Article
Written by Alan Norton
Posted on 25/11/2019

What are the most common types of fraud?

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Several types of fraud plague the business world these days.

In addition to large companies, SMEs are also increasingly falling prey to malicious people. The economic damages they cause can be the coup de grace to a company. However, the danger can be significantly reduced given proper vigilance and other measures. A Belgian company recently realised that it had paid 1.2 million euros worth of heating oil invoices over six years. A substantial sum, especially because it hadn't used a drop of heating oil during all those years. An employee kept approving the fraudulent invoices. Fictitious invoicing flows are often the basis of the ‘disappearing act’.

Nevertheless, one shouldn’t always look for the source of fraud internally.

Outsiders are taking advantage of the increased availability of online information in order to silently infiltrate a company. In doing so, they operate in increasingly brazen and creative ways.

Still, there are many steps you can take to stop potential fraudsters in their tracks. Beware of these most common types of fraud and read about how to detect or prevent them.

1. Employee fraud

This type of fraud is often situated in the financial department, accounting or internal auditing. This usually concerns higher-level employees, because the higher the position, the closer one is to the money. Furthermore, they know how to circumvent the company’s monitoring and security mechanisms. They cleverly transfer money to an account which they control directly or indirectly.

It always starts small with a relatively insignificant amount. But the amount will increase in each subsequent transaction. As long as no one asks any questions, these activities will continue uninterrupted. Until the amount has become too large to remain unnoticed.

How to prevent this?

Shared responsibility in paying suppliers is crucial. A double signature system allows you to incorporate an extra level of security.

A small internal audit will give you insight into how payments are carried out in your company and who is authorised to transfer money. This will quickly reveal any weaknesses.

2. CEO fraud and social engineering

Digital fraud - also known as internet fraud - increasingly involves CEO fraud.

Hackers target and manipulate the weakest link in a company, humans, to release sensitive information or unintentionally carry out harmful activities. In doing so, fraudsters engage in ‘social engineering’: they use the growing availability of information to infiltrate a company.

A practical example will illustrate their ingenuity:

A financial officer at a multinational company receives a personal email from the CEO. He is asked to participate in an important acquisition abroad, which must be kept secret for the time being. In order to close the deal, a sum of 500,000 euros must be allocated quickly - and discretely. The employee feels flattered by the CEO’s trust in him. Without asking any questions, he transfers the amount to the specified account. Only a few weeks later does it become apparent that there was no such acquisition.

A new type of fraud using ‘social engineering’ came to light recently, when it was announced that several European retail chains had been defrauded for a total of 9.1 million euros. Fraudsters succeeded in impersonating representatives of large brands in order to get their hands-on large amounts of money.

How to prevent this? Choose an open company culture, so that the supervisor is approached for clarification in case of the slightest doubt. CEO fraud also often involves intermediaries who present themselves as important businessmen, managers or lawyers. As such, it is very important to always do a background check on business contacts, so you know who you’re dealing with.

3. Invoice fraud

Invoice fraud is a type of fraud that’s been going on for quite a while now.

Paper invoices sent by mail are intercepted, and the account number is changed. The amount is transferred to a fraudulent account. The money, and usually the culprits, have of course disappeared by the time anyone catches on.

There is now also a digital version of invoice fraud.

A hacker infiltrates a supplier’s information system and intercepts invoice emails or other accounting data. The IT system can also be infected with a virus. This is generally a ‘worm’, which allows one to remotely change an account number in the system or in emails.

How to prevent this? Always choose digital invoices, which are more difficult to intercept.

Link account numbers to companies in your books. If you suddenly receive an invoice with a different account number, you will automatically be notified of this. Contact your supplier and ask if the change is correct.

4. Fraud via the Companies House register

A well-thought-out type of fraud abuses the Companies House register in order to deceive companies. A fraudulent person has themselves appointed as director via an official publication. They do this by printing a standard form and posting it off to Companies House, presenting themselves as the new managing director.

The fact that the signature of the current director has been forged on the form goes unnoticed. A little while later, the fraudster is listed as the new managing director in the Companies House register. A company’s Articles of Association, which any bank can request, list which people can act as a representative of the company. With a bit of skill, the fraudster can then remove quite a bit of capital from a company’s accounts.

How to prevent this?

Vigilance is (the) key. Keep a close eye on changes to the management team or Articles of Association of your business contacts. This will immediately inform you of a change to a mandate. You can then take immediate action if it becomes apparent that this is a fraud attempt.

These are just some of the examples of the ways that fraudsters will attempt to de-fraud you or your business.

Do you need more information on how to combat fraud? Get in touch today to see how we can help bolster your defences against fraud and financial crime.