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Fraud on the Rise During Unprecedented Times

Christina Solomon

November 16, 2020

Every year, businesses, government agencies and nonprofits throughout the world lose trillions of dollars due to fraud. COVID-19 and the resulting economic recession have raised the level of risk, which is expected to bring dramatic increase in fraud levels in the coming months.

In the eight months since COVID-19 was declared a pandemic, much has changed in the way business is conducted. At the outset, organizations had to adapt quickly, often prioritizing “getting things done” over ensuring compliance with documented policies and procedures.  

During times of crisis, fraud detection activities are often inhibited, either because fraudulent behavior is overlooked, or detection methods are deemphasized. Restrictions adopted due to COVID-19 have made anti-fraud efforts even more challenging.

As the long-term impact COVID-19 will have on business operations and financial results are being realized, NOW is the time for organizations to take action to mitigate fraud losses.  

Fraud creates enormous losses for organizations.

According to the Association of Fraud Examiner’s (ACFE) 2020 Report to the Nations:

  • The average loss in an occupational fraud case is $1.5 million and the median loss is $125,000.
  • Organizations lose 5% of annual revenue due to fraud. Applied to 2019 GWP, this translates to global fraud losses of more than $4.5 trillion each year.
  • Small businesses are hit especially hard, with an average loss of $1.1 million and median loss of $150,000 per case.

Pressures driving fraudulent behavior are increasing.

With record unemployment levels and widespread concerns about the reopening of the economy, pressure to commit fraud is remarkably high.

  • The two most common behavioral red flags for occupational fraud perpetrators are living beyond their means (42%) and financial pressure (26%).
  • 61% of fraudsters exhibit signs of financial distress at the time of their crimes.
  • 30% of fraudsters had concerns about their jobs or compensation at the time of their crimes.

Opportunities to commit fraud are extremely high.

New and unprecedented challenges to the global financial system have created a target-rich environment for fraudsters. For example:

  • Trillions of dollars in government loans and subsidies are rapidly injected into the global economy, raising the risk of loan and procurement fraud.
  • Millions of companies and employees are quickly adapting to virtual work environments, leading to heightened risk of hacking, phishing and data breaches.
  • Companies cutting back on staff or spending may be weakening their anti-fraud controls and opening the door for both internal and external fraudsters to attack.
  • According the Report to the Nations, more than 50% of all occupational frauds resulted from an internal control deficiency.

Bad news does not get better with time.

Organizations are coming to terms with unique fraud risks the pandemic creates, and are recognizing they must address them. In a recent study conducted by the ACFE entitled “Fraud in the Wake of Covid-19: Benchmarking Report” September 2020 Edition:

  • 68% observed an increased in fraud since May 2020.
  • 77% of respondents observed an increase in fraud since August 2020; an increase of almost 10%.
  • 92% expect to see a further increase in the overall level of fraud during the next year, with nearly ½ expecting that increase to be significant.
  • The prevention, detection, and investigation of fraud has been significantly more challenging in the current environment. The inability to travel, conducting remote interviews, and lack of access to evidence were cited as contributing factors.
  • Schemes observed included cybercrime (business email compromise, hacking, ransomware and malware), payment fraud (credit card fraud and fraudulent mobile payments), and employee embezzlement.

Anti-fraud controls.

Below are basic steps your organization can take immediately to lessen your vulnerability to fraud:

  • Assess Risks. Evaluate how your fraud risks have or may change as result of COVID-19. Assess the likelihood and significance of emerging risks and reprioritize as needed. 
  • Focus on Internal Controls. The internal controls you had in place before the pandemic may no longer be effectiveRedesign internal controls to better address identified fraud risks and remote/virtual working environments. 
  • Reassess Technology. Re-evaluate technology access, controls, and security — both in the office and remote/virtual environments. Knowing where your organization’s data is stored and all the ways it can be accessed electronically may require you to revise established protocols.
  • Preserve Confidentiality.  Your organization may need to rework how hard copy and electronic information is stored and accessed. Maintaining confidentiality of your organization’s intellectual property and its most sensitive information (and that of clients, vendors, and employees) simply cannot be put at risk due to your current work environment.  
  • Increase the Perception of Detection. Communicate regularly to staff about anti-fraud policies, ways to report suspicions of misconduct, and the potential consequences. Perform unplanned “spot” checks and regularly ask questions and for additional support before approving financial transactions.
  • Trust but Verify.  Assessing fraud risks and implementing internal controls is not alone sufficient to mitigate fraud. Implement preventive and detective measures (data analysis, internal audits, increased oversight) to test if internal controls are operating effectively.
  • Train Employees in Fraud Prevention. Do your workers know the warning signs of fraud? Ensure that staff know basic fraud prevention techniques and the role they serve in your organization’s anti-fraud efforts. 
  • Implement a Fraud Hotline.  Fraud is still most likely to be detected by a tip. Providing an anonymous reporting system for your employees, contractors and clients will help uncover more fraud.
  • Lead by Example.  Ensure your organization’s tone at the top is one of honesty and integrity. Employees pay close attention to the behavior and actions of their bosses and they follow their lead.

We can help you mitigate fraud loss for you and your business. Contact our team of specialists to learn more.

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