Classifying Internal Fraud
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As with many topics, when it comes to internal fraud, there's more there than meets the eye. In the financial services world, we tend to focus on four areas:
- Theft from the institution
- Theft from customers
- Theft of customer information
- Collusion
Simple, right? Just four categories. But when we dig a little deeper, we see each is complex and contains many unique forms of fraud. Allow me to flesh these categories out a bit. Then I'd like to hear how you classify internal fraud.
- Theft from the institution — This certainly includes real property and intellectual property, but more typically it involves money. Stealing cash and stealing from the G/L both move money from the control of the institution to the control of the employee. Lesser included offenses are G/L manipulation, which in itself has many schemes, and falsifying reports. Self dealing includes fee refunds to your own account or to accounts of other parties close to you. (Even when smaller fees or no fees were levied). Virtually every loan fraud involves stealing from the bank. After all, whose money is being lent?
- Theft from customers — This seems pretty straight forward, but can involve pretty imaginative schemes including round robin movement of funds to cover the theft, misrepresentation and abuse of position, raiding dormant accounts and escheatment candidates (what customer is going to complain?), and utilizing customer accounts as a conduit for other frauds.
- Theft of Customer information — With the heightened awareness of identity theft as a growing societal problem, this particular form of internal fraud can have serious reputational consequences. This fraud can range from collecting information on-line, to stealing reports or even generating custom reports, to stealing files. Data loss can range from tens to hundreds of thousands of records. There is a thriving black market for this information, and employees may view this as a "safer†fraud to commit since data is not controlled as tightly as money.
- Collusion — internal collusion is always a possibility. I have seen reports of as many as 12 bank employees' involvement in a scheme. Maybe more damaging is collusion with third parties. This can range from willful disregard such as neglecting to place a hold or ignoring a money laundering scheme, to aiding and abetting in the perpetration of a scheme. Information can be fed to the third-party fraudster and transactions can be done on their behalf. Controls and procedures can be circumvented, and a simple processing error claimed later.
Do these sound familiar? Do any of these scare you? They should. For us to believe that every employee is completely above temptation and entirely on the up-and-up is very naïve; dangerously so. How do you classify internal fraud?