What is Financial Fraud? How to Measure & Deduct Financial Frauds?

The advancement of new technologies has been beneficial for multiple disciplines or fields of study such as medicine, genetics, etc. However, this tool gives many more options when committing financial crimes or fraud.

Financial frauds have been and continue to be one of the most studied topics throughout history and it is no wonder that they must be studied and analyzed with precision in order to understand their forms, consequences and, if possible, prevent them from returning to happen in the near future.

In this article, I will talk about what financial frauds are, what types are there and what have been the most talked about throughout history. In addition, I will tell you the method used by financial criminals to carry out the scam.

Definition of Fraud

Fraud is a crime designed to obtain an economic benefit of its own through illegal means despite the harm of others. Financial fraud occurs in a professional and economic environment. The use of violence is not carried out, but if economic losses are caused to companies, companies, investors and employees.

It is also defined as the intentional act on the part of one or more individuals within the administration, employees, or third parties, which results in a misrepresentation of the financial statements.

Importance of Financial Fraud

Financial fraud is one of the great challenges that large companies face today. Criminals are becoming more specialized due to the great advances in new technologies. We have stopped imagining a common thief with his head covered to enter to rob in a bank. Financial criminals nowadays know much more sophisticated techniques to carry out all kinds of scams.

It is estimated that the losses of banks due to fraudulent deposits or other types of financial fraud are millionaires. One of the most common forms of financial crime is counterfeiting. It consists of modifying the information of a check or any document issued by a bank including public entities, another beneficiary, etc. There are several types of counterfeiting that we will deal with within the next point.

Types of Financial Fraud

The types of financial crimes are innumerable. On the other hand, new forms of crime can always appear, despite this, then I’ll tell you the most common ones:

• Kiting: This fraud is known as the concealment of a lack of cash through the overvaluation of cash taking advantage of the periods of transfers between accounts. Counterfeiting is done when a check is issued by an employee without proper authorization and it is stolen and cashed by another person possibly with false identification.
• Counterfeiting: Counterfeiting can also be total, that is, the person who is going to carry out the fraudulent activity falsifies this document completely. It can be done by many different methods.
• You can also change the name of the beneficiary in the checks or the amount that must be paid.
• Money laundering: This type of crime is committed when you get money from illegal activities and you want to incorporate it into the banking system.

These are some of the most common types of financial fraud however, as I mentioned earlier, there are millions of ways to fraudulently commit crimes. In addition, as new technologies are developed, new techniques are developed, which is why it is so important to have protection measures against fraud. 

Measures against Financial Fraud in Companies

• Conducting internal and external audits and controls
• Drafting corporate ethics codes
• Information access controls
• Detailed definition of tasks, roles, responsibilities, positions, etc.
• Labor rotation
• Periodic and surprise checks
• Have informants among the staff
• Training programs
• Review the background of contracted personnel and hire.
• Maintain an ethical code to prevent fraud.
• Take care of the work environment, maintain employee motivation, that is, make employees feel that they share values ​​with the company so that they can identify with it and not commit fraud.
• Reward the involvement and effort of employees.

How to detect a Financial Fraud

• The internal control systems of financial institutions are a fundamental tool for the prevention of financial fraud. Banking entities trust them and that is to help detect fraud and protect the assets of the organization. In addition, they guarantee the accuracy of the financial information and guarantee compliance with the requirements and legal regulations of the same.
• As I mentioned earlier, these controls are fundamental, however, they may not be enough to avoid financial fraud. The following aspects must also be taken into account.
• Employees: Workers of a company or entity should know the risks of fraud they face, but above all be involved in the fight against them. For this, it is important to maintain a good working climate in which employees see their effort and involvement recognized.
• The internal control systems, as mentioned above, are very important, but more aware workers are even more so.
• If we stop to think, it is not the processes or programs that commit the frauds but people who can work in the company itself and therefore are also those who can avoid them.
• The truth is that companies that consider their employees as the main asset for the fight against financial fraud obtain better results and avoid any more financial fraud throughout the year.
• When employees are aware of the risks and consequences of financial crimes, not only do they not commit them, but many people, when they observe criminal behavior in other colleagues, denounce it.
• The training of employees is essential so that they can fight against financial fraud.
• Identify the risks of fraud: The Company must know them to know what they are facing. Many companies tend to foresee the losses of fraud based on the losses of the previous year and this method does not take into account the dynamic nature of financial fraud.
• Use computer programs to identify unusual patterns of behavior that may correspond to fraudulent activities. This is essential to be protected.
• Once the program detects suspicious behavior patterns, these must be analyzed to verify if they are financial frauds or not.

3 Major Financial Frauds in history

There have been many financial crimes that have been committed throughout history. Sometimes, in order to understand and therefore prevent financial fraud, it is necessary to study the past, history in order to understand its nature, how they were committed. Obviously, in order to understand them, we must take into account the historical moment in which we find ourselves, the tools available to them, the culture, etc.

Carlo Ponzi: He was an Italian con man. He is the famous creator of the pyramid scheme or “Ponzi method” in which a group of investors is paid interest on the money of the new investors. The system only works if it manages to attract new investors. His most important blow was the creation of the Securities Exchange Company.

Peter Young: He was a mutual fund manager who started investing money from the three most important funds of the bank in high-risk stocks. These reported great profitability to the bank, but when the investors found out they withdrew their funds in a massive way and the bank had big losses.

Enron Corporation: One of the largest energy companies in the world, sold thousands of shares and falsified thousands of documents to disguise their profitability when the reality is that they were in bankruptcy.

In the year 2000, this company managed to leave Fortune magazine as the seventh-largest company in the United States. However, they uncovered their fraudulent activities that eventually led to bankruptcy. It was the biggest financial scandal that lived to date in the North American country. Its president died of a heart attack when all this was discovered.