Does Fraud Go Up as the Economy Goes Down?

As the United States economy continues to falter, one common question is whether the difficult economic conditions will cause more fraud. Many experts are saying that fraud is very likely to increase, but I’m not so sure. No on can really prove this one way or another, but it’s still important to discuss the issue. 

A recent poll done by one of the world’s largest auditing firms shows that almost two-thirds of executives believe accounting fraud will increase over the next two years. They attribute that increase to the economic downturn, specifically lower or non-existent raises and bonuses, reduced job security, and lower morale. 

Of course, difficult economic conditions might give employees more of a reason to commit fraud. If an employee can’t pay his bills, he could turn to fraud. But will he? Will the fact that more individuals are experiencing financial stress result in more actual fraud? 
And the statistics might support the theory that fraud increases when the economy goes down. 

Statistics tracked by the National White Collar Crime Center demonstrate that arrests for fraud and embezzlement go up during economic downturns. But it’s not clear more arrests are a result of more frauds being committed, or because of some other factor. 

I submit that it is quite possible that more frauds are not committed during economic downturns. It might just seem that way because consumers are more focused on negative financial stories. There are other possibilities as well. 

Maybe technological advances mean that we’re detecting more frauds than before, even though fraud could be occurring at the same rate it always has. Maybe we’re just hearing more about fraud, thanks to regulations like Sarbanes-Oxley. Maybe the explanation is the way we get our information. The Internet means we have access to more news than ever before, so maybe we’re simply hearing more stories about fraud because we’ve got more exposure to news in general. 

Another possibility is that companies could be more likely to pursue cases of fraud when finances are tight. Difficult financial conditions often cause companies to look more carefully for cost-cutting measures. Maybe in the past, certain cases of fraud might have been overlooked, but now they are pursued aggressively in the hope of recovering some of the proceeds. 

Although two-thirds of executives think there is a higher risk of fraud during difficult economic times, most of them are not acting in response to this belief. Only about 20% of the executives questioned said they were increasing fraud prevention measures like increasing fraud risk assessments and enhancing monitoring. The lack of action on the part of management is interesting, especially since they so clearly believe that fraud risks are up. 

There’s a chance that the economy may be a catalyst for more employee fraud. There’s probably an equal chance that it is not. We will never be able to prove either argument. But it is still important to talk about the issue. By educating employees about fraud risks, companies can reduce their overall exposure to occupational fraud schemes. Companies should be carefully monitoring fraud at all times, regardless of speculation on the economy’s impact on fraud rates. 

Three Keys to Fraud Prevention

Investigating fraud is time-consuming and expensive. There's little choice in the matter for some companies, however. Once a fraud is discovered, it's often necessary to investigate the situation to determine who was involved, how the fraud occurred, how much money was lost, and what evidence supports the allegations of fraud.

Preventing fraud is far less expensive. It reduces the amount of money lost to fraud, and should also reduce the need for fraud investigations. Most companies will recover 25% of less of the funds stolen by employees, so it makes sense to attempt to reduce the amount of fraud in the company. 

There are three keys to reducing fraud in companies: 

Hire the Right Employees 
Bringing on the right employees for your company means two things: One is finding people with the right skills and disposition to do well at the company. The other is finding people with an ethical history. Background checks are easy to do and relatively inexpensive. Important parts of the background check include verification of past employment, contact with references, and criminal and civil court checks. 

Create Effective Policies and Procedures 
The heart of fraud prevention is in a company’s policies and procedures.Proactive fraud prevention procedures are at the heart of internal controls. While compliance with current regulations is important, having substantive controls that actually prevent fraud is even more important. 

For maximum effectiveness, a fraud expert needs to be involved in the development of control procedures. Those experienced with fraud are in the best position to recommend the most valuable controls. Remember that effective controls aren't necessarily expensive to create and implement. There are many inexpensive options. 

Educate Employees 
Studies have found that employees can be the company’s best watchdogs. As you might expect, most employees are generally honest, and they don’t like to see someone else stealing. If management wants employees to help in detecting fraud, they must educate them on what fraud looks like, feels like, and costs. 

Most employees haven’t come into contact with fraud on the job, or they just didn’t know that they were in contact with fraud. Provide basic training for all employees to introduce them to the concept of internal fraud, and give them a foundation for on-the-job watchdog duties. 

All in all, the cost to implement some basic fraud prevention initiatives in a company can be small, especially when it's compared to the amount of money that could be lost to fraud. The long-term benefits of fraud prevention activities are undeniable, and companies can achieve immediate savings by reducing the risk of fraud. 

Tracy L. Coenen, CPA, MBA, CFE performs performs fraud examinations and financial investigations  and is the author of Essentials of Corporate Fraud.

World's 20 worst CEOs - Hall of Shame

1. Dick Fuld

About Dick Fuld, the Conde Nast Portfolio said that "it's one thing to oversee the collapse of one of the Wall Street's most esteemed firms. But when your hubris triggers a national financial panic as well, you're a shoo-in for our top prize."

As chairman and CEO of Lehman Brothers Holdings Inc, he ignored warnings from experts on several issues. He refused to talk to buyers and finally the company had to declare bankruptcy. Fuld earned about $45 million in 2007.

Dick Fuld joined Lehman Brothers in 1969 after giving up his career as an US Air Force pilot. He turned around the fortunes of the company after he took over but soon risky mortgages backfired.

From the years 1993 to 2007, he is said to have received nearly half a billion dollars in total compensation. CNN named Fuld as one of the 'Ten Most Wanted: Culprits of the Collapse'.

2. Angelo Mozillo

Angelo R Mozilo was the co-founder and chief executive officer of Countrywide Financial until July 1, 2008. He started the company in 1969.

The company soon grew to become one of the biggest mortgage lenders in the US. Countrywide was listed on the New York Stock Exchange in 1984. They granted huge loans to borrowers without verifying their repayment abilities.

Promoting risky loans, the company played a crucial role in huge subprime mortgage crisis. Finally, this led to the collapse of the company. The company was subsequently taken over by the Bank of America. CNN named Mozilo as one of the 'Ten Most Wanted: Culprits' of the 2008 financial collapse in the United States.

3. Ken Lay

Kenneth Lay, founder of energy giant Enron was found guilty of 11 charges of fraud and conspiracy that led to the company's collapse.

Enron's bankruptcy in December 2001 was one of the biggest in US history. About 20,000 employees lost their jobs and investors lost billions.

He died before the sentencing, which was scheduled on 23 October 2006. Lay died on July 5, 2006 while vacationing in Colorado.

4. Jimme Cayne

Jimme Cayne may be one of the worst CEOs but the former CEO of Bear Stearns is a good bridge player.

After losing about $1 billion in net worth from the collapse of Bear Stearns' stock, he sold his entire stake in the company for $61 million.

In July 2007, the Bear Stearns' hedge funds collapsed, an indication of the impending global financial credit crisis.

In March 2008, as Bear Stearns was on the verge of bankruptcy, Cayne played bridge at a tournament in Detroit.

5. Bernard Ebbers

Bernard Ebbers co-founded the telecommunications company WorldCom.

In 2005, he was convicted of fraud and conspiracy in one of the biggest accounting scams in the US. WorldCom's false financial reporting resulted in a $11-billion loss to investors. He is currently serving a 25-year prison term.

6. AL Dunlap

Albert John Dunlap is popularly known as 'Chainsaw Al' and "Rambo in Pinstripes". A corporate turnaround specialist, he has been barred from serving as an officer or director of any public company as a result of his activities at Sunbeam Corp.

In 1996, he was hired at Sunbeam for a restructuring process. But he was asked to leave after two years when the company's financial performance and stock price began to fall drastically. He was also responsible for laying off thousands of jobs from several companies.

7. Fred Joseph

Fred Joseph was the CEO of Drexel Burnham Lambert and COO of Shearson Hammill & Company. Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was driven into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, in which Fred Joseph played a key role.

8. Jay Gould

Jay Gould was a financier, railroad developer and speculator. He has a reputation of being one of the most unscrupulous American businessmen. He was known for stock price manipulation and insider trading. Jay Gould made a fortune trading in stocks.

9. John Patterson

John Patterson headed NCR Corporation began operations as the National Manufacturing Company, which manufactured and sold the first mechanical cash register. The company and patents were bought by John Henry Patterson and his brother Frank Jefferson Patterson in 1884 and the firm was renamed the National Cash Register Company

In 1912, the company was found guilty of violating the Sherman Antitrust Act. Patterson and other executives were convicted for illegal sales practices and were sentenced to one year of imprisonment. Patterson was known to fire many employees.

10. John Akers

John F. Akers became chief executive officer of IBM in February 1985. In June 1986, he assumed the additional position of chairman of the board. He retired from both positions on April 1, 1993 after 33 years of service.

While the rest of the world was moving toward personal computing, Akers remained stuck in the mainframe age, never quite figuring out what to do with IBM at a critical point in the tech industry's evolution. Many outsiders viewed Akers as being in over his head. IBM was paralysed by his lack of decisiveness," the magazine said.

11. Henry Frick

Henry Clay Frick was an American industrialist and art patron. Also known as the  father of the modern steel industry Frick was once voted the most hated man in America.

His action to one of the strikes in Carnegie Steel's mills in protest against lower wages resulted in resulted in 16 deaths.  He was shot three times and stabbed twice by an activist but he survived.

12. Robert Eugene Allen

Robert Allen was the president of AT&T between 1986 and 1988. He also served as its CEO and chairman from 1988 until 1997.

Bob Allen forced a unsuccessful merger with computer company NCR Corporation. AT&T cracked due to his lack of strategy. In 1997, AT&T lost more than $12 billion in a few months. Allen also laid off 50,000 AT& T employees.

13. Roger Smith

Roger Smith began his career at GM in 1949 as an accounting clerk. He was appointed chairman and chief executive in 1981, and led the world's largest automaker until his retirement in 1990.

General Motors CEO Roger Smith's came in for sharp criticism with his closing several auto plants in Flint, Michigan, resulting in over 30,000 people their jobs. GM is now on the verge of bankruptcy.

14. John Sculley

John Sculley was vice-president and president of PepsiCo. He left the company to join as the CEO of Apple in 1983. 

A great strategist at PepsiCo, he faltered at the helm of a technology company. He was fired when Apple was heading towards bankruptcy.

15. Martin Sullivan

Martin J. Sullivan is the former president and CEO of the American International Group, Inc. In 1996 he was appointed Chief Operating Officer of AIU in New York and named President in 1997. He was elected to the Board of AIG in May 2002.

In 2008, Sullivan testified before the United States House Committee on Oversight and Government Reform on Capitol Hill regarding the bailout of AIG.

AIG's stock price dropped 99 percent during the credit crisis of 2008 and 2009. A company that was worth over $100 billion before the crisis, had a market capitalization of just $1.4 billion by February 2009. Despite the crisis, Sullivan received a huge severance package.

16. Gerald Levin

One of the most powerful media executives, Gerald Levin was the chairman and CEO of chairman and CEO of Time Warner. Levin steered the merger between AOL and Time Warner in 2000, a move which was a big disadvantage to Time Warner.

7. Robert Nardelli

Robert Nardelli is the chairman and chief executive officer of Chrysler. Nardelli was fired from Home Depot after the company lost its market share and his refusal to give up a huge pay package.

He was then hired by the private equity group Cerberus, which put him in charge of its struggling Chrysler unit.

18. Stan O'Neil

Former President, CEO and chairman of the Board of Merrill Lynch & Co, Stan O'Neil drew a lot of flak for irresponsible fiscal policies that led to the worst quarterly losses in Merrill Lynch, as a result of which he was forced to quit. 

The firm's stability and capital position deteriorated during his tenure as CEO.

19. Carly Fiorina

Carly Fiorina served as chief executive officer at Hewlett-Packard from 1999 to 2005.  A year after joining Hewlett-Packard, Fiorina also became the company's chairman of the board.

She completed a controversial merger with rival Compaq in 2002. However, in 2005 she was forced to quit as the merger could not bring profits she had promised.

20. Vikram Pandit

He "did not create the mess Citi is in, but he is the financial services equivalent of the Titanic's Edward Smith - a commander ill-equipped to save his ship," the magazine said.

"When Pandit took over, Citi was already on track to report write-downs and increased credit costs of $20 billion. Today, the banking supermarket is propped up by $45 billion in bailouts and is, in effect, owned by the US government," Conde Nast Portfolio noted.

It further noted that Pandit's current salary was $1, but his "pay package was valued at $38.2 million for 2008, a year when taxpayers kept the firm in business."

The next number 21 probably (next year) will be :

Some chief executive officers are known for their outstanding skills, the ability to turn around the fortunes of the companies they run. But there are others who have tarnished the image of the CEO and the reputation of many corporate giants.

One of the worst CEOs, India has seen is Satyam's disgraced former chairman Ramalinga Raju.  Raju wreaked havoc in the company he founded. After a failed acquisition attempt involving Maytas, a family owned company in December 2008, the share price of Satyam fell drastically. This was just the beginning of the troubles in the company.

In January 2009, Raju admitted to a Rs 7,800-crore (Rs 78 billion) fraud. Satyam's accounts had been misappropriated over a number of years. Raju is now in jail and judicial proceedings are underway.

Talking about worst CEOs around the world, business magazine Conde Nast Portfolio after consulting with a panel of business school professors, identifies the business "leaders who helped drive their companies into the ground."

The magazine has complied a list of America's 20 worst ever CEOs. These 20 include "six men who helped make today's economy stink," the magazine said.

Source: www.rediff.com

How SpiceJet Nipped Online Fraud in the Bud

Low-cost airlines have turned the airline industry on its head, with every major operator cutting costs to woo customers. But with increased volumes, come increased risks. SpiceJet, which handles more than 2,000 online credit card transactions every day, was in such a situation, when it discovered that it was losing almost Rs 50-60 lakh per month, due to online frauds. Operating in an industry which survived on razor thin margins, Virender Pal, CTO, SpiceJet, knew that he had to quickly find a way to reduce fraudulent transactions.

Explaining the challenge of reducing fraudulent transactions, Pal says, “We used to screen transactions round the clock, but the fraud rates increased every day resulting in a loss of revenue to our company. The number of incidents of fraud we faced as a percentage of total transactions was 1.5 percent. That’s a huge number when you look at our volumes.” Pal says that though the firm had a process to verify online transactions in the form of a Fraud Control Unit, they relied on screening transactions manually, which increased the chances of fraud.

The most common method used by fraudsters is to use stolen credit card information to buy tickets. By the time the true credit card owner reports the fraudulent transaction, the flight usually has been taken. While no India-specific figures are available, a Cybersource study estimates online fraud to be about 1.3 percent of worldwide airline revenue.

Alarmed by the increase in online fraud, SpiceJet enhanced customer experience with real-time verification of credit card transactions to alleviate security fears. The thrust was on making SpiceJet.com a secure place for credit card transactions. Accordingly, Pal’s team faced the task of finding an automated and flexible online risk management solution that could screen online transactions efficiently. As the solution chosen would screen transactions accounting for over 90 percent of the company’s business, the firm undertook a careful study of the market, before choosing a solution. After three weeks of deliberation, the firm finally opted for CyberSource’s Decision Manager, an automated online risk management solution. SpiceJet was impressed by the fact that it could get access to a real-time database of credit cards, which was used by nearly 20,000 organizations across the world.

Post deployment, the percentage of fraudulent transactions has come down significantly. Explains a jubilant Pal, “We are now able to almost single-handedly estimate whether an online purchase should be accepted, rejected, or reviewed. We did not want to reject any transactions because this would impact customer experience. If a transaction seems suspicious, we review it. All this happens within two seconds ensuring that customer experience is not impacted.”

Due to the solution, SpiceJet can automatically evaluate credit card transactions in real time. Based on a combination of rules framed by the airline and a set of over 150 parameters, the system decides whether a transaction should be processed further or sent for a review. The firm formulated these rules after analyzing its experience of fraudulent credit card transactions. It studied the various strategies employed by fraudsters and mapped out its own security requirements accordingly. One such rule was that they would review every transaction made for booking a ticket five hours before the departure of a flight. Today, thanks to these automated rules, SpiceJet has created an environment that ensures safe transactions for customers, while boosting profitability.

Source: www.networkcomputing.in

Outsourcing in the new world order

The evolution of IT project delivery

IT delivery has changed greatly over the past 15 years. When the outsourcing industry first developed, businesses looked for IT service providers solely to reduce costs. As the global delivery model grew, outsourcers began to take advantage and used lower-cost regions to deliver some of that cost benefit.

In the short term these relationships were a success, but anyone involved in outsourcing projects at that time will admit that limitations soon became apparent, as it became evident that long term, large, monolithic outsourcing contracts may have delivered cost savings but were failing in terms of agility, productivity and responsiveness to the business, and could not handle the transformation needed.

Complex and transformational projects, requiring greater skill and co-ordination between the client and provider just weren't suited to this early model, so naturally it evolved. Rather than doing all work offshore, onshore offices to provide better local contact and expertise, were set up to support more complicated projects, and over time the long-term business impact of this combined model became another major driver of outsourcing decisions.

However, as a result of recent shifts in the economic landscape, the outsourcing industry is having to adapt once again as cost shoots back to the top of the agenda.

Changing attitudes

What does this mean for IT chiefs and their outsourcing partners? Well, opinion is divided. A survey by sourcing company Equaterra, suggests that the recession has not reduced UK businesses' demand for outsourced services. Conversely, TPI, a consultancy which tracks large financial outsourcing deals, says that it has seen a decline in the number and size of deals since 2007.

From our perspective, we've definitely found that companies tend to slow down decision making in times when cost pressures really come to the fore. They re-evaluate and realign their investment from projects that prioritise long-term transformational benefits, to those with immediate cost savings. The ideal scenario of course is to plan IT projects that can deliver both.

What is certain is that companies now want much tighter control of any IT projects they embark on.

Back to basics

Given the current challenges, there will be some companies who come to the conclusion that it is in their best interests to keep IT projects in-house, where they believe they can keep a tighter rein on things. But is this the right approach? Certainly, some CIOs may feel more comfortable with their IT delivery under one roof, but the recession brings sharply into focus the original reason they considered outsourcing in the first place - to reduce costs.

However, cost is only one of the issues and the ability to share risk is also a key benefit. The current climate means that IT providers have never had a greater incentive to deliver to their promises. They are aware that projects need to produce tangible cost savings and business efficiencies in a short time frame; otherwise the partnership is likely to come under scrutiny. And when the going gets tough, it can help to have a rationalised supplier base where one company is responsible for delivering projects according to terms set out in a service level agreement (SLA). This cuts down on the complexity of the relationship and the time spent managing it, freeing internal resources to focus on other priorities.

We've all seen over the last few months how quickly market conditions can change, and how quickly these fluctuations can be reflected in IT requirements. Crucially, outsourcing providers can deliver flexibility to scale projects up or down in line with demand, something in-house teams find difficult.

IT partners can also be relied on to provide valuable consultation, insight and specialist industry knowledge (often gained from providing IT solutions to companies in similar situations). And whereas early outsourcing contracts saw work simply 'thrown over the wall', companies should now be looking to work with third parties to use this insight to help determine and plan IT strategy.

Companies need partners who can demonstrate real thought leadership, with the expertise to identify where cost savings and efficiencies can be realised most effectively, meaning efforts aren't wasted elsewhere. The best service providers will combine this strategic thinking with cost reduction - moving processes offshore to generate immediate savings and then transforming them over time to achieve new levels of performance.

Outsourcing partners increasingly offer knowledge-based BPO services outside the traditional areas of IT or ancillary support, which may not have been previously considered for outsourcing. These tasks are typically domain specific and require staff who are highly qualified, professional and mature.

The wide availability of skilled graduates in regions such as India or China have made these tasks possible, and the wage differential between onshore and offshore means that the cost advantage is maintained. However, the real benefit that this global talent provides is the realisation of new outcomes which were not previously possible. For instance, take an insurance company investigating fraudulent claims. With onshore staff, it wouldn't look at cases below the value where the investigation cost would be higher than the fraud itself. With offshore labour this threshold can be lowered, allowing more cases to be investigated and identified as fraudulent.

Today, measuring return is still the most important factor when embarking on new IT projects. Service providers should work with organisations to establish goals and outline timeframes for their completion. It's now almost standard for SLAs to be agreed as part of contract negotiation, setting benchmarks in areas such as savings to be generated, productivity and efficiency, and outlining the planned approach to business process transformation.

Businesses worried about potential risk can also ask IT providers for a transaction-based pricing model. Rather than simply committing to work on a project for a certain period of time, this guarantees a set price for a set outcome - putting the onus on the outsourcer to perform the task in a timely and efficient way.

Conclusion

With most national economies experiencing the sharpest fall in consumer and business confidence for almost 20 years, the business outlook is understandably uncertain. With this in mind, all investment is under the microscope and IT projects need to prove they can make a long term contribution while providing a shorter-term cost advantage.

It is natural for outsourcing projects to come under increased scrutiny, but the best service providers will have already adapted to meet the demands of the new world order - marrying the traditional priority of cost reduction with the business transformation required to drive performance in the years ahead. Businesses should in fact use the downturn to forge closer, more tightly-defined relationships that can reap benefits, both now and in the future.

Source: www.computerweekly.com

ATM/Debit Card Fraud On The Rise

Credit card fraud may get most of the publicity when it comes to identity theft, but ATM and debit card theft is expected to grow 10 to 14 percent this year, according to a survey of financial institutions released today.

It turns out the study was well-timed, too: Police officials in New York City yesterday reported that a fraud ring had stolen $500,000 from hundreds of bank customers' accounts in the city using skimming devices affixed to ATM machines at Sovereign Bank branches in Staten Island. The skimmers read and stored their account information, and a rogue camera affixed to the machines captured victims' typing in their PIN numbers. They also used the information to clone the cards, according to published reports.

Nearly 70 percent of the respondents to the survey, conducted by antifraud firm Actimize, said they had experienced an increase in ATM/debit card fraud claims in 2008 compared to 2007. Around 23 percent said those claims jumped by 5 to 9percent; around 16 percent, by 10 to 14 percent; 17.5 percent, by 15 to 19 percent; nearly 9 percent, by 20 to 24 percent; 11 percent, by 25 to 49 percent; and 5 percent, by a whopping 50 to 74 percent.

Half of the institutions had been hit with fraud complaints that came out of some of the major data breaches, with more than 30 percent saying they had seen fraud incidents as a result of the TJX hack, and 30 percent out of the Heartland Payment Systems hack.

"It was interesting to confirm that not only are banking customers using ATM/debit card at risk, in general, because their data has been compromised and could be used for fraud -- but it is being used for fraud," says Paul Henninger, director of fraud solutions at Actimize.

Around 80 percent of the survey respondents said these massive data breaches can decrease consumer confidence in ATM/debit card use. Around 15 percent had reissued cards to more than 20 percent of their cardholder customers, Henninger says. "The rate at which they are reissuing cards is well ahead of what we thought it would be," he says.

Last year, respondents lost an average of $744,321, with some as high as $12 million, to ATM fraud alone, and an average of $145,560, or as high as $1 million, to data breaches, according to the survey.

By Kelly Jackson Higgins

Credit card fraud expected to increase as banks instructed to use real-time monitoring

Financial institutions and credit card processors are anticipating a rise in fraud for this year.

According to a recent survey by Actimize, 69 per cent of banks had seen an increase in credit card fraud in 2007 and 2008, and 81 per cent of respondents claimed that there would be an increase in fraud this year.

Bruno Piers De Raveschoot, VP and head of Europe at Actimize, claimed that the reason for this rise was due to cards now being used more than in the past, and people using cards without care due to the rise of e-commerce.

De Raveschoot, said: “Skimming, or mass compromise – it is becoming more and more of a problem, it is a lot more sophisticated than two years ago but they cannot get the PIN. On average it takes seven days to detect fraudulent activity and stop it.”

He claimed that one of the key problems is that fraud detection monitoring and the card distributors do not talk to each other, and only 26 per cent of banks monitor transactions in real-time – others will do it at midnight and others the next day.

De Raveschoot also claimed that replacement cards are a cause of fraud, as a hacker can ask for a replacement card to be sent out for an account once they have stolen details.

“Twenty per cent of all cards are re-issued but banks and processors do not know why it was re-issued”, said De Raveschoot. He further claimed that banks need to use a multi-channel tracking device to monitor suspicious activity, and work towards it being flexible and in real-time.

Source : SC Magazine UK, By Dan Raywood.