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Airline Fraud Survey 2006. 8 November 2006 IAAIA Conference – Goa, India Rania Bejjani.

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Presentation on theme: "Airline Fraud Survey 2006. 8 November 2006 IAAIA Conference – Goa, India Rania Bejjani."— Presentation transcript:

1 Airline Fraud Survey 2006. 8 November 2006 IAAIA Conference – Goa, India Rania Bejjani

2 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 2 Airline Fraud Survey 2006 Overview Survey background and participants Key findings Recommended actions to reduce fraud Questions and answers

3 ©2005 Deloitte & Touche LLP. Private and confidential 3 Airline Fraud Survey 2006 Survey background and participants

4 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 4 Airline Fraud Survey 2006 Objectives Our objectives were to: understand fraud risks and how these are impacting the airline industry around the world capture the root causes airlines believe are driving certain types of fraud consider trends of fraud since the last survey in 2000 flag changes and schemes which have been found to help reduce or mitigate these risks inform the airline industry of the risks it faces, share lessons learnt and promote a more secure and controlled business environment identify the key step or steps all airlines need to take to address fraud

5 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 5 Airline Fraud Survey 2006 Methodology Key steps included: Survey questions were pulled together by Deloitte and the IAAIA building on the 2000 IATA/IAAIA survey Confidential personal invites were sent out to Heads of Internal Audit or Finance Directors (for smaller airlines) to nearly 180 airlines worldwide Responses have been summarized on an aggregate, collective no- name basis and confidentiality has been maintained at all times

6 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 6 Who participated? Airlines from across the 5 continents Americas 17% Africa 7% Europe 44% Middle East 10% Pacific 10% Asia 12% Network carriers76% Low cost carriers17% Charter carriers7%

7 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 7 Participants demographics: Ho w do you compare? Revenue distribution In 2000, average employees was: 9980 Average Gross Revenue was: USD 1.9bn

8 ©2005 Deloitte & Touche LLP. Private and confidential 8 Airline Fraud Survey 2006 Key Findings Overview

9 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 9 Airline Fraud Survey 2006 Key findings Fraud related loss increased 5 fold since 2000: On average each airline suffered at least USD 3M in 2006 External fraud is by far greater than internal fraud Credit card fraud is the single most prevalent and costly fraud scheme costing every airline on average nearly USD 1M 99% of technology fraud relates to poor IT security

10 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 10 Airline Fraud Survey 2006 Key findings - contd 90% think fraud will increase or at least remain the same in 2007 Over 60% have no anti-fraud programmes, do not perform risk assessments and do not track or record fraud 60% rely on IA as a solution to fraud yet airlines have smaller IA teams than other industries 31% discover fraud by accident and 45% are informed by external parties

11 ©2005 Deloitte & Touche LLP. Private and confidential 11 Airline Fraud Survey 2006 Key Findings A closer analysis

12 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 12 How much does fraud cost you? Have you experienced fraud YesNo during the last 12 months?79%21% Estimated loss across the industry is USD 600M On average: Fraud related loss per airline has increased 5 fold since 2000 Every airline has suffered in 2006 a loss of at least USD 3M

13 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 13 External fraud is by far greater than internal fraud in volume and impact External versus internal fraud

14 ©2005 Deloitte & Touche LLP. Private and confidential 14 Airline Fraud Survey 2006 What are the most common and most costly fraud schemes?

15 ©2005 Deloitte & Touche LLP. Private and confidential 15 Airline Fraud Survey 2006 External fraud

16 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 16 External fraud schemes – Survey findings

17 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 17 External fraud schemes – A closer analysis If we exclude those schemes affecting one airline only, what are the most significant external frauds affecting all airlines? Credit card fraud: 60% of external fraud related losses relate to credit card abuse 33% of respondents have experienced credit card fraud Related losses nearly average USD 1M per airline, thats an estimated at least USD100M across the industry Technology and web-based fraud: 17% of external fraud losses relate to technology and the web 26% of respondents have suffered USD 10.2M in total Third party providers fraud: 17% of external fraud losses relate to third party providers 10% of respondents have suffered USD 9.3M in total Credit card fraud is the most prevalent and costly fraud scheme

18 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 18 Understanding credit card fraud Credit card fraud related average20002006 loss per airline in USD 96k 854k For large airlines, average cost is USD 2.5M each In Europe and US, average cost is USD 1.5M per airline Analysis by Gross RevenueAnalysis by location

19 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 19 Technology and web based fraud All respondents believe that technology surpassing current controls in place is a key driver of fraud A third nearly have experienced some form of technology fraud costing USD 10.2M In 2006, 67% of respondents think additional fraud risks have been taken by their airline because of new technology, compared with 44% in 2000 Contributing to 99% of technology fraud (in volume and USD impact) relate to Internet payment fraud Is your IT security not robust enough? Credit card fraud related loss Average per airline:USD 1M Estimate across industry:USD 100+M

20 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 20 Third party fraud – What are the common schemes and who are the perpetrators? 8 types of fraud were considered. Below are the top 3: Other types of fraud reported included theft of airline goods / services and the use of declined credit cards Types of frauds perpetrated 10 different outsourcing / service providers were considered. Below are the top 3: Other includes travel agents and advertising agencies, which were not part of the original 10 Perpetrators of fraud Billing for services not rendered 75% Incorrect pricing 11% Double billing 14% 20 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 Other 1% In flight service providers 86% Ground handlers 13%

21 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 21 External fraud schemes – Summary comparison with 2000 In 2000, 3 most common and costly external fraud schemes were: Tariff abuse Ticket theft Credit card fraud In 2006, 3 most common and costly internal fraud schemes are: Credit card fraud Technology and web-based fraud Third party providers fraud The fraud profile has changed since 2000: Credit card fraud has significantly increased in volume and costs Ticket theft, tariff abuse and counterfeit tickets have been experienced by fewer airlines Technology effect is more evident

22 ©2005 Deloitte & Touche LLP. Private and confidential 22 Airline Fraud Survey 2006 Internal fraud

23 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 23 Internal fraud schemes – Survey findings

24 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 24 Internal fraud schemes – Summary comparison with 2000 In 2006, the 3 most common internal fraud schemes are: Frequent flyer abuses Inventory theft Cargo theft In 2006, the 3 most costly internal fraud schemes are: Diversion of revenue Frequent flyer abuses Abuse of passenger personal details How does that compare with the 2006 survey? In 2000, the 3 most common internal fraud schemes were: Cargo theft Ticket theft Expense account fraud In 2000, the 3 most costly internal fraud schemes were: Payroll theft Cargo theft Ticket theft Frauds relating to frequent flyer and passenger personal details abuses are on the increase

25 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 25 Compliance with Payment Card Industry standards 33% of respondents have experienced external credit card frauds costing them USD 35M 20% of respondents have experienced internal abuse of passengers personal details costing them USD 3.5M 7% have experienced instances where their employees stole the identity of their passengers 24% are not aware of the new Payment Card Industry (PCI) standards by credit card companies Are the aware airlines compliant with the new PCI standards?

26 ©2005 Deloitte & Touche LLP. Private and confidential 26 Airline Fraud Survey 2006 Who is more exposed to fraud?

27 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 27 Does size matter? Company size

28 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 28 Average number of internal fraud cases per airline Where is exposure to fraud higher? On average, airlines operating in the Middle East, Americas and the Pacific are more exposed to internal fraud then their counterparts in other parts of the world European and Asian airlines experience significantly more external fraud * The high number of cases is driven by one airline in particular. Therefore average may not be truly reflective of the regions practices. Average number of external fraud cases per airline

29 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 29 Does your business model affect fraud exposure? Low Cost Carriers are significantly more exposed to external fraud

30 ©2005 Deloitte & Touche LLP. Private and confidential 30 Airline Fraud Survey 2006 What are the expectations for fraud in 2007?

31 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 31 Fraud expectations for 2007 Will the occurrences of fraud increase in comparison to 2006? The main reasons for the expected fraud increase are:

32 ©2005 Deloitte & Touche LLP. Private and confidential 32 Airline Fraud Survey 2006 How well do you manage fraud risks?

33 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 33 How well do you manage fraud? Airlines surveyed confirmed that they have experienced fraud, yet: 72% do not have a fraud policy 56% do not perform a risk assessment 65% do not have an anti-fraud programme 63% do not have a whistle-blowing mechanism to report fraud 61% do not have a formal system to track fraud Airlines lack robust and well established anti-fraud programme to prevent, detect, report and track fraud. This is increasing your risks of and vulnerability to fraud

34 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 34 How do you assess fraud risk? 39% perform the fraud risk assessment yearly 28% link the risks of fraud identified to anti-fraud programmes and controls 21% follow a set of stringent and consistent procedures when fraud is detected Only 22% have a good representation from across management, business units and locations when performing the risk assessment The risk assessment initiatives being undertaken are not stringent and comprehensive enough to reduce fraud

35 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 35 14 potential mechanisms that airlines rely on to discover fraud were considered in the survey and here are the most common: Fraud identification - How did you discover the frauds? Up to 31% discover the frauds by accident Combined 45% of respondents are informed by external parties Nearly 50% rely on internal assurance processes such as internal audit and internal control procedures

36 ©2005 Deloitte & Touche LLP. Private and confidential 36 Airline Fraud Survey 2006 Who is responsible for fraud prevention, detection and investigation?

37 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 37 Responsibility for fraud prevention, detection and investigation In 2006, departments responsible for fraud response have remained overall the same compared with 2000 IT Security are out of the equation

38 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 38 Responsibility for fraud prevention, detection and investigation Percentage of respondents reliance on the following departments for fraud response At least 60% of airlines rely on Internal Audit to prevent, detect and investigate fraud

39 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 39 Responsibility for fraud prevention, detection and investigation Have your staffing, retention and training been appropriate to meet these challenges?

40 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 40 How do airlines compare with other industries? Source of industry figures: The Institute of Internal Auditors' Global Auditing Information Network (GAIN) Compared with other industries, airlines have smaller internal audit teams

41 ©2005 Deloitte & Touche LLP. Private and confidential 41 Airline Fraud Survey 2006 Actions to reduce fraud

42 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 42 Steps to reduce fraud Are you focusing on the right steps? Responses from the survey suggest that: improving internal controls increasing reference checks on new employees increased focus by Senior Management on the problem are considered to be the most effective steps to reduce fraud in the future Given the findings relating to the most common fraud schemes, how fraud is currently managed and the level of resources, the above are not enough

43 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 43 The top 3 steps every airline needs to take to address fraud Implement a preventative anti-fraud programme Assess fraud risks regularly and link them to controls Define a fraud policy and educate your staff Involve all relevant parties and increase senior management focus Involve IT Security To address credit card and internet payment fraud To design improved internal controls to keep up with new technologies To facilitate compliance with PCI standards Improve your detective capability Larger and fraud-trained internal audit teams with a wider scope/reach A whistle-blowing / speaking up mechanism to report fraud internally A central repository to record, monitor and escalate as appropriate

44 ©2005 Deloitte & Touche LLP. Private and confidential 44 Airline Fraud Survey 2006 Questions and answers

45 ©2006 Deloitte & Touche LLP. Private and confidential Airline Fraud Survey 2006 45 Statement of Responsibility Disclaimer Deloitte has made no attempt to verify the reliability of the information or representations provided to us by the organizations participating in the 2006 Airline Fraud Survey. This summary document is limited in nature, and does not comprehend all matters relating to the survey that might be pertinent to your self-assessment. We make no representation as to the sufficiency of this summary for your purposes. This document should not be viewed as a substitute for other forms of analysis that management should undertake in order to assess whether their internal controls, anti-fraud program or internal audit strategy are adequate or appropriate for the organizations purposes. The information in this report is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which might affect your personal finances or business, you should consult a qualified professional advisor. This document is solely for your informational purposes and internal use and you will not disclose it to any other person or entity. This document is prepared solely for presenting the key findings of the Airline Fraud Survey. Therefore you should not, without our prior written consent, refer to or use our name or this document for any other purpose, disclose them or refer to them in any prospectus or other document, or make them available or communicate them to any other party. No other party is entitled to rely on our document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document. THIS SUMMARY AND THE INFORMATION CONTAINED HEREIN IS PROVIDED AS IS, AND DELOITTE MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES REGARDING THIS REPORT OR THE INFORMATION. YOUR USE OF THIS REPORT AND INFORMATION IS AT YOUR OWN RISK. DELOITTE WILL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE DAMAGES OR OTHER DAMAGES, WHETHER IN AN ACTION OF CONTRACT, STATUTE, TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE) OR OTHERWISE, RELATING TO THE USE OF THIS REPORT OR INFORMATION. Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.

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