Insider Fraud (Part I)
By Mike Betron, Infoglide VP and GM of Social Identity Services
When most people think about fraud, they think about high-profile, highly-publicized cases including names and terms like Bernie Madoff, Allen Stanford, Enron, and Ponzi schemes. These types of fraud cases may be rare, but the fact is, most companies face a quieter, if far less sophisticated, fraud threat on a daily basis – from their own employees.
Take a look at these three cases, which are all examples of insider fraud:
- In December 2012, Wells Fargo employee, John Femenia, and nine others were charged with fraud by the SEC. The SEC stated that Femenia and the other ring members used his position at the bank to gain $11 million by trading on tips about impending mergers.
- In July 2012, Matthew Walker was sentenced to 41 months in prison after being convicted for a scam that defrauded one bank customer out of nearly $2 million. The biggest surprise? Walker had served as vice president of Farmers and Merchants Bank in Orange County, CA, where the fraud took place.
- Also in July 2012, insurance salesman, Aaron Travis Beaird, was arrested on fraud charges for diverting his clients’ life insurance payments into a personal account. (And to top it off, he also tried to fake his own suicide and fly to Scotland to escape getting caught.)
So who commits insider fraud? In what companies and situations does it take place? In this first article of a multi-part series on insider fraud (IF), we’ll explore what insider fraud is, who commits it, and the potential consequences of IF in the financial and insurance industries.
What is insider fraud (IF)?
Essentially, insider fraud takes place when someone uses his/her position within an organization to steal money or information and/or to threaten security. As defined by the ACFE (Association of Certified Fraud Examiners), insider fraud is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”
Perpetrators are often employees or contractors who gain access to data and use it to commit fraud. Unfortunately, because these people have usually been screened during the employment process and “vetted” by the organization, they’ve been given access to important information as part of their job, so it’s more challenging for companies to catch.
In addition, there are many cases where an “insider” connects with a criminal network on the outside (like the Wells Fargo case noted above), creating a ring or team which collects information and uses it to steal funds or information on a much larger scale. In a worst-case scenario, employees in a criminal network can use their status to commit international fraud within a bank or collect data for a terrorist organization.
Types of IF – Who is affected, who commits it and what is taken
Insider fraud can take place in almost any organization, but two industries where it’s common – and highly damaging for both employers and consumers – are banking and insurance. In these organizations, employees have access to extremely sensitive and personal data, including customers’ social security numbers, account information, driving and criminal records, etc., which can lead to identity theft and the loss of funds.
So who commits insider fraud? The answer is, it varies. Clearly, institutions that forego thorough screening and background checks of potential employees during the hiring process are asking for trouble, but even employees who have never committed a crime in the past may take advantage of their access to information. Greed, drug or alcohol addiction, personal debts, a change in financial status, psychological issues, or pressure from another person are all possible reasons why an employee may be motivated to commit insider fraud.
Examples of IF in Banking and Insurance
Here are two examples of how insider fraud can affect these major industries:
Banking/Finance is probably the best-known industry to face insider fraud due to highly publicized cases of insider trading, such as the UBS scandal which caused the Swiss bank to lose billions of dollars. Unfortunately, in order to avoid bad PR, banks are less likely to report insider fraud or communicate issues with other banks.
In the insurance industry, employees may take advantage of access to personal data or information in many ways. For instance, an employee can reroute or send claim checks to a different address, change policy terms (and bill someone for a different amount), set up fake claims, or approve or set up a policy without permission.
So, if these industries are aware of the consequences resulting from insider fraud, why don’t they stop it? In our next article, we’ll take a look at why insider fraud is so difficult to track – and stop – using current security methods and what tools companies can use to effectively reduce this type of fraud.