Training Your Employees to Spot Fraud

If you're a business owner, you know fighting fraud is an ongoing struggle. It's not a battle where you can take prescribed steps and then declare victory, because bad actors are always trying to subvert efforts to prevent and detect fraud.  

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Training Your Employees to Spot Fraud

May 14, 2018

Training Your Employees to Spot Fraud

If you're a business owner, you know fighting fraud is an ongoing struggle. It's not a battle where you can take prescribed steps and then declare victory, because bad actors are always trying to subvert efforts to prevent and detect fraud.

“Long gone are the days when [fraud] was viewed as an isolated incident of bad behavior, a costly nuisance, or a mere compliance issue,” notes the PwC Global Economic Crime and Fraud Survey 2018 Pulling Fraud Out of the Shadows. “That’s because the scale and impact of fraud has grown so significantly in [our] digitally enabled world. Indeed, it can almost be seen as a big business in its own right—one that is tech-enabled, innovative, opportunistic and pervasive. Think of it as the biggest competitor you didn’t know you had.”

In fact, “organizations worldwide lose an estimated five percent of their annual revenues to fraud,” according to the Report to the Nations’ 2018 Global Study on Occupational Fraud and Abuse by the Association of Certified Fraud. The global nature of the problem helps explain the existence of International Fraud Awareness Week (November 11-17 in 2018), which is designed to “minimize the impact of fraud by promoting anti-fraud awareness and education.” Most notably, the organizers offer a rich set of online resources that help business owners combat the issue.

Employees: your best fraud prevention resource

While thinking about the problem of fraud can be potentially overwhelming, especially for small business owners who don't have the resources of large corporations, there is good news. With the right training and education, your employees and staff can be your best asset in terms of preventing and detecting fraud.

You're most likely to detect suspicious behavior if it's a group effort. Less obvious, but no less important, is that fraud training and education communicates your company's commitment to ethical operations. Training employees to combat fraud also has the potential to boost morale, because it makes your staff a part of the solution, as opposed to mere bystanders.

Of course, to implement an effective training program, you first need to determine the policies and procedures that need to be in place at your business. Employees should know what constitutes fraud, be able to recognize red flags for common types of fraud, and understand how fraud has the potential to harm everyone in the organization (i.e. resulting in layoffs, for example).

Reporting Fraud: The next steps

Once fraud is detected, employees need to know what to do next. They need a way or a place to report it, like a hotline or anonymous mailbox. Or if a customer is suspected of engaging in fraudulent behavior, you want to encourage face-to-face sharing of tips and information so staffers report potential issues to managers, supervisors or ownership in a timely fashion.

Notably, the above-referenced Report to the Nations advises that tips are by far the most common method by which fraud is detected at a business. Moreover, employees provide over half of the tips.

Better yet, arming employees with the knowledge needed to fight fraud isn't necessarily costly or labor-intensive. In fact, the information and materials can be delivered through a combination of methods. Consider utilizing an in-house instructor from your Legal or Compliance department, for example, or an outside instructor. Educational resources can also be delivered via newsletter, Webinar, online or via e-mail. Train all new hires, and then offer periodic refresher training, as needed.

Card-not-present fraud

As for the different types of fraud your employees may encounter, it can take many forms and may often be perpetrated by customers. According to the LexisNexis® Risk Solutions True Cost of Fraud Study common types of fraud include fraudulent or unauthorized transactions (including the misuse of stolen payment methods, like credit and debit cards), as well as fraudulent requests for refunds or returns.

Fortunately, there are excellent tools to help combat credit card fraud. If you take card-not-present (CNP) orders or do a mail order/telephone order business, particular attention should be paid to the tools available. Fraudulent or unauthorized CNP transactions can lead to chargebacks and costs associated with issuing credits or reversals, not to mention lost revenue due to a damaged reputation and eroded consumer confidence.

Excellent tips for preventing CNP fraud can be found in the TSYS recent white paper titled Tips for Preventing Credit Card Fraud and Avoiding Chargebacks. To be sure, you and your employees want to make sure you take advantage of Address Verification Service (AVS), which, noted in a recent TSYS Blog, Protection from Credit Card Fraud, “verifies the identity of the person making the transaction by comparing the billing address they provide with the address on file at the financial institution that issued the credit card.” You also want to make sure you require CVC/CVC2/CVV/CVV2, the three- or four-digit number that appears on the back of credit cards.

Additionally, employees who interact with customers via the Web—or spend any time on company computers—should receive security training. For example, employees need to know not to email or text sensitive data or reveal private customer information in chat sessions. Also, staffers should be educated about the dangers of phishing, which involves fraudulent attempts to get personal or company information that can be used to perpetrate identity theft.

Card-present fraud

For front-line employees or staffers interacting with customers face-to-face, focus on card-present credit card fraud. Train employees to be on the alert for suspicious behavior, such as the purchase of:

  • Multiples of the same type of merchandise
  • Very expensive merchandise, without asking any questions about it
  • A wide array of merchandise, without regard to color/size/price

Also, employees should be cognizant of customers who make a purchase and leave, but then return later to make additional purchases, as well as those who attempt to rush or distract cashiers or make purchases shortly before closing time.

Employees should also note:

  • Never accept an expired credit card, a card that has been altered or a card that remains unsigned 
  • Verify that the card number on the terminal matches the account number on the card, and that the name and last four digits on the sales receipt match the name and last four digits on the card

Employee or internal fraud

Although employees may be your best defense against fraud, it’s also possible they could perpetrate fraud.

“Our survey revealed a significant increase in the share of economic crime committed by internal actors ... from 46% in 2016 to 52% in 2018,” notes the PwC 2018 survey referenced above. Internal actors include the vendors and other third parties you interact with, and a bad actor among them might be described as a 'frenemy' of your organization.

Tellingly, the most common behavioral red flags exhibited by employee/vendor perpetrators of fraud (as identified by the Report to the Nations) are: living beyond means (41%) and financial difficulties (29%), followed by unusually close association with a vendor or customer, excessive control issues or unwillingness to share duties, recent divorce or family problems or an attitude involving shrewd or unscrupulous behavior.

The success of anti-fraud controls

Dealing with fraud on any level is a disturbing thought, but anti-fraud controls really do make a difference. The Report to the Nations looked at 18 different fraud controls—a Code of Conduct was the most common, used by 80 percent of the companies surveyed—and found that “all 18 fraud controls analyzed were associated with lower fraud losses and faster detection [emphasis added].” In fact, establishing a Code of Conduct is associated with a 56 percent reduction in median loss, as compared to no control being in place. It’s also telling that a majority of companies reported providing fraud training for employees, as well as an anti-fraud policy.

When it comes to detecting fraud, start with your greatest and most effective resource; your employees. By providing training and knowledge, you not only can save yourself significant revenue, but a lot of stress as well.

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