Internal Fraud: reasons, consequences and prevention

“Fraud is a type of criminal activity defined as: 'abuse of position, or false representation, or prejudicing someone's rights for personal gain'. Put simply, fraud is an act of deception intended for personal gain or to cause a loss to another party." - SFO (Serious Fraud Office)

In the following blog series, we’re going to be covering the main types of fraud:

  • Internal Fraud
  • Cyber Fraud
  • Identity Fraud
  • Occupational Fraud

Today we’ll be looking at Internal Fraud.

Start combatting  internal fraud 

Internal Fraud

Internal fraud, or insider fraud, is the term for fraud which happens within a company. It occurs when an employee dishonestly makes false representation, wrongfully fails to disclose information, abuses a position of trust for personal gain or causes loss to others.

“Insider fraud is a growing problem. There were 751 confirmed cases of insider fraud recorded by CIFAS Members to the internal fraud Database in 2014; an increase of 18% when compared with 2013” - Employee Fraudscape 2015, CIFAS

It's important to understand the reasons behind internal fraud, as that will allow employers and HR teams to identify potential risks and tackle them accordingly.

Even though the main cause behind internal fraud is usually financial pressure, employees tend to be prompted to commit fraud because they are dissatisfied with the company and believe they deserve a different treatment. Internal fraudsters often feel entitled to more than what they are getting from their employer and justify their illicit behaviour on these grounds.

“Of the cases examined, an average initial fraud loss of nearly £424,500 was identified. The true cost of all frauds analysed was 14% higher than the initial amount lost to the fraudster” - Employee Fraudscape 2015, CIFAS

The consequences of internal fraud go from the obvious cost of the infraction itself to the associated quantifiable costs related to penalties, inspections and recruitment replacements. Whilst the impact is severe for all businesses, it is the smallest organizations which tend to suffer disproportionately large losses due to internal fraud. Many organizations spend a lot of time and money to recover the costs of fraud but are often unable to do so completely.

Moreover, CIFAS claims that “the smaller the fraud, the greater the proportional increase in the total cost. Frauds under £25,000 incurred costs that represented an average 265% increase to the initial loss. This means that a £300 fraud loss will incur, in average, a £705 associated cost and a final bill of £1,095; while a £10,000 fraud could cost over £36,000”.

Other types of incalculable loss need to be taken into account, from damaged reputation to losing customers and productivity of the remaining staff affected by the fraud. Internal fraud also affects the general morale within the workplace, generates distrust among employees, makes it harder for everyone to focus and work efficiently and sets a bad precedent which others may end up following, too.

By establishing an environment of trust and respect among colleagues and across the entire hierarchy within the company, a HR department can ensure that employees will openly discuss issues and concerns with them, as well as report any suspicious behaviour without fear of being persecuted or dismissed.

Prevention measures may include implementing internal software to allow employees to raise a red flag in confidentiality, creating a data sharing network and monitoring staff.

Vetting schemes and background checks

“Organisations should not regard such [fraud-related] risks as a ‘given’. On the contrary, the findings demonstrate that investment in prevention is preferable to paying out additional costs incurred as a result of internal fraud. Comprehensive fraud prevention strategies combined with appropriate HR procedures must be the cornerstone of an organisation’s work.” - The True Cost of Internal Fraud, CIFAS

At Onfido, we submit that this should be the attitude of employers not only to fraud, but to the risks of bad hires in general. Comprehensive and systematic background checks of prospective employees are vital as a cornerstone in the prevention of fraud and as protection from costly mistakes, and can and should be adopted as standard practice in the UK. Making sure the candidate has a clean record is the first step towards a safe environment in which employees can be trusted with money and sensitive data.

Internal fraud can include payment fraud, procurement fraud, travel and subsistence fraud, personal management fraud, occupational fraud, exploitation of assets and information and receipt fraud.



Start combatting  internal fraud 

For a full report on Internal Fraud, please check CIFA’s Employee Fraudscape 2015.

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Irene is the person behind Onfido's social channels and blog. She does marketing stuff and gets to spend time on Twitter. At night, she neglects her own online profiles and reads (paper) books.