These instances highlight the challenges FIs face in trying to prevent and stop these crimes committed by trusted employees. All three occurred in July. In Texas, a former bank employee was arrested for allegedly participating in a seven-year, $230,000 fraud scheme. In Mississippi, a 6.5-year sentence was handed down to the former CEO of People’s Bank of the South for fraud and money laundering. In Massachusetts, a former Bank of America employee pled not guilty to charges relating to her alleged involvement in a $2 million insider fraud scam.
These incidents and recent research indicate insider fraud is a widespread, growing problem for FIs. In fact, according to Information Security Media Group's 2013 Faces of Fraud survey, 27 percent of participating FIs lost money to insider fraud over the past 12 months. Forty percent of those surveyed considered their FI sufficiently equipped to identify insider schemes. However, 58 percent reported no decline in insider fraud instances in the past year.
Like most fraud strategies, detecting and preventing internal fraud requires layers of controls. Fraud-detection systems that monitor employee behavior can play an important role. It’s also important to adopt certain fraud-fighting practices, such as separation of duties for certain transaction types (one employee cuts the check, another employee approves it). Also, monthly or quarterly audits allow FIs to review transactions and account activity on a scheduled basis. Prosecuting employees who commit fraud, of course, is a strong deterrent.
However, many FIs have found it challenging to trace fraud back to one individual or a group of individuals, which has made reporting fraud to law enforcement challenging. Further, some FIs have been reluctant to report fraud for fear of damaging their reputations. According to the Association of Certified Fraud Examiners 2012 Report to the Nations, only 66 percent of victim organizations reported their cases to law enforcement . Not only is this problematic for the culture of the FI; it also keeps the offender in the hiring pool, potentially threatening other FIs.
In my former life as a banker, I experienced the devastating impact of insider fraud. It not only affects the FI as a whole; it's also an incredibly painful personal experience for the colleagues of the offender.
The high-profile cases of insider fraud this summer prove the crime remains a very real threat to FIs, and that even high-level executives should not be above suspicion. This is an important reminder to FIs of all sizes to evaluate their insider fraud prevention measures and consider whether additional procedures will more thoroughly protect from this all-too-common crime.