By GANIYU ADEWALE OGUNLEYE It is of importance to understand the nature and types of fraud as that will be of great assistance to organizations in checkmating and combating it. Generally, fraud is categorized on the basis of its perpetrators. This way, it could be internal, external or mixed. Internal perpetrators of fraud are staff under the employment of the organization either as directors, management staff, officers, supervisors or other employees while the external ones are those outside the organization. Mixed perpetrators are those involving members of staff of an organization colluding with outsiders to carry out their fraudulent activities. Another way of classifying fraud is on the basis of methods employed in perpetrating it. Given the sophistication, inventiveness and ingenuity of fraudsters in devising ways to carry out their trade, it will be practically impossible to list and discuss all of them. However, the most important and common ones are highlighted hereunder.
Theft
Theft involves the removal of cash or assets to which fraudster is not entitled. Any business asset can be stolen by staff or other parties. The nature of theft may vary according to the asset being misappropriated and identity of the perpetrator. The most common types of theft in our system are:
i) Direct theft of cash or any asset of the business, e.g. stock, computer equipment, stationary intellectual property, price lists or customer lists, etc.
ii) False expense claim which can be anything from claiming for private entertainment expenses to large scale projects.
iii) Payroll fraud involving the diversion of ex-employees or fictitious employee payments to the benefits of perpetrators.
iv) Rolling debtors’ receipts that is misappropriating debtors’ receipts and substituting subsequent receipts.
v) Payments against fictitious jobs or supplies.
vi) Inflation of contracts.
False Accounting
The main aim of false accounting is to present the results and affairs of an organization in a better light than the reality. Frequently, these are deliberate decisions to report an unrealistic level of earnings. Whatever the purpose, the features that are common to all cases of false accounting are the window- dressing or falsification of records, alteration of figures, and in some cases, maintenance of multiple records.
The reasons for all these include:
i) to obtain more financing from banks and creditors;
ii) to manipulate share prices;
iii) to improve results over the year-end and generate performance related remuneration to which the perpetrator would not otherwise be entitled;
iv) to cover up a theft;
v) to attract customers by appearing to be more successful than in reality; and
vi) to prevent or delay intervention by supervisors/regulators.
Advance Fee Fraud (“419”)
This is a very popular type of fraud in our environment. It is internationally referred to as “Nigerian scam”. A method of perpetrating this type of fraud is for numerous letters to be sent to unsuspecting individuals by fraudsters soliciting for assistance to transfer large sum of money belonging to them but which is being held by government. The assistance requested will be in the form of advance fee which will be used to induce government officials and the details of the off-shore foreign accounts of such individuals.
Computer Fraud
Computer fraud includes:
1) Disguising the true nature of a transaction by manipulating input and or data including tampering with programme.
ii) Hacking into an organization’s computer system to steal or manipulate information.
iii) Unauthorised electronic transfer
iv) Posting of business opportunities on the internet to defraud the public.
v) Theft of intellectual property, e.g. engineering drawings, trade secrets, e-books, music, etc.
Foreign Exchange (FX) Fraud
Foreign exchange transactions have been, veritable source of fraud as a result of sharp practices involving banks or their customers. The most common types include:
i) Round Tripping – This arise in a situation where banks obtain foreign exchange through official sources at a cheap exchange rate for qualified transaction and simply sell to autonomous users at a black market exchange rate. ii) Documentary credit fraud – This can be quite varied and will involve forgery of foreign exchange documents, such as import duty receipts, shipping documents, Clean Report of Inspection and attested invoices. It can be carried out with the objective of transferring foreign exchange for non-existent transaction or by way of over invoicing.
iii) Travellers’ Cheque (TC) Fraud – This is done by illegal purchase of TCs which are then sold in the black market.
Loan Fraud
Loans and other forms of credit extensions to business and individual customers constitute the main function of financial institutions. In the process of credit extension, fraud may occur at any stage, from the first interaction between the customer and the bank to the final disbursement of the credit. Diversion of loan for other uses different from that for which it is given constitutes fraud. Also, there are instances of credit fraud whereby credit facility approved for one customer is diverted to the credit of another who is often unrelated to the first customer. That is to say, a credit facility for a customer “A” yet to be drawn down is diverted to a customer “B” for utilization.
Cheque Fraud
Cheque fraud is now common involving billions of naira annually. The most common cheque fraud involves those that are stolen, forged, counterfeited, altered or cloned.
Money Laundering Fraud
This is a means to conceal the existence, source or use of illegally obtained money by converting the cash into untraceable transactions. The cash is disguised to make the income appeal legitimate. Fraudsters are known to employ various means in order to launder their money. These include using illegally-obtained money either to purchase stocks in the capital market, or to acquire real estate.
Identity Fraud
This type of fraud is committed by individuals who assume names and identities of others living or dead with a view to gaining employment or using their stolen credit or value cards to secure some monetary benefits.
Insurance FraudIn this type of fraud, insurance agents sell policies to clients and refuse to deliver premium collected to the insurance companies, or stage-manage accidents in order to replace old or defective vehicles, or causing mysterious incidents after previously removing choice items of value for the purpose of making undue claims from the insurance companies.
Measures to Guard Against Fraud
The best defences against the risk of fraud in any organization are proactive measures. For an organization to create a corporate environment that prevents, deters and timely detects fraud, it needs to understand why fraud occur, types and methods of perpetration as well as identify its business areas that are at risk and implementing appropriate procedures to address them. It is a well established fact that before fraud can take place there must be:
i) an item worth stealing;
ii a potential perpetrator willing to steal; and
iii) an opportunity for the crime to take place.
It follows therefore that successful prevention of fraud in an organization lies in the isolation of the perpetrators from the assets and from the opportunity and knowledge required for access. In other words, walls of policies, procedures, devices and controls need to be erected to surround and isolate each factor in the equation to combat fraud. It is for this reason that the system of internal control is identified as very critical in minimizing the incidence of fraud in any business organization.
Management has overall responsibility for ensuring the security and integrity of the assets of a business by putting in place appropriate controls and review procedures. However, it needs to be emphasized that the controls required for each business will be specific to that business, depending on the way in which departments or processes function, the systems in place, the number of personnel and so on. That is to say, every organization needs to assess and determine the area in which fraud could occur and implement the controls that are considered necessary to mitigate it. Some of the direct controls that need to be considered include:
i) Timely and periodic reconciliation of bank accounts, cash in hand, inventory and other items of value.
ii) Dual signatories and authorization limits.
iii) Segregation of duties.
iv) Management review.
Other Organizational Measures
Other measures that should be adopted in the fight against fraud are those relating to the attitude and culture of the organization and the way in which it deals with fraud. These are indirect controls which convey the message that fraud will be detected, that action will be taken and that the repercussions could be severe. Some of these measures include:
a. Physical Security/Access Controls
Operating effective access controls is essential, be it within the premises themselves, particular departments or offices, computer systems, database, bank accounts or other areas critical to the business. The role of security tags, which allow someone’s movement around the building to be monitored, CCTV cameras or other surveillance equipment, should not be underestimated. Particular attention should be paid to access controls over computer systems, which should include the rigorous use of passwords, firewalls and/or other measures to prevent or detect hacking into the system.
b. Effective Internal Audit
An effective internal control functions is very critical in managing fraud risk in any organization. For maximum effectiveness, internal audit department should have enough resources to carryout its functions, that it is focusing on the most important risk area of business, that it is independent and free to establish the scope of its activities without let or hindrances by management, and that it is reporting fully and directly to the highest authority ideally the board of directors or its audit committee. Internal auditors should be given comprehensive training in fraud prevention and detection.
c. Pre-employment Screening
The fight against fraud should start even before a new employee joins the organization. There should be an effective recruitment policy which ensures that employees are recruited based on their capabilities, competence and integrity. References must be obtained from previous employers. Background checks should be conducted on employees to assure of their integrity.
d. Conducive Working Environment
The motivation for internal fraud is often employee dissatisfaction. A favourable working environment would ensure that employees are not placed under undue duress and that they are not intimidated by supervisors or superior officers. There should be a culture of openness, transparency and trust as against that of secrecy, mistrust and autocracy.
e. Fraud Policy
There should be fraud policy in organizations. Fraud policy is a formal, written statement recording the organization’s attitude to fraud. It may be part of general ethics statement or code of conduct that records the way in which the organization deals with its customers, suppliers and staff. In particular, the policy should make it clear that fraud is unacceptable and that all instances of suspected fraud will be investigated with dispatch.
f. Fraud Resolution
When fraud occurs, it should be resolved promptly and effectively. Resolution should be communicated to employees, while care should be taken to avoid defamation. Communication of the outcome reinforces in employees the organisation’s zero tolerance for fraud.
g. Fraud Training
Organisations should promote fraud training. All new employees should be provided with the organisation’s fraud policy statement. Fraud deterrence, prevention and detection programs that deal with practical issues should be included in induction and continuous career training.
h. Whistle-blowing Policy
Employees and third parties should be encouraged to report their suspicions of fraud or other irregular activity without fear of reprisal. To encourage reporting, whether anonymous or not, an E-mail or telephone fraud hotline can be implemented. The existence of such facilities should be well publicized and their roles in deterring or de fraud should be made known to all. Information should be treated on a confidential basis to reassure whistle blowers, and management should b seen to be fair and just in handling such confidential information.
