Emerging Fraud Risks: How to Tackle Fraud in 2021

While many businesses focused on keeping their doors open during the pandemic, the article argues that organisations could not afford to let down their guard on fraud and employee misconduct. It draws on ACFE data to show fraud was rising, highlights cyber, payment, unemployment, supplier and vendor fraud, and sets out three practical responses for 2021: act quickly, invest in an externally managed hotline, and train people to spot risk earlier.

Key takeaways

• Fraud was rising during the pandemic, according to the ACFE benchmark report discussed in the article.
• The main emerging risks were cyber, payment fraud, unemployment fraud, and supplier or vendor fraud.
• Financial pressure, remote working, and weaker supervision made fraud easier to rationalise and harder to detect.
• The article recommends quick response, an externally managed hotline, and fraud awareness training.
• Leaders should act before small issues become culture and control problems.

Summary

This article argues that the pandemic created the right conditions for fraud to rise. It points to ACFE data, emerging fraud typologies, and the pressure on people and supply chains, then sets out three practical responses for organisations in 2021.

Emerging fraud risks

While many businesses scramble to simply keep their doors open as a result of the global pandemic, fostering and maintaining a positive workplace culture has become an afterthought.

Despite the economic challenges of the pandemic, this is not a time for organisations to let down their guard when it comes to responding to incidents of fraud and employee misconduct and reviewing the effectiveness of internal controls. Rather, with what we know about the pandemic and the increased financial pressures being placed on employees and their families, it is time to bolster efforts when it comes to preventing or minimising internal fraud.

In September, the Association of Certified Fraud Examiners (ACFE) released its benchmark report. This follows on from its first release in July 2020, and the results clearly show that fraud is on the rise during the pandemic. Increased economic hardship for businesses of all sizes and their employees, as well as the supply chain, is creating the perfect storm for fraud and unethical behaviour to occur.

The benchmark report reveals 77 per cent of survey participants have seen an increase in the overall level of fraud affecting their organisation, compared to 68 per cent who had observed an increase in May. Perhaps what is more concerning for organisations is that 92 per cent of participants expect the overall level of fraud to continue to increase over the next 12 months and 48 per cent expect this increase to be significant.

As the business and economic environment continues to be unstable and unpredictable both domestically and globally, certain fraud typologies are starting to emerge as presenting a higher risk to business and government.

According to the survey, the top fraud risks in 2020 on the rise are:

• Cyber, including business email compromise, hacking, ransomware and malware
• Payment fraud, for example credit card and mobile payments
• Unemployment fraud
• Fraud by suppliers and vendors, for example price gouging, over-billing and product misrepresentation

The sizeable shift in fraud and misconduct should not come as a surprise. Financial pressure and distress are the number one reason employees commit internal fraud and misconduct, accounting for 42 per cent of all reported cases. So, it stands to reason that during a global pandemic creating economic uncertainty and sending most economies into recession, we would see a spike in fraud.

Despite government stimulus packages here in Australia such as JobKeeper and JobSeeker, financial pressure caused by job loss or the closure of a business can lead employees facing financial hardship to rationalise their fraudulent behaviour.

With remote working, where employees have less direct supervision and may feel disconnected, it is easy to understand why fraud is on the rise.

Additionally, for suppliers and vendors the pressure is real too. As the economy contracts and restrictions remain in place, the need for services can fall and their customers, that is, other businesses, are increasingly going out of business. These circumstances create financial pressure on the supply chain and can increase the risk of fraud occurring at either an organisational level, by the supplier, or at an employee level within the supplier organisation as they seek to meet targets, keep their job and protect their earnings.

How to tackle fraud in 2021

As we head into the new year and COVID continues to impact everyone, it is timely to consider how your organisation can prevent or minimise the impact of fraud and employee misconduct.

Here are 3 simple but effective ways you can help protect your people and organisation in 2021:

1. Respond to any fraud and misconduct issues quickly and decisively

If you want to protect your culture and reduce the negative impacts that any unwanted instances of fraud and employee misconduct can have on your business then you need to act quickly and decisively when you uncover an issue. This can be difficult at the best of times and even more so during COVID where internal HR teams are potentially still working remotely, working at a reduced capacity and are focused on other pressing priorities. However, failing to respond can be very costly, both financially and culturally.

Each instance of fraud or misconduct that is not dealt with sows the seeds for more issues to occur and will slowly and steadily eat away at your culture. If you experience an issue and are struggling with capacity or capability to respond then you should consider engaging external expertise, even if it is just through this sustained period of abnormality.

Tip: Consider outsourcing your response and investigation to an external provider with the right skills and experience who can quickly get to the bottom of the issue.

In response to the increased pressure on internal HR and risk teams we have created an Investigation Retainer Service for HR and Risk teams to help them action a wide range of issues quickly and decisively without impacting their current teams and priorities.

2. Invest in an externally managed whistleblower or ethics hotline

Tip-offs continue to be the number one source for uncovering fraud in an organisation, with 44 per cent of all fraud cases uncovered this way. Half of all tip-offs come from employees and when it involves large-scale fraud or corruption involving senior executives, hotlines continue to play an even more crucial role as employees look for safe reporting options outside the organisation where they can remain anonymous and get advice and support from experts throughout the reporting process.

Tip: An externally managed hotline should be designed to complement, not replace, your existing internal reporting channels, and if you choose the right partner you can improve the overall reporting experience through the use of multiple reporting channels, secure technology and two-way communications with anonymous reporters.

Throughout 2020 we have seen a dramatic increase in interest in our Speak Up Integrity Hotline programs where clients are looking for dedicated capacity, capability and consistency in how reports are managed. With internal resources stretched this year, and more complex issues being reported, clients are looking for an experienced partner such as Core Integrity who can act as a trusted "front door" for the reporting of issues to ensure a consistent response and build trust across their organisation.

3. Upskill your people with Fraud & Corruption Awareness training

One of the best ways to combat internal fraud and employee misconduct is to educate your employees through Fraud Awareness training that is designed and tailored to your industry and the risks you face.

By investing in upskilling your employees on what fraud and misconduct looks like, the common behavioural red flags exhibited by employees engaged in fraud and the most common types of fraud schemes, you increase your organisation's ability to detect fraud and misconduct early.

Importantly, with the increased adoption of remote working, investing in Fraud & Corruption Awareness training provides an excellent opportunity to reconnect your people with one another, build their knowledge around fraud and corruption and, importantly, enhance your organisation's fraud prevention strategies.

Tip: Don't let remote work arrangements stop you from investing in your people and their education. Consider "hybrid" training sessions in 2021 where you can deliver Fraud & Corruption Awareness Training both in person and virtually.

Like all businesses, here at Core Integrity we had to adapt to how we delivered our training in 2020. In 2019 it was commonplace to deliver training all over the country to multiple teams within the one organisation; however, in 2020 we had to adapt, and adapt fast.

Whilst we can now deliver our training programs fully remotely, we are now seeing an increased interest in our Hybrid training where we deliver in person on site with attendees also joining via video.

As we enter 2021, take some time to consider the fraud and misconduct risks facing your business. Are your people equipped with the right knowledge, tools and support to identify, report and respond to fraud in your organisation? Have your risks changed due to COVID or simply increased?

More importantly, how will you look to connect with your teams in 2021 to provide them with the knowledge and tools to support them in doing their jobs whilst protecting the organisation from fraud and corruption?

If you would like to learn more about our tailored training programs and see how we can tailor a program to suit your business, get in touch; we would love to hear from you.

FAQ

Why do fraud or misconduct issues need a fast response?

Because delayed responses allow fraud or misconduct issues to spread, damage culture and increase both financial and cultural costs.

Why invest in an externally managed hotline?

Because tip-offs are a major source of fraud detection, and an external hotline can give people a safe, anonymous reporting option with expert support.

Why is training part of the response?

Because training helps employees understand fraud, recognise behavioural red flags, and respond earlier, especially when remote working reduces direct supervision.