The Open Risk Manual defines fraud risk as unexpected financial, material, or reputational loss as the result of fraudulent activities of persons internal or external to the organisation. It noted that fraud risk is customarily split into internal and external fraud:
Internal Fraud is a recognized risk category in regulatory frameworks worldwide (Basel II/Basel III standards). The Basel II definition states more specifically: Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involves at least one internal party.
Deloitte noted that according to the 2016 Report to the Nations by the Association of Certified Fraud Examiners, professional fraud examiners estimate that a typical organisation loses 5% of its revenue to fraud. In a competitive market, that could be your profit margin! The median losses from fraud in Asia-Pacific are US$245,000 – 104% more than that of the US.
James Ellender, director with Futurum Research, shares his perspective on fraud risks in financial services globally and in the financial services industry in Asia.
Define fraud risk in the financial services industry in Asia
James Ellender: Money laundering in the form of borrowed accounts and applications for the movement of funds through international transactions is common. Impersonating senior members of an organisation to make an urgent transfer or going across to forge documents for invoices to be paid, revised contracts or invoices with new payment details.
Insurance fraud uses high compensation, critical illness policy and accounts that suffer to assist the policyholder. There is also cryptocurrency fraud which is hugely on the rise now. It is decentralized and currently unregulated in many forms.
Where fraud risks most prevalent in Asia
James Ellender: I think it is prevalent globally. With Covid, limited face-to-face interactions create an opportunity.
Deepfake technology uses artificial intelligence and machine learning to generate a likeness around someone and then make it seem real. It can create fraudulent claims from deceased persons and new account application fraud. Synthetic fraud or identity fraud create a person who does not actually exist and then utilize the information to their advantage.
Main catalysts for the rise and fraud cases
James Ellender: There are several different catalysts but mainly means, motive and opportunity. Digital transformation and technology provide the means and there is certainly an inability on the banks and the financial services to adjust to this technology quickly enough.
Look internally at the signal detection to understand what is occurring, how technology moves forward and how the fraudsters are moving one step ahead to look at motives. Opportunity encourages desperate criminals to act such as offering lower interest rates and new ways to invest to lure victims.
What’s fuelling the persistence
James Ellender: Within risk, a model called the deficit model of risk communication creates awareness. The key characteristic of this model is to go out to the masses, treat everybody as a blank canvas, educate from a very basic level. This model is evolving and changing, and more targeted towards people.
The financial services banking and the insurance industry is within the top 3 most regulated industries in the world alongside food consumption, logistics and healthcare. Money spent on the regulation and the coordination of the system globally, and the interoperability between different countries and banks is quite strong.
How to better manage or mitigate risks in 2022
James Ellender: From a regulatory perspective, keeping up to date with current trends and technology and ensuring alternative investments and brokers that work on alternative investments or work in the crypto space is covered by the regulations.
From a financial perspective, adapting to evolving digital and cyber fraud risk. If you have too stringent fraud prevention measures, it is going to frustrate transactions and customers.
Advice for moving forward
James Ellender: Fraud is a moving target which means countering fraud is complicated.
Sharing information, employing people more expert than the fraudsters and cybercriminals, and ensuring there is a rotation of experience internally to keep moving one step ahead of the direction fraud is going in.
Criminals copy techniques that have been successful and just adapt them to make them work in the new environment.
