Outsmarting white-collar crime is a major goal for commercial lines’ carriers who want their customers to reduce risk, but with the right guidance and training, it may not be as difficult as it seems. 

The typical organization loses five percent of its annual revenue to fraud. Mostly unrecoverable, these losses often carry red flags. With some of these red flags relatively simple to identify, taking a preemptive approach to policies and procedures that can identify them has become an imperative.

“Fraudsters tend to get sloppy,” Michelle McHale-Adams, Partner at Plante Moran, told a group of insurers this week at the Insurance Accounting & System’s Association (IASA) educational conference and business show in San Antonio.  McHale-Adams presented attendees of the Accounting & Risk Finance track session, “Fraud Happens,” with several case studies to illustrate ways insurers can help their customers be more aware of potential, costly corporate fraud.

“Sometimes, it’s a matter of noticing slip-ups, missing information, or a form that has been recreated that uses the wrong fonts or indentation,” she said. “If you are aware of what you are looking for, it’s easier to spot abnormalities.”

McHale-Adams told the group that according to the Association of Certified Fraud Examiners, gambling (addiction) is the No. 1 incentive to commit corporate crime, with the typical scheme’s time duration approximately 18 months. Approximately 5 percent of annual revenue is lost to fraud each year, with the typical type of fraud being asset misappropriation representing 83 percent of the 2016 cases to date). Kick-back schemes and conflicts of interest are also common.

The number-one industry impacted by fraud is mining, largely due to special and precious metals.

“Not surprisingly, no industry is immune to fraud, even tattoo parlors,” McHale-Adams said.  “But this is a surprising fact:  across all markets, 95 percent of convicted fraudsters have a clean employment record.

Such was the case of the largest municipal fraud in history, involving a long-term, respected employee of Dixon, Ill. who moved up in the ranks over a period of close to 30 years to the position of comptroller, and pleaded guilty to embezzling close to $53 million to support her championship quarter horse breeding operation.  A Dixon native, Rita Crundwell opened a secret bank account designed to look like a city account, and listed herself as the only signatory. Dixon’s auditor, who knew and trusted Crundwell, never questioned the municipality’s financial statements.  However, while she was on an extended vacation, Dixon’s city clerk, who served as acting comptroller in Crundwell's absence, discovered the account, noticed many irregularities, and many checks written on it.

“Typically, the higher up in any organization, the more control the executive has, and the less likely lower-level employees will report suspected fraud,” she said.

Insurers covering such instances of fraud are certainly interested in working with the client to educate on prevention measures, for example, established review practices/processes that include how to look for variances in bookkeeping, financial reporting and more, said McHale-Adams.

Occupational fraud is commonly separated into three categories: corruption, asset misappropriateion and financial statement fraud. Among the many types of fraud insurers need to watch for:

  • Check/credit card fraud
  • Online cybercrimes
  • Cash theft
  • Assets/inventory/services theft
  • Skimming
  • Payroll/expense reimbursement
  • Bribes/kickbacks
  • Billing schemes (shell companies)
  • Contract/procurement manipulation
  • Inferior goods substitutions
  • Altered account reconciliations
  • Fraudulent journal entries
  • Favorable loan terms

The technologies in cybercrime, such as spoofing, are more sophisticated than ever, advised McHale-Adams, as are the cyber criminals.  “These are not amateurs; in fact, they are organized professionals, usually originating from overseas. They know who you are and use what they have learned about you to lure you into a sense of false security.”
The example given was an employee in an insurer’s finance department who received an urgent (fake) email from an internal executive requesting a wire transfer. When the employee did not immediately respond, she received further, more threatening emails. “If the insurer has established and follows internal control processes, the outcome has a greater likelihood of being a positive one,” pointed out McHale-Adams.

Such an internal fraud program should include oversight, identification, evaluation, remediation, communication, education, monitoring and review.

“Trust is not an internal control, so we remind insurers to tell their customers to trust, but verify,” concluded McHaLe-Adams. “Also, ask random and periodic questions that the respondent should be able to answer relatively quickly—if the respondent becomes defensive or delays answering, that’s a red flag. Finally, it’s important for insurers to instruct their customers to keep an open-door policy, so if a lower-level employee suspects something, they can feel free to come forward.” 

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