Fraud. The word conjures up visions of a back room in some insidious place where shady characters and computer hackers count their stolen money.

Therefore, it is not surprising that there is much emphasis placed on protecting systems and data from outside criminals and battling identity or check fraud. The cold reality, however, is that fraud has a more familiar face - it’s typically an inside job perpetrated by employees. What’s worse, smaller businesses, including financial institutions, are more likely to become victims of occupational fraud than larger companies.

Identifying red flags

Insider fraud within the banking industry takes many forms - from simple teller embezzlement, to originating fictitious loans, to selling customer data. Sadly, the average length of time an occupational fraud incident continues before it’s discovered is about 18 months. The financial costs can be devastating; the erosion of customer trust, worse still.

To reduce or avoid losses, financial institutions should learn to recognize a few warning signs. These red flags can be categorized into situational, opportunistic, and characteristic variables or influences that can potentially result in fraud.

Situational red flags include employees with high personal debts or losses, those living beyond their means, and individuals with gambling, alcohol, or drug abuse problems. Such situations can present a strong motivation to steal. Indeed, a great many fraud cases are committed in order to meet personal financial obligations, particularly ones that have spiraled out of control.

Opportunity presents another temptation. Often financial institutions invest far too much trust in key individuals without instituting the necessary balance of controls. Opportunistic red flags can include dominant employees who are intimately familiar with operations and employees who have close ties with customers and/or vendors and suppliers.

Lastly, character traits can also serve as red flags. Studies have shown that employees who engage in workplace abuse, such as excessive absenteeism, pilfering, and goldbricking, are at higher risks for committing fraud.

Eight steps to help prevent fraud

Considering the potential damage internal fraud can cause, prevention should be a high priority for every institution. Here are eight measures to help prevent and detect workplace fraud.

Conduct background checks on all employees. Financial institutions must be diligent and investigate the possibility of criminal records, confirm certifications, look into employment histories, and check references on all job applicants, especially on those responsible for handling inventory, money, and information. Drug screening, psychological testing, and other prescreening procedures are also recommended.

Maintain rigorous internal controls. Divide responsibilities between employees and make certain there are strong checks and balances in place. Stealing alone is one thing, but having to enlist the help of a co-worker can greatly reduce the opportunity. Additionally, when employees know there’s an active fraud watch, it alone can be a powerful deterrent.

Establish a fraud policy and a written code of ethics. Communicating clear guidelines about what are acceptable and unacceptable activities is vital to creating a sound fraud prevention environment. Adopt a zero-tolerance policy on fraud, spell out the consequences, and enforce the policy consistently.

Uphold equitable personnel policies and treat employees fairly. Disgruntled employees are statistically more likely to commit fraud. Employees who believe they’ve received unfair treatment or inadequate compensation may steal and embezzle as a way to resolve their grievances.

Require mandatory vacations. Perpetrators who avoid taking time off usually do so for fear of being found out. Vacations mean that assignments are rotated, making it more difficult to hide wrongdoings.

Conduct audits. Surprise audits can also uncover suspicious activities and fraud. Employees who are caught off guard won’t have time to cover their tracks. Audits can also point out internal control weaknesses. Correcting weaknesses can prevent opportunities for fraud.

Increase awareness and education. Consider conducting an in-house seminar for executives and management about the symptoms and signs of fraud. Educate employees about why fraud occurs, how to recognize it, and what to do if they suspect fraud.

Enlist a third-party hotline. The best tips come from employees, but they are often hesitant to blow the whistle for fear of disclosure, repercussions, or retribution. Wipfli’s Confidential Fraud Hotline allows employees to report suspected fraud, toll-free and anonymously. The critical and confidential information is then reported to the institution’s previously appointed fraud contact.