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Understanding the threat of business fraud

Our reality today is that most companies are targets for fraud. Organizations of all sizes are under constant strain by suspicious and fraudulent activity and often do not have the proper controls to protect themselves.

The impacts of fraud can be damaging and include massive financial and reputational losses. Most organizations acknowledge the nature and severity of the threat of fraud. In many instances, despite recognizing those risks, new technology causes institutional blind spots, all while fraudsters become more sophisticated with the methods they use to attack weaknesses. To successfully stay ahead of financial crime, a comprehensive payment fraud strategy must be developed across systems, departments and payment methods.

The issue of fraud is particularly threatening to organizations who lack internal resources responsible for managing risks. Companies who operate on lower turnover are more susceptible to serious consequences should they suffer a major fraudulent incident. Financial instability caused by fraud can threaten the existence and reputation of a business.

The level of recent payment fraud activity is of growing concern for businesses. In 2018, 82% of organizations reported incidents of fraud, according to the 2019 AFP Payments Fraud & Control Survey‡, underwritten by J.P. Morgan.

Internal and external business fraud

Payments fraud can be categorized into two sectors, internal and external. While external fraud such as social engineering and email account compromise is covered widely in the media, internal fraud including asset misappropriation and insider fraud is rarely acknowledged. This can be problematic, as internal fraud makes up a disproportionate percentage of the losses incurred by overall corporate fraud.

Many companies overlook this risk and fail to consider the threat their own employees pose to economic security. This may be in part due to confidence in the systems in place and a reluctance to suspect internal staff.

Regardless of whether the fraud is being perpetrated internally or externally, put yourself in the shoes of a fraudster. How would you take advantage of the systems in place? What vulnerabilities would you exploit? The best way to weed out a fraudster is to think like a fraudster. Companies always benefit when they improve their controls around systems and processes, and ensure their people are in an ongoing anti-fraud mindset.

Types of business fraud

For businesses, there are many types of fraud threats to consider. Four types of fraud have grown to pose a significant threat.

Asset misappropriation is the most common type of fraud, where an employee steals cash or other assets through deceitful means. According to the Association of Certified Fraud Examiners (ACFE), more than 89% of all internal fraud schemes involved an asset misappropriation element, and the median loss from an asset misappropriation was $114,000. Asset misappropriations are commonly detected through employee monitoring or through internal controls like segregation of duties, account reconciliation, and independent verification of data.

Business email compromise (BEC) is a growing problem and a critical vulnerability in many organizations. This scam accessing company information through methods like phishing, social engineering, email and social media account spoofing, and malware, and it can involve vendors, billing systems, and online message traffic. The goal of BEC is to deceptively impersonate an associate or customer and fraudulently reroute payments or steal private information for financial gain.

Social engineering is the psychological use of deception, manipulation, and trickery to influence a target to go outside of normal security protocols to divulge information for nefarious purposes by a fraudster. Fraudsters can ask a user to give up a login and password, to change banking information, or to send a confidential business file because it was recently “lost” by accident. The list of potential requests can seem endless. The medium used to begin the deception can include multiple communication channels, including in person, by email, in a text, via an app, on social media or over the phone.

With even minimal access to one employee’s account–like getting the victim to click on a malicious online message link–, fraudsters may secretly install malicious software that will give them even more access to passwords and bank information. Fraudsters use social engineering tactics because it is usually easier to exploit your natural inclination to trust than it is to discover ways to hack your software.

Insider fraud relies on accessing your valuable digital resources. However, you need to know who they are, what they’re doing, and if resources have been compromised. The factors that cause a person to commit fraud can include:

  1. Perceived financial need or stressor
  2. Opportunities to execute the fraud (authority, access and business knowledge)
  3. Rationalization that enables the person to reconcile the situation within their own mind or values (i.e. thinking the person is just borrowing money for a short time)

Reducing vulnerability in payment processes

Regardless of the type of fraud, organizations need to conduct regular audits and institute processes like user-based permissions and separation of duties to help reduce the occurrence of internal fraud and recognize weaknesses in their payment systems. These evaluations should assess each step of the payment journey and identify any areas that have the potential to be manipulated or abused.

This type of self-evaluation is particularly important for growing companies, as it helps to proactively identify vulnerabilities that arise through expansion. In many cases, growing businesses have few security systems in place to begin with.

Regardless of the size of the organization, companies should recognize a culture of trust is not enough to protect them. Those without the proper systems in place need to introduce them sooner rather than later, or run the risk of suffering from fraudulent activity. Those systems have the power to not only reduce the risk of fraud, but also help to identify mistakes that may in fact be incurring additional costs to the business.

With regular evaluation, loopholes can be recognized and closed before they are exploited.

Taking action to prevent business fraud

Left unchecked, fraud has the potential to cause significant damage to your business. To minimize the risk of fraud in your organization, you need an infrastructure that coordinates your people, processes and technology to recognize and detect vulnerabilities before they are exploited. With a well-managed fraud prevention strategy, you can radically limit fraudulent activity throughout your business and reduce the potential losses incurred.

BEC prevention

  • Implement multi factor authentication as a best practice and establish check and balance procedures for payments and sensitive information requests
  • Train employees to question and escalate suspicious emails before clicking links, downloading files or replying
  • Be on the lookout for internal requests that are unusual and often pressing for payments or data exports outside of normal procedures

Social engineering prevention

  • Maintain strong email, virus protection, and overall IT security protections on all electronic devices, especially smartphones.
  • Set your operating system to update automatically
  • Use an anti-phishing tool offered by your web browser or third party to alert you to risks
  • Educate and train employees to identify red flags such as pressure, urgency, and nonstandard communications and then escalate for additional review before approving, changing, or sending anything
  • Establish procedures giving employees a known “way out” so they can always halt an uncomfortable conversation or raise red flags.
  • Verify the identity of the person you are talking with. When in doubt, communicate with the purported individual on your terms; email them something if they want to use the phone, or ask them to verify something you know would only be known to them, such as an invoice number

Preventing internal fraud

Organizations can use the following activities to help identify and prevent an internal threat before it escalates and triggers substantial monetary and brand damage.

  • Monitor internal user activity across all systems: It is critical to establish normal and abnormal organizational benchmarks for employee activity to identify inconsistencies in behavior patterns
  • Track behavior in real time: Rather than analyze data retroactively, organizations can monitor and alert from the moment data is captured

By leveraging these measures, fraud can be discovered at an earlier stage to prevent customer data breaches and malicious attacks.

To ignore the threat of fraud is not an option, as businesses cannot afford the costs to their bottom line or their reputation that fraud incurs in today’s payment ecosystem.

Download the complete whitepaper about understanding business fraud. If you are interested in learning more about how UMB can help your business as a financial partner, visit our website


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When you click links marked with the “‡” symbol, you will leave UMB’s Web site and go to Web sites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.