Why does it take a big loss to take fraud management seriously?
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I never thought this could 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 bad things won't happen to them.
The natural tendency to assume the best is 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. Not to mention the fact that, some issues are just inherently unpleasant.
Such is the case with fraud. It's common to hear the "we don't have that problem†refrain. 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. People are willing to take their chances that "fraud won't happen here". That is a risky proposition:
- Consider the case of a former Senior Vice President at Twin City Bank (now owned by Home Banc-Shares, Inc.) Brent Geels was sentenced to almost five years for stealing as much as $2.1 million from the bank over a span of 8 years.
- Or check out the 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. I know Ben Franklin is rolling over in his grave.
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? How do you convince people (your executives) that playing the odds is not a good idea?