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Detecting & Preventing Fraud: Behavioral Red Flags in Financial Institutions

“I never would have suspected that person!” This is often the response from management when questioned about an employee who has been caught engaging in fraudulent activities within their financial institution. In many instances, identifying potential fraudsters before they commit a crime can be challenging, especially if you don’t interact with them on a daily basis. However, there are key behavioral and performance indicators that can raise red flags for managers and HR professionals, offering valuable insights into potential issues.

Recognizing the Overt & Subtle Signs Of Fraud

According to the 2022 report by the Association of Certified Fraud Examiners (ACFE) on occupational fraud, titled ‘A Report to the Nations,’ it’s important to note that the majority of occupational fraud perpetrators have no prior criminal record. Nevertheless, 8% of these individuals have previously faced termination from a job, while 9% have been subject to disciplinary actions by an employer.

The ACFE’s research also reveals that most fraud perpetrators exhibit at least one behavioral red flag before their fraudulent activities are uncovered. Living beyond their means is the most common indicator, accounting for 39% of cases, and forming unusually close relationships with vendors or customers is also prevalent. Other behavioral red flags may be subtler. A deceptive employee might appear exceptionally friendly and cooperative in the workplace, but frequently come into conflict with colleagues or disregard established rules. They may also exhibit signs of social isolation, defensiveness, or a desire for excessive control.

In approximately half of all occupational fraud cases, the perpetrators are involved in non-fraud-related misconduct before or during the fraud incident. This could include disciplinary actions related to behavior such as bullying subordinates or habitual tardiness. Additionally, the ACFE’s study shows that a small number of dishonest employees are investigated for issues like sexual harassment or inappropriate use of the internet. Some fraudulent employees may also display performance problems, with 15% receiving poor performance evaluations and 12% being denied raises or promotions.

Stop The Scheme

When misconduct or poor performance results in disciplinary measures, supervisors and HR professionals have a golden opportunity to potentially halt an ongoing fraud scheme. After all, the longer a fraudulent activity goes unnoticed, the more costly it can be for the financial institution. Fraud schemes lasting less than six months have a median loss of $47,000, but those extending from 13 to 18 months can escalate to a median loss of $125,000. Therefore, when you detect any signs of trouble, it’s essential to investigate further.

However, it’s crucial to exercise caution. While closely monitoring any employee who consistently disregards rules, disrupts workplace harmony, or neglects their job responsibilities is advisable, most underperforming or challenging employees are not necessarily involved in fraudulent activities. It’s wise to consult legal counsel before making any accusations related to potential criminal activity.

Maintain Controls

Establishing and enforcing internal controls is another essential aspect of safeguarding your financial institution. These controls can help protect your organization from financial losses, even if you fail to identify a potential fraud perpetrator within your ranks. Reach out to us for assistance in strengthening your internal controls and enhancing your fraud prevention measures.

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