CHAPTER 2
Concepts and Dynamics of Fraud

I find that the harder I work, the more luck I seem to have.

—Thomas Jefferson

  INTRODUCTION

Having engaged with definitions and made reasonable discourse on certain key points (misrepresentation, for example) we now begin to deal with fraud contexts and scenarios in earnest.

In the main, in fraud there is no ‘scene of crime’ and often there are no mistakes to follow. This is a major reason why there have been such enormous hurdles in tackling the problem. But these hurdles are in effect man-made. That is still a true entity and the existing state of the norm in investigating crime even when fraud activity took a new turn, when fraud visibly and palpably was worked into alignment with cybercrime.

A recent development also covered in this chapter is the speed and rapidity of frauds in contexts of finance and credit cards, with the unenviable task of reconciling security against fraud with the insatiable need to have the business edge against other banks and hence leading a strategy for ‘Faster Payments.’

Exposing Fraud must, if it is to be taken to its full value, also bring out the shortcomings and wanton political hurdles by some in enforcement, and those with formal responsibilities to investigate, but who habitually or culturally by organisation fail to do so, and by conclusive fact, fail the victim of fraud. This is not to be critical for the sake of it. It is a simple fact that victims of fraud are not interested in hubristic politicised boasting by enforcement authorities. Instead they want action. Therefore this is to inform some simple needs for attitude adjustment to the public as opposed to promoting empires that produce little. Often also with the ever-present excuses of either ‘lack of funding’ or oddly constructed priorities in crime enforcement policy, or simply refusing to do what they claim to do.

Incidentally, this chapter also may help you to decide which counter-fraud industry to work in (insurance, finance, the banks, legal, main-stream industry) and you MUST ‘know your business’.

  2.1 COSTS OF FRAUD – INCLUDING THE HIDDEN ONES 
WE DON’T LIKE TO MENTION

I will be brief but pertinent at this point. I will also spare you from another dry repetition of pitching statistics with hackneyed statements of fraud losses which will be of no use by next week, and most of which evade the more inherent hidden issues of fraud ‘losses’.

There are excellent resources (which pitch some scary realities) in regard to the cost of fraud. The Association of Certified Fraud Examiners (ACFE) publish their annual Report to the Nations and base their research findings on very comprehensive qualitative terms of reference. It is accepted as the foremost report of its kind. Again, the point is made that this book focuses on fraud and, whilst there are publications to report corruption levels, these are not of the same construct. Likewise, measurement of money laundering is not and in fact cannot be measured in the same way as fraud.

But the failure to learn from or even think about previous fraud occurrences is a major part of the reason why, despite more technological advances and armies of risk experts, there is more fraud and money laundering in the world than ever before. The costs never lessen. Also, it is true to say that corporations actually refuse to address previous fraud incidents to inform new counter-fraud policy planning because of reputational risk, for one reason. A brief repetition of an earlier comment will do no harm: that to be a victim of fraud is to be made a fool of. This point applies to a corporate identity as well as the individual. Too many businesses view fraud losses as mere business losses instead of criminal losses, and hence do not think in terms of crime prevention (which is not so complicated if one chooses to) and prefer to spend massive amounts on marketing to gain more revenues yet are prepared to stand by and watch some of these revenues fall to fraud. Incredibly, though, we insist in maintaining this ‘pool’ of availability for fraudsters, or a swamp of business loss and that swamp is endlessly refilled and replenished – we fail to TRULY learn from past mistakes, because FRAUD is embarrassing and something we don’t want others to know about. Internally we just want to move on. But there is an absolute duty to know why it happened!

Hence online and corporate fraud remain a serious concern for global business. But part of the problem in tackling the ever-evolving nature of fraud often comes from the very techniques but more importantly, lacklustre approaches used to prevent it.

The global market research and survey company, Frost & Sullivan, estimates that there are 2.28 million information security professionals worldwide. This figure is expected to increase to nearly 4.2 million by the end of 2015. Consequently therefore, the information security industry is going through an exponential growth rate. Current worldwide growth rate is billed at 21%. The information security industry is currently over $100B ($60B in US, $20B UK, $4.5B Japan, over $1.5B in India).

So acknowledgement and ‘credit’ where it is due, must go the financial institutions for the marked increase in fraud prevention controls over the past 3 years, especially formulated to grow with the surge in popularity of social media, e-commerce, and mobile services. E-finance is proof of the benefits consumers are enjoying from information and communication technologies. But there is also the creation of a worthless fraud prevention sub-market of its own; the creature ‘solutions’ based IT resources being a means of leeching off the need for security and fraud prevention; namely a fixation on selling as opposed to securing.

Conversely, these same technologies can create harm, when personal consumer information is stolen by way of fraud and identity theft. Or is it purely down to the ‘technologies’? Studies show that information systems workers, as expert as they are in matters technical and analytical, lack basic security knowledge. Proof? Since 2005, an estimated 543 million records have been lost globally from over 2,800 data breaches, and identity theft caused $13.3 billion in consumer financial loss in 2011 (BJS, 2011). That is a cost of fraud as well.

Thus it is a major challenge for policy makers whose job is to keep on the right side of the law while trying not to lose the business, by balancing ex-ante regulation with ex-post litigation to protect both consumer and commercial interests.

Furthermore, a survey among lawyers in the USA, UK and Europe shows a serious concern about cloud computing services (using software as a service: users rent use of servers; cloud providers manage the infrastructure and platforms on which the applications run). Lawyers clearly state that data in the cloud is a ‘business risk’. Yes that is so, but when we look beyond the business risk, there emanates a conflict, which in turn equals risk of loss to fraud and puts companies at risk of massive penalties because of ‘naturally occurring’ data protection transgressions. Legal experts contacted by Future Intelligence (independent IT expert analysts) say that in its current state, the cloud technology system (worth £14.4 billion globally to the technology companies promoting it), puts companies trusting personal data in breach of data protection legislation.

But the legal experts have also uncovered the potential for corporate fraud. The natural cross-over opens a can of worms which squirm off in different directions: data fraud, breaches of auditing standards (which could constitute an offence of fraud in its own right by failing to disclose information if cover-up attempts were made) financial statement fraud, ‘skimming’ or understated sale or debtor payments.

Therefore, getting behind enemy lines, as opposed to following never ending sales-lines may warrant some thought. This is so because the battle plans drawn up by fraudsters vary as much as the countries in which they operate, some with single-cause fraud motives, or those who attack with a scatter of scams, cyber-attacks, and multi-layered, organised and systemically networked financial crime activity.

A TRILLION-DOLLAR WAR

Is there an inescapable link to fraud in order to fund drug habits? Afraid so. Many criminals have gone beyond shoplifting to do this and say ‘ID theft is the way to go’.

By some estimates, the war on drugs just in the USA has cost close to a trillion dollars. What has that vast expenditure bought? Very little. According to the government’s ‘Survey on Drug Use and Health’, more than 22 million Americans – nearly 9 % of the U.S. population – used illegal drugs in 2012.

And laundering drug money is often done online and by social networks. Hence, the amounts of money involved are de facto immeasurable, staggering figures (that fraud institutions and the ‘Big 4’ auditing companies are reluctant to admit to).

So where are the systems and ‘controls’ etc., which control this?

• Answer 1: The financial institutions cannot even agree on what fraud is half the time. The whole concept of fraud falls down when it gets to the...