The Association of Certified Fraud Examiners (ACFE) has released their latest Report to the Nations study on the global impact of occupational fraud. In addition to revealing key trends and highlighting the immense costs of occupational fraud, the report also discusses the behavioural red flags for occupational fraud. By understanding what behavioural red flags are and how to look for them, businesses can adopt KYC-based employee screening protocols to proactively address the threat posed by the perpetrators of occupational fraud.
The Cost of Occupational Fraud
The ACFE estimates that organizations around the world are losing 5% of their revenue to fraud every year – a percentage that equates to global losses of over USD 4.7 trillion every year. In 2022, the report covered 2,110 cases with losses totalling USD 3.6 billion. The median loss per case was $117,000 while the average loss per case was $1,783,000 – 21% of occupational fraud cases resulted in losses of over $1 million.
“Occupational fraud – fraud committed by individuals against the organizations that employ them – is among the costliest forms of financial crime in existence.” – ACFE.
Although falling victim to occupational fraud is a clear and present financial threat that businesses must consider, taking steps to actively address such a diverse threat may seem challenging. While measures such as employee training and company culture are complex and will vary from organisation to organisation, there is one key approach to combating occupational fraud that remains consistent and easily accessible for all businesses: KYC-based employee screening during the onboarding process.
What are Behavioural Red Flags?
Businesses can search for and identify specific details about customers or employees using KYC tools for identity verification and data validation – examples include credit checks and employment history verification. However, exactly what a business sees as a “red flag” will vary on a case-by-case basis.
For example, a car rental company will likely consider age and gender to be potential red flags – male customers between the ages of 18 and 25 pose the highest risk of damaging a rented vehicle. However, from the perspective of a large financial institution in the process of hiring a new accountant, age and gender will matter less.
Instead, the financial institution may closely scrutinize a prospective employee’s credit rating, because high levels of debt have proven to indicate that said employee poses a higher risk of committing occupational fraud in the future.
Living Beyond Means – Key Behavioural Red Flags for Fraud
Like with every crime, there exist behavioural trends which signal that an individual poses a higher risk for perpetrating a specific crime. The ACFE has identified eight behavioural red flags which indicate a higher risk of occupational fraud, chief among which is an individual “living beyond their means”.
“A fraudster living beyond his or her means is the most common red flag by a sizeable margin. This has ranked as the #1 red flag in every study since 2008.” – ACFE.
Living beyond one's means – defined as spending more money than one can afford to spend – will typically entail a person making purchases on credit and accumulating a large amount of debt. In 2022, the perpetrator “living beyond their means” was the most dominant red flag for occupational fraud and was featured in 39% of occupational fraud incidents, while “financial difficulties” was the second most common red flag and featured in 25% of incidents.
When ranked by their incidence rate, the top five behavioural red flags for occupational fraud are:
- Living beyond means (39%)
- Financial difficulties (25%)
- Unusually close association with vendor/customer (20%)
- Control issues, unwillingness to share duties (13%)
- Irritability, suspiciousness, or defensiveness (12%)
- Bullying or intimidation (12%)
- Divorce/family issues (11%)
- Wheeler-dealer attitude (10%)
Some of these behavioural red flags will reveal themselves over time and are therefore difficult to pick up on during a routine interview and background check. Because of the challenges inherent in trying to note and act on these red flags, it is important to proactively attempt to identify those that one can, such as high levels of debt that can be revealed with a credit check.
KYC Services – The Value of Background Checks During Employee Onboarding
Individuals living beyond their means will oftentimes be reflected in their credit scores. In this context of enhanced KYC, credit checks play a key role in identifying the two most critical behavioural red flags characteristic of prospective employees that pose a high risk of occupational fraud.
“Background checks are an important tool in the fight against fraud, as they can prevent organizations from hiring individuals with known histories of misconduct.”
Background checks as part of the hiring process are a crucial mechanism that a business can use to address the threat of occupational fraud.
Shockingly, however, 43% of organizations that fell victim to an incident of occupational fraud did not conduct any background checks on the employee who would later commit occupational fraud. Furthermore, of those organizations who did carry out background checks on the individual, 21% of the time these checks revealed clear red flags but the individuals were hired anyway and would later go on to commit occupational fraud.
Comprehensive KYC protocols that are carried out during the employee onboarding process offer a reliable, fast and cost-effective way to identify prospective employees who pose a high risk of occupational fraud. By doing this, businesses can better protect themselves from occupational fraud and financial crime in the future.
Employee Verification During the Onboarding Process
In their report, the ACFE includes a checklist that is designed as a benchmark to help businesses evaluate the integrity of their fraud prevention mechanisms.
The eighth point on the checklist encompasses employee verification checks to be completed during the hiring process. These include:
- Past employment verification
- Criminal and civil background checks
- Credit checks
- Drug screening
- Education verification
- Reference checks
These checks encompass crucial mechanisms for evaluating and validating employee identity and integrity. Integrating these checks into the employee hiring and onboarding process allows a business to screen new employees for some of the most obvious and easily detectable risk indicators.
The Issue of Scalability – Tailored KYC Solutions by Organizational Size
Problematically, there exists a major discrepancy between the rate at which smaller businesses adopt anti-fraud controls when compared to larger organizations.
“Whether it’s due to resource limitations, a lack of awareness, or a tendency to place too much trust in their employees, small businesses implement anti-fraud controls at a much lower rate than their large counterparts.” – ACFE.
This discrepancy between large and small businesses is significant and represents a serious risk for smaller businesses. With fewer resources and less capital in reserve, smaller businesses are significantly more vulnerable when it comes to dealing with the fallout from an incident of occupational fraud.
“Small businesses (those with fewer than 100 employees) had the highest median loss of USD 150,000, while large organizations (those with more than 10,000 employees) had a median loss of USD 140,000. It is important to note, however, that a small business likely will feel the impact of a loss this size much more than its larger counterparts.” – ACFE.
For companies with high staff turnover, detailed screening processes that include meaningful person-to-person interviews are costly and often unrealistic. In these instances, a business wants to screen and onboard new employees as quickly and efficiently as possible, while still maintaining a high level of security protocols to guard against the risk of occupational fraud.
KYC Services and Digital Onboarding Solutions in South Africa
ThisIsMe offers scalable KYC solutions for employee onboarding that are designed to meet the demands of any business. Our advanced API allows for automated, cost-effective, large-scale remote onboarding procedures to be carried out with ease. For businesses with less intensive employee onboarding demands, our Partners platform provides scalable access to our world-class KYC services at a competitive price point.
As South Africa’s leading provider of world-class KYC, due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience how our full suite of KYC, advanced due diligence services, risk assessment and data validation services can help your business address the threat of occupational fraud, book a demonstration by contacting our team here.
