Fraud is a human problem

Fraud looks like a lot of different things.  Stuff for sale online that doesn't really exist, the "IRS" calling you to collect a debt you don't owe, employees padding expense reports, vendors over-billing, cybercrime, identity theft, bribery and corruption.  It happens online, over the phone, in-person, and through the mail.  This week it even happened at RiotRibs, the pop-up protest kitchen that was feeding the revolution until one of their volunteers created a cashApp handle similar to the official RiotRibs handle and started taking donations.

Fraud is everywhere, so as a society we have created many fraud prevention tools.  Financial institutions employ machine learning, data analytics, and artificial intelligence to detect and deter fraud.  Companies install network firewalls and send reminders to employees about not clicking on suspicious emails.  People install virus protection software and try not to lose their credit cards or send money to foreign royalty.

It seems like we are better prepared than ever, and we are.  Despite that, the Identity Theft Resource Center received 20,677 phone calls on their toll-free line and assisted in 10,149 unique cases in 2019.  As individuals and institutions become more aware of fraud and more adept at spotting it, fraudsters get more savvy in the schemes they run and the tools they use, finding new and more creative ways to separate other humans (and institutions) from their money.

Fraud is a human problem.  It requires a human solution.  It’s not enough to put up thicker walls and install bigger locks.  Like so many societal ailments, we have to address the root causes of fraud before we will be able to make real and lasting progress toward reducing its overall occurrence.

In the anti-fraud industry, we often frame the discussion about why fraud occurs in the context of the fraud triangle.  One side of the triangle is opportunity, one side is financial pressure, and one side is rationalization.  When there is opportunity to steal cash or misuse organizational assets, and someone feels financial pressure, if they can rationalize taking the money that is the moment when fraud is most likely.

Most of the common fraud-prevention controls focus on eliminating opportunity.  Such as requiring two signatures on checks over a certain dollar amount and manager approval of time sheets or travel expense reimbursements.  Opportunity receives the most attention because it is the most concrete and quantifiable.  Also, controls for opportunity focus on systems and process, so they can be applied in a uniform and impersonal way to any employee or any vendor.

The other two sides of the triangle are a lot more personal and nebulous.  Indicators of financial pressure include: lifestyle above means, significant medical expenses, drug or gambling addiction, family issues or domestic violence.  Rationalization includes: feeling underpaid, under-appreciated, or un-noticed, thinking the fraud is a temporary fix or they will do it just this once.  These are more challenging for any organization to mitigate because they cannot be remedied by things like rules or procedures alone.  The resolution for these factors must consider the thoughts and feelings driving behavior.  It must consider the humans within the system.

Even when a systemic control is put in place, it still requires people to execute it.  The second signer still needs to review the check amount and verify the recipient.  The manager still needs to scrutinize the hours claimed on timesheets and review receipts before approving reimbursement.  The controls are only as effective as the people are diligent in carrying them out. 

There is no escaping the human component in fraud.  The typical occupational fraud lasts 14 months before detection (according to the Association of Certified Fraud Examiners 2020 Report to the Nations), and most cases are discovered by accident or through a tip.  Many fraud schemes rely at least in-part on social engineering, either to execute the scheme itself or as a means to cover it up.

Fraudsters have figured out that fraud is about humans, so fraud prevention needs to be equally human.  One human-centered area that gets a fair bit of focus already is tone at the top.  This is that the actions and behaviors modeled by those at the top of an organization filters down and are adopted by the rank and file.  There is currently a lot of emphasis on having a strong ethical corporate culture, including clear ethics policies and regular training.

What leaders are doing matters immensely.  And that can't be the end of the conversation.  We need to go much deeper and consider how each of us as individuals are shaping the environment around us.  Part of establishing a strong ethical culture is cultivating an environment that encourages people to speak up and ask questions, especially when something doesn’t feel quite right.  We need to practice recognizing our gut reaction as the alert system it was designed to be, and invest the time to learn how to interpret what our body is telling us.

In most cases, people noticed red flags long before a fraud is discovered because those behaviors are outside what is usual for the environment.  Unfortunately, many red flags of fraud can also be indicators of incompetence or training deficiency, and because people like to feel capable and be seen as competent, coworkers or community members don't raise their concerns to avoid embarrassing their friend, coworker, or boss.

To overcome this, we need to reshape the culture we create in our workplaces and community organizations.  We need to cultivate an environment where folks can raise concerns or questions without it being interpreted as a question of someone's worth as a human being.  This takes leadership setting a deliberate tone from the top, as well as every person doing their own personal work.  When we are all showing up as our fullest selves, we can see everyone around us more clearly.  When we can see each other and the culture of our environment more clearly, we can address the human causes of fraud.

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Information and Inspiration

• Twitter: Riot Ribs URGENT THREAD
• Identity Theft Resource Center: 2019 Annual Impact Report
• Association of Certified Fraud Examiners - 2020 Report to the Nations
• The Center for Nonviolent Communication: Home
• Fraud Magazine: Dixon's Quiet Hero
• OregonLive: Salem woman arrested in $2.1 million Oregon tax fraud case
• Pink Collar Crime: what is it?