Edmundo Llopis

In today’s environment, it is imperative for an institution to have a dedicated and well staffed Fraud Management and Investigative Department.

According to a recent study by the Association of Certified Fraud Examiners, organizations lose about 7% of their revenues to fraudulent activities.

Factored against the U.S. Gross Domestic Product for 2008 — seven percent equates to ~$994 billion.

These are estimates of the direct economic loss to businesses. We must also account for the major indirect costs; legal, accounting, higher insurance costs, reputational cost (difficult to estimate, but glaringly apparent after the fact) and loss of productivity associated with hiring and firing employees.

In the past several years, we have seen convictions of executives from

Enron, WorldCom and other companies, demonstrating that fraud occurs at all levels of an organization. Corporations must have policies in place that:

• • Exposes and punishes all corporate corruption
• • Have a Zero tolerance to fraud
• • Holding corporate officers and directors accountable
• • Having independent corporate Audit and Fraud Management functions, ensuring segregation of duties

Do your organization leaders recognize fraud as a risk management issue?

Are there designated fraud managers to oversee all product lines? Are your fraud management strategies implemented in company policy? If not, these are some of the essential starting points to implement effective Fraud Management.

A policy needs to be in place in preparedness of fraud management through advancement of a uniform, consistent, and measurable approach to fraud risk. The result of not addressing fraud risk at a consistent and effective level accounts for a financial loss, loss of reputation and trust within the marketplace, as well as potentially violating specific regulatory controls. The future and health of your company is dependent, in part, on how well the threat of fraud is managed.

With fraud continually rising and the authorities continuing to struggle with its complexities, it is up to the financial industry to make it uneconomical for the fraudsters. Fraud is a non- competitive industry wide problem.  It’s in the best interest of the industry to actively collaborate in combating this virally malignant epidemic. We must also do a better job in sharing information amongst ourselves, while fostering public policy changes regarding the sharing of non-competitive preventive investigative information and evaluate systems-based tools and solutions.

Institutions need to determine which exposures lend themselves to a

Systems-based proactive detection approach, while applying and facilitating specific fraud detection and investigative support systems-based solutions. Facilitating linkages of internal and external databases to enhance overall investigative and due diligence efforts is also paramount.

To remain competitive in managing fraud/risk, institutions must implement fraud prediction scoring algorithms, across all major product lines. It is estimated that Fraud Early Warning (FEW) systems, in the U.S., annually prevent approximately 40 billion dollars in fraud losses.  FEWs systems create goodwill and improve customer satisfaction. In the U.S. FEW accounts have lower attrition and higher sales, while building franchise value through projecting an image of security and safety.

One of the problems facing the industry is that criminals are becoming more sophisticated, while criminal money is funding new efforts and more corruption among employees and professionals.

We need to be more vigilant and think like a fraudster and ask ourselves these questions: Where are our weakest links? How can the process be attacked without drawing attention to an individual? How can the evidence be destroyed or hidden? Can an auditor, for example, be mislead or distracted during a review? Are there employees with extravagant life-styles and spending habits, expensive vices, personality changes or serious financial pressures? Are any employees displaying an arrogant and / or secretive nature?

Some of the “red flags” we must look for are:

• Inadequate segregation of duties

• “Controls are a waste of time”

• Absolute trust/control by one person

• “Management by fear” or total domination by department head

• Key employees have “no time” for vacations

• Perceived or actual conflicts of interest

• Sharing of passwords

A lack of fraud awareness is a common problem in organizations – middle managers are more likely to commit internal fraud. The Health Care and Banking sectors seem particular susceptible to fraud perpetrated from outside entities. It is noteworthy to mention that frauds primarily occur because of the circumvention or overriding of internal controls, which account for (17.1%), No segregation of duties account for (13.1%) and lack of periodic checks account for (10.1%). Worsening the fraud problem is outdated systems and controls, highly educated organized criminal groups using sophisticated technology, new fraud schemes created everyday, inexperienced and uninformed employees and new internet-based communication methods; no border and broader targets.

A study conducted by KPMG’s Forensic Services in Brazil revealed that 81% of the respondents have witnessed different types of fraud at work.  Having a fraud repellant organization, dedicated to a zero tolerance to fraud, is essential to a successful Fraud Management Program.

* Sentaire Partners, LLC