South Africa: Beware The Trojan Horse: Fraudsters Hiding In Plain Sight

Last Updated: 22 November 2013
Article by   KPMG

KPMG International report reveals culprits are predominantly an employee colluding with others inside and outside their organization.

In these turbulent economic times businesses and investors alike should be aware that fraudsters can come in all shapes and sizes.  Who commits fraud?  What characteristics should you look for?  Most commonly, they are employed by the victim organization (61 percent) posing as something of a Trojan Horse.  In 70 percent of frauds, the perpetrator found it tough to go solo and colluded with others.  Of these, 42 percent took their time before committing a fraudulent act having been employed for more than six years by the victim organization.  All of this is according to the latest study by KPMG International entitled Profiles of a Fraudster

"Fraud specialists have long debated whether it is possible to develop a profile of a fraudster that is accurate enough to enable organizations to catch people in the act of fraud or even beforehand," says Déan Friedman, leader of KPMG's Investigations Network in the Europe, Middle East and Africa region for the Global Forensic practice.  "The prediction of a crime before it occurs is, at least for now, the subject of science fiction.  But an analysis of the constantly changing nature of fraud and the fraudster can help organizations stiffen their defenses against these criminal activities.  Forewarned is forearmed."

Characteristics of the typical swindler

  • 36 to 45 years of age (with 70 percent of fraudsters between the ages of 36 and 55).
  • Employed in an executive, finance, operations or sales/marketing function.
  • Holds a managerial or executive position (25 and 29 percent respectively).
  • Employed in the organization in excess of six years.
  • An opportunistic fraudster – first-time offender, trusted employee, in a position of responsibility, perpetrator's alleged behavior comes as a surprise to others.  Predators, someone who seeks out an organization to start a scheme almost immediately upon being hired and deliberately defrauds the organization with little remorse, are less common.

Response of the fraudster to the rapid flux of the business world

The report also reveals that the three drivers of fraud – motivation, opportunity and rationale – continue to be timeless themes. Capability; however, continually changes, causing the profile of the fraudster to alter too.  Organizations need to understand the ever-changing behavior of the fraudster if they are to mitigate the risk of fraud and then to respond quickly to such crimes if they occur. 

"The intriguing thing about fraud is that it is always morphing, like a strain of flu; you can cure today's strain, but next year it evolves into something as bad if not worse," said Phil Ostwalt, Global Coordinator for Investigations for the Global Forensic practice at KPMG and Investigations leader in the United States.

One major change is the growing use of technology by fraudsters, and not just in the technologically advanced countries, such as the US.  A concern for all business is that we are about to see a new generation of people, able to use more technology and with access to much more information than past generations.  All of which points to a new era for fraud and illegal activities. 

"Companies can't stand still and allow yesterday's controls to address today's or tomorrow's fraudster," continues Ostwalt.  "Technology not only enables the fraudster, but also enables the organization to defend itself.  Newer approaches like data analytics and data mining give the company a much better chance of catching the fraudster."

The opportunistic fraudster

The study found that over half (54 percent) of the frauds were facilitated by weak internal controls.  This suggests that if many organizations tightened controls and the supervision of employees, the opportunity for fraud would be severely curtailed.  Too often, organizations do not focus on fraud prevention by setting up the right controls and learn their lesson too late.

But strong internal controls will not prevent all fraud.  For 20 percent of the fraudsters, the fraud was committed recklessly, regardless of the controls.  And for 11 percent, fraudsters colluded to circumvent the controls.  In these cases, the fraudster may be somebody who understands the controls and knows how to manipulate them or who finds a flaw in the controls by accident and exploits them. 

Other key survey findings

  • It's all about the money for most:  The overwhelming reason for committing fraud is financial.  Out of a total of 1,082 motivations listed, 614 were motives of greed, financial gain and financial difficulty, and a further 114 were related to business targets.  The only non-financial motive that comes close is sheer eagerness (or "because I can") with 106.
  • No need to play by the rules: A third of the fraudsters (36 percent) exhibited a sense of superiority as rationale for their fraud.  This may be linked to the fact that 29 percent of the frauds were committed by executive directors, the largest single job title.
  • Common crimes: The most prevalent fraud is misappropriation of assets (56 percent), of which embezzlement comprises 40 percent and procurement fraud makes up 27 percent.  The second most prevalent fraud is revenue of assets gained by fraudulent or illegal acts (24 percent).
  • Not a solo act: When acting in collaboration, 74 percent of frauds were perpetrated over one to five years.   With regard to value, 18 percent of frauds had a total value of $50,000 – 200,000. In 43% of the cases, the financial impact of victims exceeded $500,000, exceeding $5,000,000 in 16% of these cases, more than fraudsters acting solo.

Culture of corruption

To a large extent, culture influences our actions and determines what we consider ethical and compliant behavior.  Therefore, it's interesting to note key regional differences in the survey findings.

  • At the global level, there were elements of bribery and corruption in one third of the frauds (33 percent).  This compares with the US (24 percent), China (48 percent), CIS (64 percent) and West Africa (67 percent).
  • Fraudsters in Canada, more than in other countries, try to avoid the risks of having an accomplice.
  • 50 percent of the investigated cases in the US occurred in a highly regulated environment, compared with 50 percent in China, 33 percent in CIS and none in West Africa.
  • There were more people committing fraud after working for the victim organization for only one to four years in the UK, Canada, Czech Republic and India, than in South Africa and Germany.

"Ultimately, the fraudster of tomorrow will depend on the opportunities of the day," said Ostwalt.  "Two decades ago, illicitly taking money from a bank was usually accomplished by a closely knit gang, sometimes using violent methods or forged signatures to achieve their ends.  The opportunities to rob a bank have been transformed by the internet, smart devices and the ability to analyse vast amounts of data.  While the fraud landscape has not changed significantly in recent years, companies need to watch the horizon over the next 18 months to see if a changing economy or environment affects its fraud risk."

About the survey

Data was gathered from fraud investigations conducted by KPMG member firms' forensic specialists in Europe, Middle East and Africa (EMA), the Americas, and Asia-Pacific between August 2011 and February 2013.  KPMG analyzed a total of 596 fraudsters who were involved in acts committed in 78 countries.  The survey examined "white collar" crime investigations conducted across the regions where the perpetrator was known and detailed contextual information on the crime available.  It incorporates the observations and views of KPMG Investigations leaders in 42 countries across the world. The report builds on the similar studies from 2011 and 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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