up at work with bruises or broken limbs and suspicious explanations of how it happened should be of immediate concern to a manager for the employee's own safety. But beyond this, some employees are coerced to commit fraud to bring home extra money through threats of physical abuse; others will commit fraud for money to get themselves, and/or possibly their children, out of an abusive relationship.

Emotional abuse: Much like physical abuse, verbal abuse causes damage, but the bruises are on the inside and it's a person's will that is broken. Examples of behaviors of an emotionally abused person include: an employee who is hesitant to participate in extra-curricular activities (e.g., lunch with workmates, after hour drinks, holiday parties) because "my [spouse/boyfriend/girlfriend] doesn't like me to"; receives frequent calls from his or her partner during the day that often makes them tense; is withdrawn or exhibits a lack of self-confidence; and avoids developing friendships with other staff members. This abuse is just as real as physical abuse and just as effective at driving someone into committing fraud.

Clandestine behavior

There are any number of secretive behaviors of which a supervisor should be aware as possible indicators of insider fraud. Examples include insiders who:

  • Frequently look to see where "the boss" is.
  • Repeatedly look over their shoulders to see who might be watching them.
  • Appear to be hiding something in a drawer, a purse, a pocket or elsewhere.
  • Is seen in areas that are unusual for the job they perform.
  • Brings personal recording technology -- e.g., flash drives, cameras or camera phones, iPods -- into the work environment.
  • Spends a lot of the time at the photocopier or fax machine when their job doesn't require it.
  • Is overly possessive about what they are working on.

Remember, insider fraud isn't the only reason why employees may exhibit these behaviors, but it's on the list of possibilities. A wise manager will take the precaution of having internal audit or other properly trained investigators quietly and confidentially review the recent activities that the employee has been engaged in to ensure fraud is not part of the picture as well.

About the author:

Jodi Pratt is consultant to the financial services industry on fraud management and is co-founder of www.FraudAvengers.org, a consumer-focused weblog on personal payments fraud prevention.


This was first published in November 2010

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