Time to confront the insider fraud issue

19 July 2010

If you work in the accounting, operations, sales, customer service or purchasing department of a lender or financial services business you might be feeling a bit uncomfortable at the moment. And if you’re a manager you are even more likely be feeling twitchy. Why? Well, according to a landmark report from the US you’re one of the professionals most likely to commit insider fraud - a global problem that is growing at alarming speed.

People who work in these areas are responsible for committing 80% of all insider fraud, the 2010 edition of the Global Fraud Report published by the influential Association of Certified Fraud Examiners claims.

But that’s not the end of the story. ACFE’s research identifies banks and other financial services firms as the number one targets for criminal gangs of fraudsters, as well as opportunist thieves.

It also reveals that:

- The average loss caused by insider fraud is almost £90,000.
- The typical fraud goes on for 18 months before it is detected.
- Insider fraud is more likely to be detected by a tip-off than by any other means.
- Smaller organisations such as like building societies, niche lenders and insurers are disproportionately targeted by staff seeking to commit insider fraud because their employers typically lack adequate controls.
- More than 85% of fraudsters in the study have never been previously charged with or convicted of a fraud-related offence, making their activities even harder to detect.

While I may disagree when it comes to the occupation of the main perpetrators of insider fraud, UK statistics overwhelmingly support ACFE’s research and shed further light on the scale of the problem on this side of the Atlantic.

As the credit crunch struck the US two of the banks that failed there collapsed as a result of insider fraud

The National Fraud Authority, a government body set up to counter financial crime, estimates that total fraud in the financial services sector accounted for more than £3.8bn in 2009. The NFA also believes that mortgage fraud accounted for more than £1bn - aided and abetted by staff insiders and a growing army of professional advisers.

Risk management consultancy Kroll claims that staff and senior executives stole a total of £641m from their banking and financial services employers in 2009, while a survey by KPMG reveals that 90% of all UK frauds involve organised criminal gangs and managers.

You’d think that with the fraud headache growing on a daily basis managing directors and chief executives in the UK would be working overtime to ensure their organisations are protected. I only wish this was the case.

The truth is that many of our banks, large lending institutions and financial services companies are still not adequately equipped to combat fraud. Information on the measures taken by these organisations, such as the deployment of reliable enterprise fraud management systems, is hard to come by. And when they do lay their hands on such data it is invariably unreliable.

That’s why it’s useful to look further afield to get an idea of the scale of the problem. The recent debacle at France’s second largest bank, SocGen, provides a good example. A trial has been taking place in Paris, with the star turn - a 35 year old trader who allegedly masterminded a £4bn fraud against the bank - being accused of single-handedly bringing SocGen to its knees. SocGen has admitted publicly that none of its managers knew what was going on and that it had insufficient internal controls to police the actions of its employees.

What an astonishing admission, but is SocGen alone in this regard? I doubt it.

Again casting my eyes across the Atlantic I note that US research suggests most banks and large financial services companies are prone to underestimating the scale of the insider fraud threat they face.

A 2009 study by the Federal Deposit Insurance Corporation, a body set up in 1933 by the US House of Congress, discovered that of the 67 banking failures that occurred between 1960 and 1974, 57 involved insider fraud. The types of crimes committed included self-serving loans to members of lenders’ management teams or their friends, defalcations or direct frauds by bank personnel and various fraudulent manipulations by officials at lenders.

You may think this research is out-of-date and irrelevant. You may also think that what occurs in the US doesn’t happen in the UK. Wrong, and wrong again.

As the credit crunch squeezed the US economy in 2008 two of the seven banks that failed in the country collapsed as a result of insider fraud, and both these institutions had a significant presence in the UK. The US authorities may not have uncovered illegal activities until after the firms collapsed but neither did UK regulators.

I believe we’re at a crossroads - either our banks and lenders start to talk openly about the scale of the fraud problems they face or they play Russian roulette with their reputation and pray they don’t get caught out by a SocGen type of incident. I know what my decision would be, and it wouldn’t involve leaving anything to chance.

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