Welcome to Fraud Awareness and Prevention training. Periodically you may find out about fraud when it hits the headlines. We often think “This will never happen to me!” In reality, fraud can and does occur to both businesses and individuals more frequently than we would like to imagine. The commonwealth’s business operations put it at risk of fraud every day. You play a critical role in protecting the commonwealth from this risk. Today we will discuss what fraud is, learn about the different types of fraud, how it is committed, as well as discuss the Fraud Triangle. We will also learn about the effects that fraud has, ways to spot and avoid it, and what to do if you suspect fraud. Fraud is the wrongful deception with the intent to gain personally or financially. It is to intentionally deceive another person in order to persuade them to part with something of value. Fraud can also be a person who pretends to be something he or she is not. There are two main types of fraud, internal and external. Internal fraud occurs when employees or closely related third parties misuse the organization’s resources or assets for personal gain, or to cause financial or reputational loss to the organization. External fraud occurs when an individual outside the organization deceives the owners or employees for personal gain, or to cause financial or reputational loss to the organization. Let’s discuss examples of both of these types of fraud. Some examples of internal fraud are bribery and corruption, financial statement fraud, market abuse, asset misappropriation, client abuse, and data and technology abuse. Bribery & Corruption is the wrongful use of influence in commonwealth dealings to procure a benefit for the actor or a third party. Financial Statement fraud is a deliberate falsification or alteration of financial statement data in order to deceive the users of the financial statements. Market Abuse is the act of manipulating the financial markets, disclosing inside information, or making insider deals. Market abuse can be perpetrated by individuals inside and outside of an organization. Asset Misappropriation is the theft or misuse of commonwealth assets. Client Abuse is the use of an employee’s position or status within an organization to take advantage of a customer. Data & Technology Abuse is an unauthorized activity that affects the availability, confidentiality, or integrity of computer resources and electronic data. It also includes unwarranted use of commonwealth data that is not available to the external public by taking advantage of a position of trust or a path of access. This unwarranted use is done with the intent of stealing, selling, or otherwise using the proprietary data to incur gain to oneself or cause loss to others. Some examples of external fraud are kickbacks, new account and product origination, account funding, non-monetary customer activity, market abuse, and data and technology abuse. A kickback occurs when a third party compensates an employee in exchange for favorable treatment or services. These kickbacks interfere with the employee’s ability to make unbiased decisions. New Account and Product Origination is when fraudsters open accounts or apply for products with a stolen identity, forged documentation and misrepresentation. Account Funding is fraudsters opening accounts with non-existent funds and forged or fraudulently acquired assets. Non-monetary Customer Activity is customer activity that generally involves account, profile, and data changes as opposed to monetary transactions. Market Abuse is the act of manipulating the financial markets, disclosing inside information, or making insider deals. Market abuse can be perpetrated by individuals inside and outside of an organization. Data & Technology Abuse is an unauthorized activity that affects the availability, confidentiality, and integrity of computer resources and electronic data. Vectors are the enabling mechanisms, paths, or tools that a fraudster utilizes to commit fraud. Let’s talk about the common ways in which fraud is typically committed. Social engineering is a method where fraudsters coerce individuals into disclosing sensitive or confidential information. Phishing is where fraudsters use the internet, phone, or text message to convince employees to release personal/financial data by posing as a legitimate entity. Abuse of position is the coercion of a vulnerable or junior individual to perpetrate fraud. Ransomware, after encrypting an employee’s personal data or restricting access to the victim’s system, fraudsters request a ransom to return the data or revert the changes made to the system. Spyware and Malware is malicious software designed to harm the computer upon which it is installed. Such software is most often intended to collect personally identifiable information, or PII, and authentication credentials, the username and password, of victims. Data breach is a security incident in which sensitive, protected, or confidential data is copied, transmitted, viewed, stolen, or used by an individual unauthorized to do so. Developed in the 1950s by American criminologist Donald R. Cressey, the Fraud Triangle represents the notion that fraud in the workplace occurs due to the financial pressure, rationalization, and opportunity to commit fraud. Pressure is what motivates the crime to be committed in the first place. An individual may have financial problems that they are unable to solve through legitimate means. So, they begin to consider committing an illegal act, such as stealing cash or falsifying a financial statement, as way to solve their problem. Some examples of pressures that commonly lead to fraud include: The inability to pay one’s bills, a drug or gambling addiction, the need to meet earnings to sustain investor confidence, the need to meet productivity targets at work, or a desire for status symbols such as a bigger house, nicer car, etc. Opportunity dictates the methods by which the crime can be committed. The person must see a way they can use or abuse their position of trust to solve their financial problem with a low perceived risk of getting caught. It is also critical that the fraud perpetrator be able to solve their problem in secret. Many people commit white-collar crimes to maintain their social status. For instance, they might steal to conceal a drug problem, pay off debts or acquire expensive cars or houses. If a perpetrator is caught embezzling or falsifying financial information, this will hurt their status just as much as the underlying problem they were trying to conceal. The fraudster not only has to be able to steal the funds, they have to be able to do it in such a way that they will likely not get caught. The vast majority of fraudsters are first time offenders with no criminal past and they do not view themselves as criminals. They see themselves as ordinary, honest people who are caught in a bad set of circumstances. Consequently, the fraudster must justify the crime to themselves in a way that makes it an acceptable act. Some common rationalizations fraudsters use include: “I was only borrowing the money.” “I was entitled to the money.” “I had to steal to provide for my family.” “I was underpaid; my employer cheated me.” “My employer was dishonest to others and deserved to be fleeced.” The effects of fraud can have a substantial impact on the commonwealth. Financial loss is an obvious effect. When an employee misappropriates assets, the loss is fairly easy to quantify. For example, if a cashier takes $60 from the cash register, the commonwealth loses $60. Another effect is external confidence, once fraud has been uncovered, the organization faces an ongoing problem of public mistrust. Increased audit costs may be charged due to the organization becoming a higher audit risk. Auditors will more closely scrutinize the books before signing off on financial statements. Psychological unrest can sometimes be the most troubling. Victims were baited into a scam and have lost all sense of security, self-esteem, and dignity. For many, this takes years to recover. A fraud victim may feel lonely or embarrassed because of a change in social status. The incident may cause marital problems and prevent the individual from providing adequate support for their family. The loss of employee morale can be hard on the workplace. Employees can feel disheartened that something happened in their workplace. They could feel that more could have been done to prevent it and may feel that they are solely at fault. Employees may also fear for the future of their organization, security of their job, and worry about possible legal implications. Those who commit fraud are largely first-time offenders. Additionally, fraudsters generally exhibit one of two behavioral traits: They either live beyond their apparent means or they are experiencing financial difficulties. Here are some common ways to detect fraud in the workplace. The perpetrator will often display unusual behavior that when taken as a whole is a strong indicator of fraud. The fraudster may not ever take a vacation or call in sick in fear of being caught. He or she may not delegate to co-workers even when overwhelmed with work. Another symptom may be changes in behavior such as increased drinking, smoking, defensiveness, and unusual irritability and suspiciousness. Complaints have been known to be some of the best indicators of fraud and should be taken seriously. Even if the motives of the complainant are suspect, the allegations usually have merit and warrant further investigation. An excessive number of voided transactions could mean that the sale was rung up, the payment diverted to the use of the perpetrator, and the sales slip subsequently voided to cover the theft.  Missing documents can be a red flag for fraud. Although it is expected that some documents will be misplaced, the auditor should look for explanations as to why the documents are missing, and what steps were taken to locate the requested items. All too often, the auditors or auditee will select an alternate item without determining whether or not a problem exists. Sales employees may make bogus refunds to customers for merchandise. When committing this type of fraud, the sales employee will have the refund sent to their home address or the address of a friend or co-worker. When funds, merchandise, or assets are stolen and not covered by a fictitious entry, the general ledger will be out of balance. An inventory of the merchandise or cash is needed to confirm the existence of the missing assets. In cases where a customer payment is misappropriated, adjustments to receivables can be made to cover the shortage. Where payables are adjusted, the perpetrator can use a phony billing scheme to acquire cash for his or her own use. Excess purchases can be used to cover fraud in two ways: fictitious payees are used to convert funds, or excessive purchases may indicate a possible payoff of purchase agent. Duplicate payments are sometimes redirected for the use of an employee. The employee may notice the duplicate payment, then he or she may prepare a phony endorsement of the check. Ghost employee scams are schemes that are frequently uncovered when an auditor, fraud examiner, or other individual reviews payroll information of employees. Missing or otherwise unaccounted for employees or multiple direct deposits sent to the same bank account could indicate the existence of a ghost employee scheme. Employees frequently conceal fraud in their individual expense account reimbursements. These reimbursements should be scrutinized for reasonableness and trends, especially in the area of cash transactions. Inventory shortages. Normal shortages over a period of time can be computed through historical analysis. Excessive shortages could explain a host of fraudulent activity, from embezzlement to theft of inventory. Excessively large payments to individuals may indicate instances of fraudulent disbursements. Timesheet manipulation is where employees are paid for hours not worked by altering time sheets before or after management approval. Crooks use clever schemes to defraud millions of people every year. They often combine new technology with old tricks to get people to send money or give out personal information. Here are some tips on how you can avoid getting scammed. Spot imposters. Scammers often pretend to be someone you trust, like a government official, family member, charity or a company you do business with. Do not send money or give out personal information in response to an unexpected request from a text, phone call, or email. Do online searches. Type a company or product name into your favorite search engine with words like “review,” “complaint,” or “scam.” Search for a phrase that describes your situation, like “IRS call.” You can even search for phone numbers to see if other people have reported them as scams. Don’t believe your caller ID. Technology makes it easy for scammers to fake caller ID information, so the name and number you see aren't always real. Hang up if someone calls asking for money or personal information. If you think the caller might be telling the truth, call back to a number you know is genuine. Don’t pay upfront for a promise. Someone might ask you to pay in advance for things like debt relief, credit and loan offers, mortgage assistance, or a job. They might even say you’ve won a prize, but first you have to pay taxes or fees. If you do, they will probably take the money and disappear. Consider how you pay, credit cards have significant fraud protection built in, however some payment methods don’t. Wiring money through services like Western Union or MoneyGram is risky because it’s nearly impossible to get your money back. Government offices and honest companies won’t require you to use these payment methods. Be skeptical and do additional research if a business or charity requests that you make a payment through a money wiring service. Having internal controls can help protect assets from fraud as well as improve efficiency in operations. Conducting audits allows you to measure your internal controls and ensure that the organization is running efficiently. Audits allow the commonwealth to identify risks, strengths, and opportunities for improvement. Talk to someone you trust before you give up your money or personal information. Con-artists want you to make decisions in a hurry. They might even threaten you. Slow down, check out the story, do an online search, consult an expert or just tell a friend. Hang up on robocalls. If you answer the phone and hear a recorded sales pitch, hang up and report it to the FTC. These calls are illegal, and often the products they are trying to sell are bogus. Don’t press one to speak to a person or to be taken off the list as this could lead to more calls. Be skeptical about free trial offers. Some companies use free trials to sign you up for products and bill you every month until you cancel. Before you agree to a free trial, research the company and read the cancellation policy, and always review your monthly statements for charges you don’t recognize. If someone sends you a check, and requests that you wire some of the money back after depositing, it is most likely a scam. By law, banks must make funds from deposited checks available within days but uncovering a fake check can take weeks. If a check you deposit turns out to be a fake, you are responsible for repaying the bank whether or not you still have the funds. Sign up for free scam alerts from the FTC. Get the latest tips and advice about scams sent directly to your inbox. If you suspect fraud in the workplace, please report it to your supervisor or HR office immediately. Today we discussed what fraud is and the different types of fraud. We learned how fraud is committed and about the fraud triangle. We reviewed the effects that fraud has, and ways to spot and avoid it. Lastly, we reviewed what to do if you suspect fraud. This version of the course is intended for individuals who require an accommodation for a disability. Once you have fully reviewed the information in this training, contact your Human Resources Office to request credit for completing this course. You will not receive credit for completing this course until you do so.