Our 2018 Global Economic Crime and Fraud Survey strongly underlines the need to invest in anti-fraud technology – and confirms that growing numbers of companies are doing so. But the study also highlights the vital importance of continuing to invest in people, especially when it comes to blocking the ‘last mile’ to fraud. This imperative is reinforced by the fact that fraud is carried out by people, not machines – and that more than half (52%) of respondents who’d suffered economic crime said an internal actor was responsible for their most disruptive fraud.
Applying the fraud triangle…
A useful way to frame the problem of internal fraud is a construct called the fraud triangle (see the animated graphic below), incorporating three key factors that induce people to commit fraud: pressure, opportunity, and rationalisation. The genesis of a fraudulent act usually follows a standard trajectory. It starts with pressure, generally related to an internal issue. Then, if an opportunity presents itself, the person will wrestle with it emotionally. The final driver, which enables them to move from thought to action, is rationalisation.
…to tackle the underlying drivers through different antidotes
All three of these drivers must be present for an act of fraud to occur. And since all three are distinct stages of the process, they each need to be addressed individually through a differing antidote. With opportunity, the solution is controls – and here our study shows organisations are investing heavily, and to good effect. Some 59% of respondents ranked opportunity as the leading factor contributing to the most disruptive fraud committed by internal actors. And 50% said they expend a high degree of effort in building up business processes such as internal controls that target the opportunity factor.
Meanwhile, the antidote to pressure is openness. The pressure to commit fraud can arise at any level of the organisation, and the importance of financial incentives in driving someone to commit fraud has often been overestimated. The motivation often isn’t money, but embarrassment over failure and fear of exposure. Short-term bespoke controls can help check whether aggressive sales targets may lead to fraudulent or illegal behaviour – and a well-publicised open-door or hotline policy can help too.
The antidote to rationalisation is culture. The person who decides to commit an act of fraud against their own employer has found a way to excuse (or rationalise) their own intended behaviour. They convince themselves that it won’t hurt anyone, is for a ‘good reason’, will be rectified before anyone finds out, or simply that they won’t get caught. To tackle this rationalisation, key steps include understanding the environment that governs employee behaviour, and providing consistent training to reinforce ‘acceptable’ behaviour.
Lowering your ‘fraud floor’
Just as fraud does not happen because of a single factor but a combination, so organisations need to create the right blend of technology and people to tackle the motivations behind it. And while fraud will always occur to some degree, organisations have many opportunities to lower their fraud floor. In particular, investing in understanding and evolving the organisational culture may offer a high return. As organisations do this, they may well find that establishing – and demonstrating – a culture of honesty and openness, from the top down, is their single most important step towards preventing fraud.
Key takeaway questions for organisations
- Do you know the norms for ethics and compliance in your industry?
- Does your ethics and compliance programme explicitly target fraud?
- Do your incentive programmes consider pressures that it can create on your employees and can you monitor it?
- Do you have an open-door policy or hotline that could serve as an early warning sign of internal fraud?
- Have you probed your internal culture for potential trouble spots?
