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Will We Ever Get Rid of Fraud?
Wednesday, September 7, 2016 6:40 AM

Chad Stanislav, VP Financial & Technology, Credit Union Resources

Fraud and deceit have been around since the beginning of man. History is riddled with examples of persons being duped for gain. Proverbs says “food gained by fraud is sweet to a man, but afterwards his mouth is full of gravel.” Those who have experienced fraud first hand would enjoy being the one to place the gravel in someone’s mouth. I imagine some of you are thinking worse than just gravel. Deceit can be found everywhere from nature to animals. Unfortunately, humans have taken deceit and fraud to new levels.

The Three Basic Components of Fraud
There are three basic components of fraud: need, opportunity, and justification. Need and justification are closely related and all are driven by the human mind. Humans have the ability to create needs based on social norms regardless of whether the need is real or perceived. There are those who would say our moral fiber has been unraveling for years, to the point where doing the right thing means less and less with each passing year or generation.

But the mind/brain is complex. People can easily be persuaded toward different beliefs. So things make sense to them when they can justify why they are committing fraud. In the credit union, employees commit fraud for many reasons, from feeling something was owed to them, a need to “keep up with the Joneses,” or plain greed.

As a financial institution, you have no ability to control or change people’s needs or their justifications. However, with the opportunity component of fraud, you have some ability to control.

The Weakest Links

Some people will always look for a weakness and ways to exploit the system for personal gain. Your credit union has probably experienced fraud at some point, be it stolen cash, fictitious loans, changing due dates, manipulating closed accounts, altering parameters on accounts to benefit someone, or running personal expenses through the credit union, just to name a few.

Beyond policies and procedures, the credit union’s weakest links are its employees. Ongoing, consistent training is vital to preventing fraud. Being diligent in the review of procedures and testing them to ensure they are being followed are essential measures for mitigating fraud.

Fraud is not only perpetrated by employees; it has become an ever-growing, sometimes lucrative business conducted by individuals for a thrill or for the money and gangs and organized crime. It is conducted locally and abroad. There is no escaping fraud, but credit unions can make it more difficult for fraudsters to succeed. The sophistication of committing fraud has moved from a scatter approach (a lot of emails hoping someone will take the bait) to a more targeted approach with greater rewards if successful.

There are myriad ways to conduct fraud remotely. Credit cards, member accounts, and the potential for identity theft are constant threats to credit unions. The people committing fraud have become experts at using social media to gather data about employees and members. The patient and ever-persistent perpetrator will gather as much information as is needed to exploit the weak links. Sometimes employees divulge information unknowingly. Sometimes a fraudster making dumpster dives can reap member information. Sometimes finding back doors to computer systems can expose weaknesses. The ways are endless.

Make Vigilance a Priority

Over the years, credit unions have been good about developing policies and procedures to address issues or potential weaknesses, but to ensure the policies and procedures are working properly, independent monitors need to verify them. This can be accomplished by an in-house internal auditor or an outsourced internal auditor.

Credit unions must be vigilant at reviewing its policies and procedures, consistent with employee training, and periodically perform audits to ensure that procedures are being followed. How periodically?

Policies should be reviewed annually or when significant changes are made; whereas, procedures should be reviewed on a more frequent basis. Procedures guide the everyday processes. Training can make a credit union run smoothly and with a consistency that ensures members are served properly.

Training should also include observing. Credit union managers must watch for items or behaviors out of the ordinary or that don’t make sense. Common sense is a great tool for this, but there is a question as to whether all possess it. A trained employee will at least keep procedures at the forefront of their mind when performing their job.

Auditing the Staff

Auditing the staff and various areas of the credit union will ensure compliance with the policies and procedures and identify weaknesses or areas in which employees need further training. The policies and procedures, training, and auditing are a circular process necessary to making the credit union operate effectively while mitigating the risks of fraud. Make sure the checks and balances established in your credit union are effective at detecting and stopping fraud before it does damage.

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