The Association of Certified Fraud Examiners (ACFE) has released their latest Report to the Nations study on the global impact of occupational fraud. This report – spanning over 2000 case studies across 133 countries and in 23 industries – reveals key insights into the nature of occupational fraud and highlights noteworthy trends. Chiefly, the immense costs and potential for lasting damage to an organization highlight how essential it is for businesses to proactively adopt KYC-style anti-fraud controls that can address the threat posed by perpetrators of occupational fraud.

The Costs of Occupational Fraud

Economic crime (also known as financial crime) is a broad term that encompasses a wide range of crimes, the principal motives of which are economic gain. Occupational fraud is one such type of economic crime.

“Occupational fraud – fraud committed by individuals against the organizations that employ them – is among the costliest forms of financial crime in existence.” – ACFE.

The ACFE estimates that organizations around the world are losing 5% of their revenue to fraud every year – a percentage that equates to annual global losses of over $4.7 trillion. In 2022, the report covered 2,110 cases with losses totalling $3.6 billion. The median loss per case was $117,000 while the average loss per case was $1,783,000, while 21% of occupational fraud cases caused losses of over $1 million.

When compared to the statistics from two years prior, these losses from occupational fraud reveal a relatively stable trend. The 2020 report covered 2,504 cases with losses totalling over $3.6 billion. The median loss per case was $125,000 while the average loss per case was $1,509,000 – figures that reveal a slight decline in overall losses from occupational fraud. 

“The amount of money lost to occupational fraud each year represents a staggering drain on the global economy. It directly impacts organizations’ abilities to create jobs, produce goods and services, and provide public services.” – ACFE.

All forms of financial crime represent an immense drain on the global economy. A 2020 report by Deloitte estimated that money laundering makes up 2-5% of the global GDP, as much as $2 trillion. Pieter Alberts, senior operations manager at the Financial Intelligence Centre, said that South Africa is losing between $10 billion and $25 billion annually in illicit financial flows.

In this context, occupational fraud represents another form of financial crime that needs to be addressed if businesses and governments want to operate in an economy that is free from pervasive economic crime and not marked by a sense of insecurity and suspicion.

Understanding key trends and grasping the extent of the threat posed by occupational fraud allows businesses to adopt practices and mechanisms that can help to reduce the pervasive risk posed by occupational fraud.

Industry-Specific Losses – Who is Most Affected by Occupational Fraud?

As with all forms of financial crime, some industries are disproportionately affected when compared to others. The following table ranks industries by the highest median loss incurred from occupational fraud in 2020 and 2022, respectively.

A high variance in the extent to which different industries are affected by economic crime is nothing new. Furthermore, the median losses per industry do not directly correlate with the incidence rate for the same industry – some industries experience a low industry rate of occupational fraud, yet suffer immensely high losses. To understand the patterns of occupational fraud and gain insight into the different incidence rates per industry, read our analysis here. 

Losses also varied significantly between the type of organization.

• ·       69% of victim organizations were for-profit organizations
• ·       44% of victims were private companies ($120,000 median loss)
• ·       25% were public companies ($118,000 median loss)
• ·       9% were nonprofits ($60,000 median loss)
• ·       18% of victim cases related to government ($138,000 median loss)

A company’s annual gross revenue also leads to a large variance in the losses incurred from occupational fraud – the dollar value represents the median loss.

• Less than $50 million ($100,000 median loss)
• $50 million – $499 million ($105,000 median loss)
• $500 million – $999 million ($150,000 median loss)
• $1 billion or more ($150,000 median loss)

Annual gross revenue also leads to significant differences in how badly a business is affected by forms of economic crime. PwC’s 2022 Global Economic Crime and Fraud Survey revealed how customer fraud ranked as the second most pervasive form of economic crime for all businesses with annual gross revenues of below $10 billion, yet ranked as the most pervasive form of economic crime for all businesses with annual gross revenues in excess of $10 billion.

Organizational size – ranked by how many employees a respective business has – also significantly impacts the total financial losses incurred from occupational fraud. The percentage represents the number of cases, while the dollar value represents the median loss.

• Less than 100 employees ($150,000)
• 100-999 employees ($100,000)
• 1,000-9,999 employees ($100,000)
• 10,000+ employees, ($138,000)

When considering the losses incurred from occupational, it is notable that collusion between perpetrators significantly increases the losses from an incident of occupational fraud. A single perpetrator represents 42% of cases and a median loss of $57,000. When two perpetrators collude, the median loss more than doubles and increases to $145,000. When three or more perpetrators collude, the median loss increases to $219,000.

The Impact of Anti-Fraud Controls

Anti-fraud controls prove immensely successful at reducing significantly reducing the cost of occupational fraud incidents.

“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 that form part of the hiring process are a crucial part of a business’s fight against 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 revealed clear red flags. Nevertheless, these individuals were hired anyway and would later go on to commit occupational fraud against their employer.

Failures of businesses to conduct proper KYC checks on prospective employees is an issue that extends to insufficient third-party due diligence. A report by PwC revealed how 24% of respondents to PwC’s report had no third-party due diligence or risk monitoring program whatsoever, even though 20% of respondents cited vendors/suppliers as the perpetrator of their most disruptive incident of financial crime.

Discrepancies such as these must be addressed if businesses want to address the threat posed by both internal and external perpetrators of financial crime. To better address the threats posed by occupational fraud, comprehensive KYC and background checks must form an integral part of a business’s employee onboarding process.

Identity Verification During the Employee Onboarding Process

As South Africa’s leading provider of world-class 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 threats posed by perpetrators of occupational fraud, book a demonstration by contacting our team here.