FRAUD RISK MANAGEMENT

TACKLING FRAUDS USING THE LATEST MOST

EFFECTIVRE TACTICS

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DISCUSSION TO FOCUS AT------
• Fraud –what it is
• Recent Trends

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Financial Crimes
Vs
Frauds

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 Crime is the breach of one or more rules or
laws for which some governing authority, via
mechanisms such as police power/courts, may
ultimately prescribe a conviction.
Financial Crimes are defined as a crime against
property, involving the unlawful conversion of
the ownership of property (belonging to one
person) to one’s own personal use and benefit.
Financial crimes often involve fraud.

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Fraud ????----what it is
An intentional act by one or more
individuals among management,
those charged with governance,
employees or third parties,
involving the use of deception to
obtain an unjust or illegal
advantage
(International Standards on Auditing 240)
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 ROLES OF
MANAGEMENT &
AUDITORS

AGAINST THE
FRAUDS

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 Audito
rs
Frauds
ters

Manage
me
& Contr nt
ols

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Put more succinctly, fraud includes any intentional or
deliberate act to deprive another of property or money
by guile, deception or other unfair means.

Approximately around 7% of annual

revenues are lost to frauds. Applied to
the projected 2008 US GDP, this 7%
figure translates to approximately

$994 billion in fraud losses ;;;ACFE

GLOBAL OUTREACH OF FRAUDSTERS

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• Fraud is seldom witnessed at first hand.
It's a crime that is often shrouded in
ambiguity, and it's sometimes difficult
even to determine whether or not a
crime has actually been
committed….Sometimes it could seem
like a moving target and thus difficult to
hit---

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Fraud is often found/proven at
the subterranean levels—very
often at the source
documentation level. Also at
the adjustment level

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 HEAT
OXYGEN

FRAUDS
Rationalization
FUEL
Pressure

Opportunity

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Fraud Triangle
Perceived Opportunity

Pressure Rationalization

Trusted persons become trust violators when they conceive of themselves

as having a financial problem which is non-shareable, are aware this problem
can be secretly resolved by violation of the position of financial trust, and are
able to apply to their own conduct in that situation, verbalizations of which
enable them to adjust their conceptions of themselves as trusted persons
with their conceptions of themselves as users of the entrusted funds or
property.
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PERCEIVED OPPORTUNITY
Employee must also perceive that s/he has an opportunity to commit

the crime without being caught

PRESSURE
1. Non-shareable financial problems
2. Violation of ascribed obligations
3. Problems resulting from personal failure
4. Business reversals
5. Physical isolation
6. Employer-employee relations
7. Solving the problem in secret
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RATIONALIZATION
Embezzlers generally rationalize their crimes by viewing them as:
1. essentially non-criminal,
2. justified, or

3. part of a general irresponsibility for which they were not completely

accountable

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 Monitoring &
Correcting
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Deficiencies
re
SYSTEMS &CONTROLS

su Information and
es
Pr
Communication (MIS)
Opportunity

STRUCTURE
FRUADS
(-$$$)

Control Activities
Rati on ali
Risk Recognition and
Assessment
zation
Control Environment
Monitoring &
Correcting
Deficiencies

SYSTEMS &CONTROLS
Information and
Communication (MIS)
Functioning

STRUCTURE
FI (+$$$)
Well
Control Activities
Risk Recognition and
Assessment
Control Environment
WHY FRAUDS
OCCUR
???

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 Criminology and Ethics
• Why Crime?
– when rightful means exist for enrichment through effort-

To become rich Over night

Human Behavior -- unpredictable

• Theories of Crime Causation --- multiple theories
• White Collar Crimes
• Organizational Frauds– context of complex relationships and expectations

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 Understanding Human Behavior
• Behavior consists of our activities and actions, especially actions toward one
another

• Fraud as an Act of Behavior--- A high school graduate and government employee once used her government
credit card for personal purchases in an emergency. When no one detected her action, the employee charged another
$4,500 in personal items to the government”. ---Beth’s case

• Behavioral Analysis and the Detection of Fraud---studies motives

• Operant Conditioning and the Deterrence of Fraud --

• Why People Obey the Law

– Instrumental Perspective ----because they fear punishment
– Normative Perspective -----what one considers just and moral
– Legitimacy----if the authorities have legitimacy, the public will obey the law
– Voluntary Compliance----

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CRIME CAUSATION
Free Will, Criminal behavior attracts if gains more than losses,

• Classical Criminology
• Routine Activities Theory --- holds that both the motivation to commit crime and
the supply of offenders is constant

• Biological Theories --- criminal behavior is not result of choice but caused by physical
traits of those who commit crime

• Psychological Theories --- criminal behavior is the product of mental processes

– Cognitive Theories -- inadequate moral and intellectual development

– Integrated Theories -- driven by social factors family life, schools, gang membership
– Conditioning Theory – the failure of person to incorporate satisfactorily the dictates
of society represents the major explanation for subsequent criminal behavior

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CRIME CAUSATION
• Social Structure Theories
Theory of Anomie --- (Normlessness) discrepancy b/w what people or indoctrinated into
desiring and the ways available to them to achieve such ends is the cornerstone for explanation of criminal
behavior

• Social Process Theories– criminality is a function of individual socialization and the

social-psychological interactions people have with the various organizations, institutions, and processes of society

– Social Learning Theories – peer groups

– Theory of Differential Association--- criminal behavior is learned in interaction
with other persons in a process of communication

– Social Control Theory--- institutions of the social system train and press those with whom
they are contact into patterns of conformity

– Differential Reinforcement Theory— people learn social behavior by operant

conditioning, behavior controlled by stimuli that follow the behavior

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RECENT TRENDS

"It is a fraud to borrow what we are unable to pay."

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FRAUD CONTROL LIFE CYCLE
Technology Enabled
Process
Are we Control
here now Environment
Solutions helped
in reducing
Frauds
Strengthening of
Legal Framework
International efforts
Dollar to combat Financial
Value of Crimes
2002 2009
Frauds New Techs
cracked and new
weaknesses
Found

Time
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Globally, in 2006, most scammers operated from the United States.

The U.S. still held a huge lead in active internet users then, a gap that has
since closed considerably.

In 2008, China and the U.S. each have approximately 200 million internet
users, and most of the world has grow commensurately.

As the user populations have grown abroad, so have their scammer

populations. Several countries stand out in 2008 as have disproportionately
huge populations of scammers: Nigeria, Romania, the Netherlands and
China.

Lottery and fake money transfer frauds seem to be the specialty of the
Nigerians. The United States still leads in Identity Theft and
Phishing/Spoofing frauds.
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FinCEN March-2009 To be further studied from document
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RECENT FRAUDS AND FORGERIES EVENTS
Record number of fraud cases in first half of 2009.

•Highest number of cases in 21 years of KPMG’s Fraud Barometer

•Over STG 630m of fraud by value in the courts in UK

•Over 160 cases of serious with charges in excess of STG 100,000 came to
UK courts in the first half of 2009

•Attempted fraudulent sale of Ritz Hotel in London

•Mortgage Fraud with steady rise

Source: KPMG, UK

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