5 facts about fraud that most companies learn the hard way

Source: Soldiers Media Center

Fraud happens. Often. Here are just five facts that companies learn the hard way when fraud occurs:

Fact #1 – Fraud does not happen on the company’s timetable.

Revenues are up. Revenues are down. It doesn’t matter. The company could be experiencing the best of times or the worst of times. The fraudster doesn’t care. All he or she wants is money. Fraud will happen on the fraudster’s timetable. He or she decides if, when, how much, and how often. If the company has countermeasures in place, the fraud may be prevented or the losses kept to a minimum. With little or no countermeasures in place, however, watch out.

Fact #2 – Fraud scares people, especially senior executives.

When I meet with clients, I often tell them that fraud is a small word with big implications. In my experience, senior executives are most often apathetic when it comes to discussions regarding fraud. That is, until they are made aware of an actual fraud taking place on their watch. Then they become exceptionally nervous and spend a great deal of energy worrying about what will happen. They don’t know what they don’t know, and that makes them nervous, sometimes angry, and generally apprehensive about the future. Is this my fault? Will I be blamed? How much money will we lose? Will we get it back?

Fact #3 – Fraud prevention is an afterthought in most companies.

When meeting with a new client, we want to gain a sense of the overall maturity of their efforts to prevent, detect, and investigate fraud. Below is a small selection of the questions that we typically ask:

  • Do you have an employee hotline? How do you measure its effectiveness?
  • Do you have a fraud case management database? If so, when was the last time the information was used to develop proactive countermeasures?
  • What controls do you have in place to prevent and detect fraud? Who “owns” control development, deployment, and testing?
  • What policies and procedures do you have in place to ensure that employees are unable to steal your company’s intellectual property? When was the last time someone tested their effectiveness?
  • How often does fraud take place in your industry?
  • Have you incorporated “lessons learned” from fraud at other companies?
  • Who is responsible for fraud prevention, detection, and investigation within your organization? If separate departments, how often do they meet to share intelligence?

Very rarely will senior executives answer these questions without providing some potential areas for improvement. Most often, they struggle to answer at least one or two of the questions, which can lead to some uncomfortable silences and pained expressions. That’s OK. We know that fraud prevention is an afterthought. It shouldn’t be, but it is. Most companies don’t think about fraud until it happens or they narrowly avoid taking a loss. I personally want to change that. There is no reason that companies need to experience the vast majority of employee and third-party fraud. A company will never be fraud free, but it can certainly make it much more difficult for fraud to happen.

Fact #4 – Fraud investigations are easy to screw up.

Investigating fraud, particularly employee fraud, is much more complicated than it appears. Employees have rights, and lots of them (as they should). If in the course of an investigation a company violates those rights, the “hunter” can become the “hunted.”

Let’s consider a real-world example.

Local law enforcement thinks that one of your employees, Bob, is involved in drug trafficking. Your internal audit department is also investigating Bob. They plan to talk with him next week regarding some missing inventory. A detective from local law enforcement wants internal audit to ask a couple of questions that would help him with the drug investigation. In fact, the detective really wants to be in the room during the meeting. Helping law enforcement is a good idea, right? We might need them to help go after Bob for the inventory we think he has stolen. Would we screw up the investigation by helping law enforcement? How? We’ve already sent an email to the detective detailing the inventory theft. The detective agrees – this guy is a criminal!

(Hint: this investigation is destined for failure.)

Screw up an investigation, and you may be forced to rehire the employee that allegedly committed fraud as well as pay lost earnings and possibly even a fine. Trust me, it happens.

Fact #5 – Fraud losses are rarely recovered.

We’d like to think that law enforcement can reach out and claw back the proceeds from a fraud whenever needed. The truth is that most of the time, the proceeds are long gone. Fraud schemes typically last a median of 18 months. During that time, your company’s money is burning a hole in the pocket of the fraudster. They want to buy goods and services, pay down debt, stop foreclosure, share their good fortune with family and friends, etc. The last thing they want to do is deposit the money in their bank account and watch it gather interest (although in very rare circumstances, this does happen).

Notwithstanding the fact that fraudsters want to spend the proceeds, the truth is that law enforcement is often unable or unwilling to help companies recover fraud losses. Law enforcement is overstretched. At the local level, detectives in small cities are assigned all manner of cases, from petty theft to murder. In larger jurisdictions, detectives have an overwhelming case backlog that is closely tracked by their superiors. Financial crimes can be extremely complicated and time consuming to investigate, especially if the detective does not have a financial background. Detectives need to close cases – quickly. At the federal level, the bar is even higher. A six-figure loss may be devastating for your company, but it may barely raise the eyebrow of an FBI special agent in a large metropolitan area. With no connection to organized crime, drugs, or terrorism, the case file may be shelved and forgotten.

I strongly support law enforcement and have worked with some very talented local, state, and federal agents. However, we really can’t expect them to pursue every fraud that hits their desk. Let’s be honest; why should we expect law enforcement to help recover losses when so many of them could have been easily avoided?

If you have additional “facts” that you would like to share, please feel free to add a comment.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.



About Paul McCormack
I have over 20 years of experience in corporate fraud and intellectual theft prevention, detection and investigation. Unlike many fraud experts, I have both industry and professional services experience. To date, I have conducted over 800 interrogations of fraud suspects including numerous senior corporate executives. As a freelance writer, I have written over 1,000 articles on a broad range of topics. My areas of expertise include: • Asset Misappropriation • Big Data • Bribery, Corruption, and Collusion • Check, Wire, ACH, and Credit Card Fraud • Consumer Fraud • Corporate Security • Cybersecurity • Data privacy (Europe, Brazil, Russia, India, and China) • Drug Trafficking • Embezzlement • Employee Fraud • Executive Protection • Fintech • Financial Statement Fraud • FCPA • Healthcare fraud • Identity Theft • Intellectual Property Theft • Internal Audit • Interrogation Tactics • Loss Prevention • Mobile Fraud • Money Laundering • Operational Excellence • Organized Crime • Payments Fraud • PCI Compliance • Retail Fraud • Risk Management • Terrorism and Counterterrorism • UK Bribery Act • Workplace Violence

10 Responses to 5 facts about fraud that most companies learn the hard way

  1. Mike Jackson says:

    Great article!

  2. Joseph Riro says:

    This is quite insightful, i totally agree that combating fraud whether insider or thirdparty not only requires immense support in terms of policies but rather prevention and concerted effort by all concerned parties.

  3. Good article.It is just the same in the UK.

    There is little chance in focusing those at the top of an organisation to consider fraud prevention and training as an ongoing agenda item unless they have become subject to a fraud within their own organisation.

    One point I believe needs further consideration and debate is the attitude that law enforcement believe it appropriate to decline to investigate or prosecute a fraud where the complainant has not introduced what they consider are appropriate fraud prevention measures prior to their loss.Thus inferring they should share some of the blame for their loss.

    Personally, i believe this is not the stand that should be taken by law enforcement.Irrespective of how weak existing prevention systems are (if in place at all) law enforcement should be looking to prosecute the fraudster and recover any criminal gains whenever possible. Obviously,it is sensible to ensure where there is poor fraud prevention measures in place this will not have a fundamentally detrimental effect on the weight of evidence required in order to instigate a successful prosecution against an accused fraudster.A matter for a prosecutor to determine not law enforcement.

    The alternative, as exists at present, is that there is a good chance the easier it is to commit a fraud the better the chance of evading a prosecution.

    Police would not drop a prosecution for burglary because the home owner did not install a burglar alarm or they had failed to lock their front door.

  4. Maritz H says:

    Yip – onviously South Africa is not the Crime Capital any longer – I only thought this happens in SA (just wait till I’m finished moving my tongue from my cheeck). Well, I seem to have come across this so often and unfortunately management do not consider furtehr recommendations and just make the “problem” to disappear by moving the responsibility to another area, but not addressing the fundamental basics of fixing the identified problem and then again hitting their heads against the same wall in a few year’s time.
    Thanks for this article, I will most definitely use aspects thereof for my own area of responsibility.

  5. Thanks everyone for your comments. Glad to hear that the post struck a chord around the globe it seems!

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  10. srholmes3 says:

    Reblogged this on srholmes3 and commented:
    This is very good.

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