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Fraud ✔✔"Any illegal acts characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the perpetrated by individuals and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business ad- vantage."
Main types of fraud ✔✔Internal Fraud and External Fraud
Internal Fraud ✔✔which involves the employees of the company against which the fraud is perpetrated
External Fraud ✔✔deceptive conduct by non-employees that
deprives the organization of value, and/or is undertaken for financial gain.
embezzlement ✔✔theft or misappropriation of funds placed in one's trust or belonging to one's employer.
financial fraud ✔✔"cooking the books." This type of
fraud generally refers to falsely representing the financial condition of the company, so as to inflate the value of stock, fraudulently boost executive bonuses, or otherwise mislead shareholders, lenders, employees, investment analysts, or other users of the information.
Skimming (cash larceny) ✔✔Accounts receivable fraud, this
involves simply stealing cash before it enters the organization's accounting system.
Billing Schemes ✔✔Perpetrated by employees who cause their employer to issue a payment to a false supplier by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.
check tampering ✔✔taking advantage of employee access to blank company checks, using a password to
steal computer-generated checks, or producing counterfeit checks.
Employee reimbursement scheme ✔✔making false claims for reimbursement, or inflating or creating fictitious business expenses. (Travel /meal reimbursement.
identity fraud ✔✔involves the unauthorized use of another person's personal data for illegal financial benefit. Involves abusing the stolen information to transact personal business in the victim's name.
identity theft ✔✔the fraudulent acquisition or stealing of confidential personal information.
2 categories that encompass Fraud ✔✔Theft (stealing money, ID, or assests) and deception (cooking the books, lying to shareholders, employees or partners)
Myth #1 of the Financial Services ✔✔"We have very little fraud here" ex: subprime mortgage fraud
Myth #2 of Financial Services ✔✔"Ethics and training compliance has us covered" Fraud is not always covered in ethics policy or training.
Myth #3 of Financial Services ✔✔"Fraud is an unavoidable cost of doing business" Fraud is usually not serious enough to destroy a financial service firm, it is much more than necessary cost of doing business.
Chapter 1 review points ✔✔• The numbers do not lie: Fraud is a huge worldwide problem—for all organizations.
- Financial services fraud. Seventy-one percent of financial institutions experienced attempted payment fraud (check fraud, ACH fraud, or credit card fraud in 2017).
- Definitions of fraud. The broad definition of fraud is illegal activity representing either theft or deception, or a combination of both.
- Myths about fraud. It is easy to become complacent about fraud, but doing so can be very costly.
Fraud does occur in every organization, and is potentially serious enough to cause major long- term damage.
- Main types of fraud. Countless varieties of fraud threaten financial institutions. Fraudsters are con-
stantly thinking up new ways to target financial services institutions.
20-60-20 rule of human component of fraud ✔✔20% of people will never commit fraud
60% are fence sitters and may commit fraud if given the opportunity
20% of people inherently dishonest (pg 29)
2 types of insider fraud threat ✔✔Employee level fraud and management level fraud
unfairly denied them a raise or promotion, or because some other form of mistreatment made them "victims."
Opportunity Element of the triangle ✔✔Helps explain the ways in which many frauds are committed by employees, middle managers, and executives of financial services organizations. (pg34)
What caused the Fraud Triangle to morph into the Fraud Diamond ✔✔Personal Greed, was considered the 4th side of the diamond. (pg 36)
Loans to phantom borrowers Start of chpt 4 ✔✔Internal fraud where an employee can submit a fictitious loan to a loan officer of the same company.
Loan Lapping (aka accounts payable fraud) ✔✔the fraudster will make loan payments from funds received from subsequently closed or older fraudulent loans in a form of loan lapping scheme. pg 36
Nominee or straw borrowers ✔✔"A third-party"or "nominee" loan is a loan in the name of one party that is intended for use by another. In other words, a persons PII is used with permission to secure a loan for someone who would not qualify, thus circumventing the system.
Kickback on Illegal loans ✔✔A bank insider is induced to approve a loan to a non-credit worthy borrower, where the borrowers agrees to give something of value to the banker to approve the loan.
Reciprocal loans ✔✔a dishonest loan officer or bank manager agrees to authorize loans to one or more crooked bank colleagues or to dishonest counterparts in other financial institutions made with the understanding that a comparable, reciprocal loan or favor would be made in return. (pg
Linked financing ✔✔a form of loan fraud in which a large depositor or a deposit broker agrees to give a bank its business in exchange for a loan that it might otherwise not qualify for or that is used to perpetrate a real estate fraud.
Working Capital or Asset-based Loan Fraud ✔✔typically are made by committing the borrower's receivables, inventory, or other assets as collateral. Also referred to a "Floor-plan" lending as merchandise is used as collateral for the loan.
Hard indicators ✔✔Are pieces of evidence that are tangible. Often they are signs represented by numerical oddities or by physical evidence.
Segregation of Duties (SoD) ✔✔refers to separating job functions in a way that no single employee is in a position with sufficient authority to perpetrate a fraud, either single-handedly or with a collusive vendor, customer, or ex-employee.
The responsibility for record-keeping for an asset should be separate from the physical custody of that asset.
delegation of authority ✔✔refers to having specific levels of authority, indicating who is permitted to approve particular components of the lending process, performing postfunding review functions and other key credit-related activities. This
Chapter 3 review points ✔✔• While fraud was instrumental in bringing about the subprime mortgage crisis, it is important for
anti-fraud professionals to remember that nonmortgage loan frauds and numerous forms of other internal white-collar crime also can be very costly.
- Mortgage fraud, while sometimes perpetrated by dishonest insiders, is primarily an externally
initiated fraud. The criminals typically include dishonest mortgage brokers, appraisers, borrowers,
and builders.
- The first step toward preventing employee-level fraud is understanding and detecting the numer-
ous red flags of such schemes.
- With a solid understanding of red flags, an organization can conduct detailed risk assessments to gather evidence of suspected frauds and put into place effective controls to minimize vulnerability
to most employee-level frauds.
- A virtually limitless variety of anti-fraud controls can be implemented to minimize the organiza-
tion's fraud risk. The choice of which controls to put into place is best determined by conducting a
fraud risk assessment that pinpoints signs of specific fraud vulnerabilities. (pg 55)
2 types of employee level embezzlement ✔✔Looting customer accounts such as savings and checking by teller skimming o bank funds and (#2) exploiting control weakness in the bank's operations such as account payable and procurement.
Looting crimes ✔✔Making unauthorized withdrawals, by diverting funds of customers to accounts with false records
Shell company and/or phony invoice fraud ✔✔Setting up shell companies and submitting invoices to be paid, usually a high person who approves third-party payments. The company appears real and legit.
Vendor Master File (VMF) manipulation ✔✔Employees with access to VMF can generate phony invoices, enter bogus vendors, and obtain approval of fraudulent transactions.
Collusion with Vendors ✔✔dishonest vendors typically involves a bribery or kickback scheme jointly perpetrated by a bank employee and a crooked supplier.
Three-stages of collusion with vedors ✔✔pre-solicitation, solicitation, and submission. (pg 62)
Purchasing of unnecessary goods. ✔✔Dishonest insiders accept bribes or kickbacks
from a specific vendor in exchange for recognizing the need for the vendor's product or services by his
or her organization. (Pre-solicitation phase)
Specification schemes. ✔✔Vendors pay corrupt bank employees to write contract specifications that favor their particular goods or services. (Pre-solicitation phase)
Bid splitting. ✔✔when competitive bidding is required only for contracts or purchases over a minimum amount., a corrupt procurement employee may accept a bribe from a vendor to split the contracts so that each of the two amounts falls below the competitive bidding threshold. (Pre- solicitation phase)
Creating phony suppliers. ✔✔a dishonest procurement employee may be paid off to permit a collusive vendor to create nonexistent "competitors" and submit phony bids in their names, with pricing that ensures that the actual vendor wins the business. (Solicitation phase).
Pay-per-view schemes. ✔✔A dishonest purchasing employee may accept a corrupt vendor's offer for payment in exchange for advance access to the contract specifications. The crooked vendor obtains a competitive (and illegal) advantage over rival bidders and essentially is
guaranteed to win the business.(Solicitation phase).
Early-start schemes. ✔✔A dishonest buyer accepts something of value from a crooked vendor in exchange for receiving advance access to the contract specifications. The preferred vendor gains extra time to prepare its bid, thereby putting the competition at a disadvantage. (Solicitation phase)
Falsifying receipts. ✔✔Receipts for transportation, hotel, restaurant, and other business travel expenses are easily obtained and "recycled" by employees either by forgery or by alteration. It is all too easy, for example, to alter the date or amount on a receipt before it is submitted. (T&E Fraud).
Claiming expenses just below the minimum documentation requirement. ✔✔If receipts are required for all expenses over $25 for meals, an employee may fraudulently submit undocumented claims for amounts of $24.99 or $24.95. (T&E Fraud)
Claiming for "out-of-policy" expenses. ✔✔A dishonest employee may test your organization's anti-fraud controls by submitting a receipt for a personal expense incurred during a business trip. If the form is complicated the processor may just approve payment (T&E Fraud)
Purchasing Card Fraud (P-Card) ✔✔Corporate card used by legitimate holders who charge non- business expenses to the employer and falsely document them as legitimate job-related purchases. (pg 64)
Automated Clearing House (ACH) ✔✔An electronic network for financial transactions in the U.S. The network processes batches of debits and credits to various financial institutions allowing for fast, safe and efficient transfer of funds.
Forged Check ✔✔a check signed by someone else other than who is specified on the check without that person's permission
Theft and Forgery of stolen check ✔✔An employee stealing blank checks ad making them out to him or herself or cash, and forges the name of the authorized person to sign checks.
Check interception and forgery of endorsement ✔✔Perpetrator steals checks made out to legitimate payee and are signed. The perpetrator white outs the payee, alters or changes the payee information to themselves or others.
Electronic Payee Alteration ✔✔Where an insider in AP, modifies the Vendor Master File changes the name of a legitimate business to a name that is similar enough that it wont be noticed. The perpetrator simply changes the information back after the execution of the fraud.
Check alteration by inserting numbers ✔✔Changing the amount of the check by changing one or more number.
Theft of confidential information ✔✔perpetrators (possible employees) steal PII of customers and use the information to commit identity frauds such as unauthorized loans, credit accounts (pg
Insider abuse of Computer Systems ✔✔insiders pose a substantial threat by virtue of their knowledge of and access to their employers' systems and/or databases, and their ability
to bypass existing physical and electronic security measures through legitimate means.
Red Flags of all the above employee level embezzelment ✔✔Pg 72- 76
Checklist of all the above employee level embezzelment ✔✔76-
Chapter 4 Review points (Employee Level Embezzlement) ✔✔Pg 83
Management-Level self dealing ✔✔Self dealing is approving loans to ones self (pg 87)
Foreign Corrupt Practices Act (FCPA) ✔✔a law that prohibits U.S. corporations from making illegal payments to public officials of foreign governments to obtain business rights or to enhance their business dealings in those countries
Recording false revenues ✔✔misrepresenting financial performance involves recording nonexistent revenue or misrepresenting the period in which the revenue was received.
Fraudulent revenue recognition ✔✔involves recording revenue—typically loan interest income and interest from investments and related revenue—from a future reporting period in the current period, or understating amounts set aside for loan losses.
Manipulating liabilities ✔✔Neglecting to record expenses and burying vendor invoices, management can make it appear as if expenses for a particular reporting period are lower than they actually are, thereby making earnings appear greater than they are.
Overstating Assets ✔✔failure to mark investments to market when the securities markets decline, overstating the amount of cash, or recording the value of an outstanding loan as being greater than its estimated market value.(pg93)
Manipulating interest rates ✔✔Libor (London Inter-Bank Offered Rate) is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so
