Financial Fraud: Part 1

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Fraud is an intentional act of criminal deception in order to obtain an unjust or illegal advantage. Typically, fraud results in financial or personal gain. Fraud can be committed by one or more individuals—from low-level employees, to management, to government officials. Understanding the motivations and circumstances surrounding fraudulent behavior, enables proactive measures to be taken to deter and prevent it. 

Reasons for Fraud

The Fraud Triangle was developed based on the work of criminologist Donald R. Cressey and describes the three major reasons why people commit fraud.

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• Pressure is the motivation, incentive or reason behind the fraud. It often stems from financial problems, personal debt, addiction, or unrealistic performance expectations. The individual feels pressure to resolve a situation and sees fraud as a way out. For example, personal financial hardship, pressure to meet sales targets or performance goals or a gambling addiction.
• Opportunity is the ability to commit fraud without being caught. It usually arises from weak internal controls, lack of oversight, or access to assets or information that can be manipulated. For example, poor segregation of duties, lack of audits or monitoring, or access to financial systems without checks
• Rationalization is the internal justification an individual uses to make the act seem acceptable. They convince themselves that what they’re doing isn’t wrong or that they deserve it. For example, I’m just borrowing the money, They don’t pay me enough, Everyone else is doing it.

Together, these three elements create an environment where fraud is more likely to occur. If even one of these elements is missing, the likelihood of fraud decreases significantly.

Sources of Fraud

The source of fraud typically refers to the origin of the activity relative to an organization and are either internal or external.

• Internal fraud (also known as occupational fraud or insider fraud) is when an individual within an organization abuses their position for personal gain. This can include an employee, manager, or executive
• External fraud is committed by someone out side of the organization.  This can include criminals, customers, vendors, competitors, or even organized crime.

Categories of Fraud

1st Party Fraud

• • Who commits it? The customer themselves.
  • What happens? A person intentionally misrepresents themselves or their intentions to gain financial or other benefits.
  • Examples:
    • Applying for a loan or credit card with no intention of repaying.
    • Using false information (e.g., fake income or identity) to get approved for services.
    • Friendly fraud: disputing legitimate charges with their bank to get a refund.

2nd Party Fraud

• • Who commits it? Someone authorized by the customer, but acting maliciously.
  • What happens? The customer knowingly allows another person to use their identity or account, often for fraudulent purposes.
  • Examples:
    • A parent letting their child use their credit card, and the child makes unauthorized purchases.
    • A person giving their login credentials to a friend who then commits fraud.
    • Selling access to one’s own account to someone else who uses it for fraud.

3rd Party Fraud

• • Who commits it? An unauthorized external party.
  • What happens? A fraudster uses stolen or fake identity information to impersonate someone else.
  • Examples:
    • Identity theft: using someone’s personal data to open accounts or make purchases.
    • Account takeover: hacking into someone’s account and using it fraudulently.
    • Synthetic identity fraud: creating a fake identity using real and fabricated data.

Stay tuned for Part 2!

To learn more about combating fraud with SAS Fraud Detection, see https://www.sas.com/en_us/software/fraud-decisioning.html

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