1. Financial Services Fraud
Jonathan B. Wolfe, CPA Director, Accume Partners

2. Agenda Overview Fraud within Financial Services
Definition of Operational Fraud
Fraud Statistics
Fraud within Financial Services
Banking, Insurance, Investment Advisors/Broker Dealers
Risk Factors
What can an internal auditor do?
Fraud Risk Assessment
Employ Best Practices
Fraud Resources

3. Financial Services Fraud
Overview

4. Definition of Occupational Fraud
The term “Occupational Fraud” may be defined as:
“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

5. Definition of Occupational Fraud
All occupational fraud schemes have four key elements in common. The activity:
is clandestine;
violates the perpetrator’s fiduciary duties to the victim organization;
is committed for the purpose of direct or indirect financial benefit to the perpetrator; and
costs the employing organization assets, revenue, or reserves.

6. Occupational Fraud
All occupational frauds fall into one of three major categories:
Asset Misappropriations, which involve the theft or misuse of an organization’s assets.
Corruption, in which fraudsters wrongfully use their influence in a business transaction in order to procure some benefit for themselves or another person, contrary to their duty to their employer or the rights of another.
Fraudulent Statements, which generally involve falsification of an organization’s financial statements.

7. Fraud Statistics Source: 2006 Association of Certified Fraud Examiners
Fraud Statistics Source: Association of Certified Fraud Examiners (ACFE) Report to the Nation
10- The Sum of Percentage in this chart exceeds 100% because in some cases respondents identified more than one detection method.

8. Fraud Statistics Source: 2006 ACFE Report to the Nation

9. Fraud Statistics Source: 2006 ACFE Report to the Nation
Banking and Financial Services Industry has the highest number of cases
Insurance was ranked 5th.

10. Fraud Statistics Source: 2006 ACFE Report to the Nation
Where is it happening?
Accounting, Finance and Executives represents 55% of the cases.
While frauds committed by those in the highest age groups were the most costly on average, over two-thirds of the frauds reported were committed by employees in the age group. The median age among perpetrators was 42.
Most of the perpetrators were either employees (41.2%) or managers (39.5%). Owner/executives (19.3%).

11. Fraud Statistics – Median Loss Source: 2006 ACFE Report to the Nation

12. Financial Services Fraud
Fraud Within Financial Services

13. Fraud Within Financial Services Source: 2006 ACFE Report to the Nation
Banking and Financial Services Fraud
Not surprisingly, two of the three most common schemes in the banking and financial services industry were cash larceny and skimming. These schemes generally involve the physical theft of incoming cash and cash on hand (for example, in a vault).
Among the 23 non-cash cases in this industry, the most common type of scheme involved the theft of proprietary information about bank customers.
Of the 148 cases, 80% were prosecuted.

14. Fraud Within Financial Services Source: 2006 ACFE Report to the Nation
Insurance Fraud
Fraudulent billings represented nearly 30% of the insurance industry cases. These cases were nearly twice as common as the next-most-frequently reported scheme, which was check tampering.
Conversely, nearly 70% of the organizations in the insurance industry conducted fraud training for their employees and managers — a higher rate than for any other industry
Of the 78 cases, 74% were prosecuted.

15. Risk Factors Incentives or pressures Opportunities
Attitudes or rationalizations

16. Industry Fraud – Banking & Mortgage Banking
Notary
Volume pressures – Loans, Deposits
Appraisers
Artificially inflating home values
Check Fraud
Participating financial institutions can report all checking accounts "closed for cause" to a central database, called ChexSystems. This program prevents people, who have outstanding checks due to retailers, from opening new accounts.
Black Market Peso
Peso brokers laundering monies through the purchase of foreign goods.

17. Industry Fraud - Insurance
Premium Fraud
Premium fraud occurs when employers fraudulently misstate the number of employees or the nature of their work, such as reporting a roofer as an office worker.
Billing Fraud
Ohio pain management specialist threatened to deny desperate patients painkillers unless they let him use their names to bill insurance companies more than $60 million in narcotic drugs and expensive diagnostic tests he never gave. Some patients grew addicted, and two died of overdoses. He also fraudulently billed insurers for more than 100 patients a day for years. He received life in federal prison.
Employer or Insurance Carrier Fraud
In this type of fraud, employers or employees of an insurance carrier will make a false statement regarding a workers entitlement to benefits. The statement is designed to discourage the worker from pursuing a legitimate claim

18. Industry Fraud – Investment Advisors and Broker Dealers
Churning – Excessive Commission Scams
Discretionary Accounts
3% or more commissions
Breakpoint Sales – Fee Scales
Over Concentration - brokers are obligated to advise their clients to diversify in order to decrease risk.
House Stocks - A "house stock" is essentially a stock that the firm wants people to buy in order to artificially increase its value.
Failure to Place an Order - broker is trying to inflate the value of a stock as part of an unethical investment scheme, it may be against his interests to sell the stock.
Unauthorized Trades - brokers who have had discretionary trading contracts with their clients may take advantage of their freedom and purchase "house stocks", or engage in other illicit trading practices designed to increase their earnings at the expense of their client.

19. Financial Services Fraud
What can an Internal Auditor do?

20. What can an Internal Auditor do?
Fraud Risk Assessment
Systematic Rather Than Haphazard or Informal
Address
Financial reporting
Misappropriation of assets
Expenditures and liabilities for improper purposes
Fraudulently obtained revenues and assets, and costs and expenses avoided by fraud
Fraud by senior management
Extend to Business Unit and Significant Account Levels
Likelihood: Identify Fraud Risks That Are “More Than Remote”
Significance: Identify Fraud Risks That Are “More Than Inconsequential in Amount:
Consider Risks of Management Override

21. What can an Internal Auditor do?
Employ Best Practices
Develop a Fraud Policy
Enhance Audit Programs
Leverage your Sarbanes Oxley work
Educate Audit Committee and Boards
Evaluate Code of Ethics
Provide annual training programs
Integrate fraud monitoring into your enterprise risk management program
Implement a whistle blower policy
Discuss SAS 99 with your external auditors
Outside resources – CFEs, consultants
Technology – ACL, data mining

22. Does Internal Audit Make a Difference. YES
Does Internal Audit Make a Difference? YES! Source: ACFE Report to the Nation
Internal audits had a positive correlation with both time to detection and median loss. Fifty- nine percent of victim organizations had an internal audit or fraud examination department at the time of the fraud.
Similarly, organizations with internal audit departments detected their frauds in 18 months, as opposed to 24 months for those without internal audit departments.

23. Fraud Resources The Institute of Internal Auditors
Association of Certified Fraud Examiners
Securities and Exchange Commission
The Treasury Department
National White Collar Crime Center

24. Financial Services Fraud
Questions?