Why does it take a big loss to take fraud management seriously?

I never thought this would happen. I had no idea there was a problem. I'm completely surprised. These are the kind of reactions you tend to hear in the post-mortem discussions of any financial disaster—from the Bernard Madoff caper to the sub-prime mortgage crisis. Human nature being what it is, people generally want to assume that everything is fine. No problems. Never better.

• The computer network is fine-until it stops working.
• The sales forecast looks on target-until the end of the quarter.
• The deposit accounts are safe-until a big fraud incident happens.

Why? Because business as usual is easier than dealing with a problem. Because problems aren't always visible on the surface. And because it's not always clear who's responsible for detecting and dealing with a problem. Plus, some issues are inherently unpleasant. Such is the case with fraud. It's the rare bank that acknowledges a fraud problem of any type or magnitude. Insider fraud is particularly hard to own up to, because it's personal. Trusted employees would never steal from their bank, right? Other types of fraud—from new account fraud to ACH fraud-often stay invisible and unaddressed, until a major loss sends out an institution-wide wake up call:

• Consider the case of a former Senior Vice President at Twin City Bank (now owned by Home Banc-Shares, Inc.) Brent Geels plead guilty to stealing as much as $2.1 million from the bank over a span of 8 years.
• See how a trusted 29-year employee is accused of embezzling at least $5 million dollars..
• Or check out the recent case of four men in three states charged with stealing $2.5 million from unsuspecting customers after compromising their identities online, taking over the bank accounts, opening HELOCs and wiring the money out of the accounts.

Losses of this magnitude bring fraud to the forefront and get the attention of the executive team. They provide the incentive to act and to revisit how the institution handles ongoing fraud management. And they can lead to new procedures, technology, and other changes. In the end, the bank (and its customers) may end up in a stronger position and better protected from fraud. But it's too bad that it takes a whopping loss to trigger action. An ounce of prevention is worth a pound of embarrassing, high-loss fraud. Didn't Ben Franklin say this? Has your bank turned a fraud loss into better fraud management? Would you admit it if you did? What dollar value does a fraud event need to reach to get executive attention $100,000, $500,000, $1 million?

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