Internal Fraud: The Weak Link in the Chain

Fraud impacts organisations of all sizes across a range of industries and geographies. Consequences can be direct, through financial losses, or indirect, through fines and reputational fallout. More than $7 billion was lost globally to internal fraud schemes in 2018, according to a report by the Association of Certified Fraud Examiners (ACFE)[i]. A survey conducted in the same year by PwC[ii] found that 49% of respondents had been victims of fraud or economic crime, a 36% rise from 2016. Addressing the risk of fraud is a key challenge for all organisations. Blockchain technology may provide a solution.

What are the most common types of internal fraud?

The ACFE report revealed that asset misappropriation — defined to include both the theft of company assets, such as cash or inventory and the misuse of company assets — was the most common type of fraud, representing 89% of reported cases with a median loss of $144,000. Financial statement fraud — which involves overstating assets, revenues and profits and understating liabilities, expenses and losses (or the opposite) — made up just 10% of cases but were the costliest, with a median loss of $800,000. Corruption — including bribery, economic extortion, and illegal gratuities — made up 38% of reported cases with the highest proportion found in the energy (53%), manufacturing (51%), and public (50%) sectors.

PwC’s survey data showed that 52% of fraud cases were committed by internal actors, 24% of which were senior management. Both ACFE and PwC highlighted a lack of oversight combined with a high-pressure work environment as providing the ideal conditions for fraudulent activity.

How do organisations currently address internal fraud?

Establishing a code of conduct and engaging with external as well as internal auditors are the most common anti-fraud measures taken by organisations. Employing the use of data monitoring tools also contributes to lower losses and faster detection. However, the PwC survey cited that 29% of organisations had spent at least twice as much on investigating and preventing fraud than was lost to it and 34% believed technology solutions were producing too many false positives. Moreover, the most common method of initial fraud detection did not rely on technology at all, relying instead on employee tips and whistleblowing, which represented 40% of cases reviewed by the ACFE.

Can blockchain technology help to combat internal fraud?

Blockchain is an anti-fraud technology by design. The essence of the technology is to serve as a shared and tamper-proof record of activities that are time-stamped and verified by a distributed network of computers. This provides a near real-time audit trail of information being exchanged. So even if fraudulent information is recorded on a blockchain, there is a simple way to identify and tag the associated transactions.

When documents such as financial statements, excel sheets and any other sensitive digital files that are prone to tampering are created, edited, stored, exchanged or destroyed, such activities can be automatically “logged” to a blockchain. These blockchain transactions can then be viewable to anyone (for full public accountability) or only to those granted permission to view or access the original files for inspection (such as external auditors or regulators). Potential fraudsters that are aware of this auditability and the permanence of these records are much less likely to carry out their desired schemes.

Blockchain should not be expected to solve all types of fraud, especially those that take place primarily offline, nor does it serve to detect or predict when fraud takes place. The technology nonetheless serves as a significant fraud disincentive and data integrity enforcement tool. Diginex has built a suite of fraud-focused data integrity solutions that are tackling real problems today, including the protection of migrant workers from corrupt employment practices and preventing tampering in real estate investment transactions.

For more information about how we can help your organisation address the risks of fraud using blockchain technology, please contact Thomas Glucksmann, our Tokyo-based Head of Data Management Solutions.

[i] Association of Certified Fraud Examiners 2018 Report to the Nations. Analysed 2600 real cases of occupational fraud from companies across 125 territories and 23 industries.

[ii] PwC Global Economic Crime and Fraud Survey 2018. Data were gathered from 7,200 respondents across 123 different territories.