Overview of Frauds in the World

It is a well established axiom that economic crime in general, and fraud in particular, flourishes in environments that provide the right combination of circumstances to the “fraudster.” Generally, the three conditions that must exist before a person commits fraud were mentioned in other articles.

When these factors are present, the environment is conducive to fraud and perhaps to other types of economic crimes as well. Respondents who recalled one or more instances of economic crime were asked to give general information about the perpetrators. From this data an interesting profile of the North American corporate fraudster emerges like in the following:[1]

·         Male 79%

·         Company employee 60%

·         College educated 47%

·         Company manager 47%

·         31 to 40 years old 32%

As seen from above figures, fraud is a significant and growing threat in the whole globe. According to a survey, the following indicators are also proving these:[2]

·         45% of companies worldwide have fallen victim to economic crime in the past two years.

·         The larger the company, the higher the likelihood that it will experience and detect acts of fraud. While companies around the world, on average, reported suffering 8 fraud incidents since 2003, larger companies reported an average of 12 incidents.

·         No industry is safe – whether regulated or unregulated. From 38% to 60% of the companies in each of the sectors reported significant frauds. 2 Types of economic crime

For a fraud to occur, there must be an opportunity and an individual (or group) with an incentive to commit it, and those individuals must also be able to rationalize their own actions – at least to themselves. Most frauds reported involved a lack of adequate internal controls (opportunity), the need to maintain an expensive lifestyle (incentive), and the perpetrator’s lack of awareness that their actions were wrong (self-rationalisation). [3]

When we focus on the whole globe, the following information has been revealed about how many cases have happened after 2003.

From the above figure, we understand that the highest increase is in Africa. The increase in North America and in Europe is also high. However, the rise in Asia and Central / South America is low than the above places.

As the company size increases the number of fraud reports also increase. A company’s size is directly related to the likelihood that it will experience fraud. While only 36% of small companies surveyed reported suffering fraud, 62% of the large companies reported fraudulent activities during the same period.[4]



Size of the Company’s that are Reporting Fraud



 

 

 

After the analyses of the world, we will try to understand the fraud events in North America since it is a very active business place. We have seen that the more the frequency of the audits, the more the number of cases. The following table which has been generated regarding the North American companies proves this theory.



Frequency of the Audits



 Up to now, we have been talking about the fraud events. However, there are some factors that are very important or attractive in the rise of fraud activities. The following table shows the main fraud drivers.[5]



Main Fraud Drivers from US / North America / Globe



When we look at the above table, it shows that the frauds are happening mostly because of the efficient control systems. Lacking awareness of wrong doing and insufficient internal controls bring us to this result. However, these global signs are not as same as the drivers for US and North America continent. Some of the factors are seen to be same but there are some differences from North America and US separately. For US and North America expensive life style appears to be the most important cause for frauds.

After US analyses, we can focus on a developed European country, United Kingdom. The relationship in the UK between opportunity and incentive in perpetrators’ decisions to commit fraud was similar in some respects to this relationship in Western Europe and the rest of the world. There was no single factor which swayed the balance. The need to maintain an expensive lifestyle was acknowledged as playing a role in 39% of the offences reported both in the UK and globally. A lack of internal controls provided opportunity in 42% of the UK cases and 41% globally. And the perpetrator was easily tempted in 54% of the UK cases and 50% globally.[6]

 

Main Fraud Drivers from UK



In contrast to the global results, however, most UK perpetrators did not lack awareness that what they were doing was wrong. In only 36% of the reported cases was this cited as playing a role, in comparison to 52% globally. The greater awareness amongst UK perpetrators that their actions were wrong may reflect a heightened awareness in the UK of the need to combat economic crime.[7]

UK companies may also have an inflated confidence in their control systems. Only 27% thought that their control systems would be a hypothetical factor in economic crime, whereas a weakness in control systems was actually a factor in 42% of the cases of reported fraud. The overwhelming majority of companies responded that they were satisfied with their internal controls (74%).[8]

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[1] Steven Skalak, 2005 Global Economic Crime Study: US and North America, US, PWC, 2005, p.11.

[2] Kai D.Bussman, Global Economic Crime Survey 2005, Germany, Martin Luther University, 2005, p.2

[3] Bussman, Ibid, p. 2.

[4] Bussman, Ibid, p. 6.

[5] Skalak, Ibid, p. 13.

[6] PWC, Global Economic Crime Survey 2005, US, PWC, 2005, p.5

[7] PWC, Ibid, p.5

[8] PWC, Ibid, p.5

Samples of Fradulent Transactions, Frauds in Credit Cards

It is for sure that frauds are always happening in today’s social or business environment. If we talk about the fraud concept in a general scope we can say that we face with many fraud cases as explained below.

When we talk about credit cards, we are facing with the following issues regarding credit card frauds:[1]

·         Credit card fraud losses totaled pounds 504.8m in 2004, up by 20% compared to 2003. The rise is attributed to fraudsters increasing their illegal activity before the security benefits of chip and PIN are fully realized. The table illustrates plastic card fraud losses in pounds m split by fraud type, and is based on UK- issued cards.

·         Card-not-present fraud (CNP) continues to be the biggest fraud type (up by 24% to pounds 150.8m compared to pounds 122.1m in 2003). However, these losses only grew in proportion to the number of businesses now offering transactions made by phone, fax or online. Online credit card payments have increased fivefold since 1999, to the point that 10% of all credit card spending now takes place online.

·         ID theft on cards has grown significantly over the past two years (up 22% from pounds 30.2m in 2003 to pounds 36.9m in 2004), but remains a small proportion of overall fraud losses.

·         Counterfeit card fraud increased slightly and there was a small rise in fraud on lost and stolen cards. Together this accounts for almost half (48%) of all losses. However, with chip and PIN now almost fully implemented, it is set to have a major impact in these two areas.

·         Fraud on cards stolen before the genuine cardholders receive them (mail non-receipt) grew sharply - up by 62% to pounds 72.9m - as criminals took advantage of the unusually high number of cards sent out due to the rollout of new chip and PIN cards

When a credit card is lost or stolen the criminal gains direct access to the individual’s credit card account. The criminal may also gain access to other personal information about the individual as the lost and stolen credit cards are often contained in wallets, purses and briefcases. This may compound problems if the information is used to broaden the fraud, for example by applying for other cards. Fortunately, most lost or stolen cards are quickly recognized and upon notification of the issuer, losses can generally be minimized. More importantly for consumers, card issuers generally indemnify their customers from fraudulent use if the theft or loss is promptly reported.[2]

Other than this, non-receipt or mail fraud occurs when an individual’s mail is intercepted by a criminal. Most issuers have card activation programs requiring customers to call and authenticate in order to begin purchasing with their card. These programs help mitigate non-receipt losses and enable issuers to quickly detect non-receipt fraud.

Another problem occurs with the counterfeit cards. A counterfeit card is created when a criminal gains possession of a valid card number. This information can then be encoded on a blank card’s magnetic stripe or manually changed on the face of a stolen plastic. A quick search on the Internet can provide the criminal with all the resources to manufacture fraudulent cards. Custom embossing machines, tipping machines, decoding machines, programs for encoding credit card magnetic stripes, and various other tools for the production of counterfeit credit cards are all available from a variety of internet sites.[3]

Including the credit cards, all credit applications need an application form in which the applicant shows his / her information. In these applications, application fraud may occur where fraudsters tell lies on application forms in order to obtain credit, insurance or other products. This fraud type has increased by 21%, with 19,239 such frauds detected and filed by CIFAS Members. There was also an increase in identity fraud during the quarter with 21,122 cases filed - an increase of 12% - when compared with the same period last year.[4]

Finally, although the scale of facility takeover cases filed is smaller, the increase between the first quarter of 2006 and the first quarter of 2007 has steep at over 34%. One of the most disturbing developments revealed by the latest figures is the swing away from previous address fraud towards current address fraud. Current and previous address frauds rose in number from 10,976 to 12,690. Current address frauds now represent 60% of these frauds, compared with just 44% a year ago.[5]

Current address fraud is a type of identity fraud where the victim lives at the "current address" given on the fraudulent application. The perpetrator of the fraud is often also resident at the same property as the victim. In such cases, the fraudster applies for, and uses, products in the name of the victim whose property they share. The fraudster will generally have access to, or can intercept, the victim's post, for example where individuals are resident at a property that has a communal mailbox with shared access. Other contributory factors to current address fraud can include the abuse of Companies House data, data breaches, fraudulent mail redirections and bin raiding.

Previous address fraud is where the fraudster misappropriates the identity of another person and falsely claims that the victim has recently changed address. Due to the short period of time at the 'new' address any Credit Reference Agency (CRA) checks are performed primarily against the 'previous' address where the victim is, in reality, still resident. In such circumstances, the fraudster will usually apply in the name of the victim for new products and will undertake facility takeover fraud from the 'new' address.

Other than this, employee fraud is estimated to cost US businesses and organizations USD 200 billion per year, far out shadowing the USD 11-billion cost of violent crime. Researches have shown that individuals commit fraud when combinations of 3 factors exist:[6]

·         Perceived pressure,

·         Perceived opportunity to commit and conceal, and

·         A way to rationalize the behavior as acceptable.

These 3 factors combine to create the fraud triangle. The common schemes used to commit Type 1 (receipts) fraud are lapping, credit memo fraud, stealing of receipts, stealing of duplicate payments, and bad debts fraud. Type 2 frauds involve stealing funds or other assets from warehouses, petty cash funds, inventory stocks, and other sources. The 3^rd type involves stealing funds by paying someone who should not be paid, paying too much to someone, paying for something that should not be purchased, or receiving inferior goods. Those firms that have reduced fraud have worked on the 3 elements of the fraud triangle.

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[1] Cabinet Maker, “Credit Card Fraud: The Facts and Figures”, Tonbridge, July 2005, p.29.

[2] Peter Burns, Anne Stanley, “Fraud Management in the Credit Card Industry”, Discussion Paper Payment Cards Center, April 2002,  p. 4.

[3] Burns, Stanley, Ibid, p. 4

[4] “Current address fraud a cause for concern”, Credit Management. Stamford: Jul 2007,  p. 8.

[5] Ibid  p. 8.

[6] Albrecht, W. Steve. “Fraud in Governmental Entities: The Perpetrators and the Types of Fraud”, Government Finance Review. Chicago: December 1991. Vol.7, p. 27.

Organizations Fighting Against Fraud and Fradulent Transactions

There are some establishments that are founded all over the globe to create principles and ways to fight against fraud. One of those organizations is “European Anti Fraud Office” that has been established in order to fight against fraud inside European Union. Their mission, methods and principles are shown in the following paragraphs.

The mission of the European Anti-Fraud Office (OLAF) is to protect the financial interests of the European Union, to fight fraud, corruption and any other irregular activity, including misconduct within the European Institutions. In pursuing this mission in an accountable, transparent and cost-effective manner, OLAF aims to provide a quality service to the citizens of Europe.[1]

OLAF achieves its mission by conducting, in full independence, internal and external investigations. It also organizes close and regular cooperation between the competent authorities of the Member States in order to coordinate their activities. OLAF supplies Member States with the necessary support and technical know-how to help them in their anti-fraud activities. It contributes to the design of the anti-fraud strategy of the European Union and takes the necessary initiatives to strengthen the relevant legislation.[2]

In order to do the above activities they are very sensitive about the following principles:[3]

·         Integrity,

·         Impartiality

·         Professionalism,

·         Respect to the rights and freedoms of individuals

·         Being fully consistent with the law.

One other example can be given from United Kingdom. Serious Fraud Office has been established as an independent governmental department that investigates and prosecutes serious or complex fraud. It is a part of the United Kingdom criminal justice system. The Office is headed by the director who is appointed by and accountable to the Attorney General. The Attorney General is appointed by the Prime Minister and is responsible to Parliament for several departments including SFO. [4]

The Serious Fraud Office commenced operation in April 1988. It has been responsible for the investigation and prosecution of some of the biggest frauds in British history. The SFO and its powers were created by the Criminal Justice Act 1987. The impetus for introducing the Criminal Justice Act 1987 and creating the SFO was the Fraud Trials Committee Report, commonly known as 'the Roskill Report' published in 1986.[5]

Its main recommendation was the setting up of a new unified organization responsible for the detection, investigation and prosecution of serious fraud cases. In the UK during the 1970's and early 1980's there was considerable public dissatisfaction with the system for investigating and prosecuting serious and complex fraud.[6]

The government established the Fraud Trials Committee, an independent committee of inquiry, in 1983. Chaired by Lord Roskill, it considered the introduction of more effective means of fighting fraud through changes to the law and to criminal proceedings.[7]

The third organization may be Association of Certified Fraud Examiners (ACFE). ACFE is the world's premier provider of anti-fraud training and education. Together with nearly 40,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession.[8]

The mission of the ACFE is to reduce the incidence of fraud and white-collar crime and to assist the membership in its detection and deterrence. To accomplish its mission, the ACFE:[9]

·         Provides qualifications for Certified Fraud Examiners through administration of the CFE Examination,

·         Sets high standards for admission, including demonstrated competence through mandatory continuing professional education,

·         Requires Certified Fraud Examiners to adhere to a strict code of professional conduct and ethics,

·         Serves as the international representative for Certified Fraud Examiners to business, government and academic institutions,

·         Provides leadership to inspire public confidence in the integrity, objectivity, and professionalism of Certified Fraud Examiners,

After we state some organizations in fighting against fraud, we must also mention an act which is called Sarbanes-Oxley Act of 2002 that is a controversial United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Peregrine Systems and WorldCom.[10] These scandals resulted in a decline of public trust in accounting and reporting practices and this law has passed for restoring public trust to financial reports.[11]

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[1] OLAF, “Mission”, http://ec.europa.eu/anti_fraud/index_en.html

[2] OLAF, “Methods”, http://ec.europa.eu/anti_fraud/index_en.html

[3] OLAF, “Principles”, http://ec.europa.eu/anti_fraud/index_en.html

[4] SFO, “About the SFO”, http://www.sfo.gov.uk/about/about.asp

[5] SFO, “Creation of SFO”, http://www.sfo.gov.uk/about/creation.asp

[6] SFO, Ibid.

[7] SFO, Ibid.

[8] ACFE, “About ACFE”, http://www.acfe.com/about/about.asp

[9] ACFE, “About ACFE”, http://www.acfe.com/about/about.asp

[10] Wikipedia, “Sarbanes-Oxley Act”, http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act

[11] David H.Bangs, “The Fight Against Fraud”, Internal Auditor, p. 35.

What is Fraud? The Concept of Fraud

In the broadest sense, a fraud is a deception made for personal gain. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and is also a civil law violation. Many hoaxes are fraudulent, although those not made for personal gain are not technically frauds. Defrauding people of money is presumably the most common type of fraud, but there have also been many fraudulent "discoveries" in art, archaeology, and science

In criminal law, fraud is the crime or offense of deliberately deceiving another in order to damage them – usually, to obtain property or services unjustly. Fraud can be accomplished through the aid of forged objects. In the criminal law of common law jurisdictions it may be called "theft by deception," "larceny by trick," "larceny by fraud and deception" or something similar. [1]

In academia and science, fraud can refer to academic fraud – the falsifying of research findings which is a form of scientific misconduct – and in common use intellectual fraud signifies falsification of a position taken or implied by an author or speaker, within a book, controversy or debate, or an idea deceptively presented to hide known logical weaknesses. Journalistic fraud implies a similar notion, the falsification of journalistic findings.[2]

When we come to the financial reporting, the fraud can be defined as “intentionally and being aware of the consequences from the overvaluation or undervaluation of the assets and hiding the necessary documents in order to spoil the financial statements”.[3] This shows that the investors and the shareholders take decisions depending on the polluted data which will create great losses in the future.

Other than the above statements, fraud can be also defined to be "an intentional perversion of truth" or a "false misrepresentation of a matter of fact" which induces another person to "part with some valuable thing belonging to him or to surrender a legal right".[4]

In addition to the traditional criminal definition of fraud, there are many regulatory laws that have very specific rules that must be complied with. If you do not follow these rules to the letter, you could be charged with and convicted of fraud.

There is a term which is generally used instead of fraud. This term is abuse. However, abuse has a different meaning. Where fraud can be explained as “intentional deception or misrepresentation made by a person with the knowledge that the deception could result in some unauthorized benefit to him or some other person, abuse term can be defined as “the provider practices that are inconsistent with sound fiscal, business, or medical practices, and result in an unnecessary cost to these programs, or in reimbursement of services that are not necessary or that fail to meet professionally recognized standards.[5]

From these explanations it is clear that abuse is much more different than the word fraud. Nevertheless, both terms were included in the 2006 Act of Fraud. In order to give more understanding the article is stated below:[6]

“A person is guilty of fraud if he is in breach of any of the sections listed in subsection (2) (which provide for different ways of committing the offence).
(2) The sections are-

(a) section 2 (fraud by false representation), 

(b) section 3 (fraud by failing to disclose information), and

(c) section 4 (fraud by abuse of position).….” 

As seen from the act, the financial frauds have not been mentioned. The focus is on business issues and the hierarchical status.

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[1] Wikipedia, “Fraud”, http://en.wikipedia.org/wiki/Fraud

[2] Wikipedia, Ibid.

[3] Nuray Ergül, “Türkiye’de Hile ve Hile Denetimine Bakış Açısı”, Vergi Sorunları, November 2003, No:182, p. 120.

[4] Free Advice, “What is Fraud?”, http://criminal-law.freeadvice.com/white_collar_crimes/fraud.htm

[5] Department of Finance and Administration, “What is Fraud and Abuse?”, http://www.tncarefraud.tennessee.gov/what_is_Fraud_abuse.aspx

[6] Fraud Act 2006, United Kingdom, Article 1.