Insights from the Global Fraud & Risk Report

How Corporate Fraud Became More Personal with Big Data

Results from Kroll’s annual Global Fraud and Risk Report are in, and the findings show a significant rise in fraud and risk incidents over the past year. A staggering 88 percent of respondent U.S. companies reported cyberattacks in the past 12 months, but the findings from the report of U.S. companies diverged from global averages in a number of notable ways.

Any of the fraud reports and surveys conducted and published by industry practitioners will tell you within the first few sentences that fraud globally is on the rise. As a fraud examiner who mainly focuses on data analytics, I would be the first one to tell you that the exponential increase in the volumes of data created and maintained by individuals and organizations worldwide correlates positively with the increase in the number of reported fraud incidents. However, correlation does not imply causation, and findings of the recently published Kroll Global Fraud & Risk Report show that the real culprit might be the data handlers rather than the data itself.

This year, Kroll expanded the scope of its annual fraud report to include separate coverage of fraud, cybersecurity and security incidents in an effort to better address the complexity of the landscape. Aside from confirming and documenting the already recognized global fraud epidemic, perhaps the most important insight this year’s research has produced is the role of the insider as the main perpetrator, whether this insider we speak of is a new hire or a board member, a current or ex-employee, a contractor or a permanent worker. Seventy-nine percent of survey respondents blamed one of the indicated employee categories as the key perpetrator of fraud, whereas 57 percent felt that insiders were key perpetrators for cyber incidents and 56 percent felt this way for security incidents.

One might think cybersecurity incidents are much less dependent on behaviors of individuals compared to traditional fraud involving physical assets; however, the research shows otherwise. In fact, the most frequent types of cyber incidents in this year’s report were infestation by virus/ worm and phishing attacks by e-mail, which take advantage of the weaknesses in personnel’s judgment rather than the technical infrastructure. In simpler terms, the most frequently seen types of attacks are enabled by an individual who inadvertently downloads a virus or clicks on a link in a phishing e-mail.

The problem does not stop at the unintentional click. Unfortunately, many employees willingly participate in intentional theft of electronic data. As the electronic assets of corporations grow at an exponential rate, confidential electronic data is becoming harder to control. As a result, it is becoming easier and more tempting for individuals, be they current or former employees, to intentionally misappropriate corporate data for their own benefit. Between 2015 and 2016, incidents involving theft of information increased by 60 percent, whereas incidents involving theft of intellectual property increased by 300 percent. Much of this increase can be attributed to insider threats perpetuated by current and former employees.

An important distinction to note here is that individuals can either be willing participants in a fraudulent act or they can be enablers of fraud by inadvertently exposing a company’s assets. That former and current employees can play different roles in a fraud scheme increases the pressure on corporations to effectively manage their workforces. Employees must be well-selected and well-trained, and their interests must be well-aligned with the interests of their employer during and after their period of employment.

This year’s Global Fraud & Risk Report showed an increased emphasis on fraud risk controls aimed at strengthening the workforce. Across all industries, there is greater recognition of the roles employees play in the fight against fraud and corruption. Employee background screening, staff training and whistleblower hotlines have claimed their rightful spots among fraud risk mitigation measures. Corporations now realize that purchasing an intrusion detection system is not sufficient for cybersecurity gatekeeping and that they must also train their employees to effectively use these systems.

An effective internal controls program to protect against insider threats does not stop at providing employee training, especially in industries where the trained employees are not likely to stick around for very long. The industry risk breakdown of the Global Fraud & Risk Report demonstrates that the industries with the greatest increase in fraud exposure also happen to have the highest turnover of staff. In the professional services and transportation industries, junior employees and temporary workers emerge as the most common perpetrators of fraud, whereas former employees are the noted culprits for cybersecurity and security incidents.

Of course, the personal aspect of corporate fraud is not limited to employees. Customer data is often one of the single most valuable assets for corporations across industries, at least in the eyes of the perpetrators. Cybersecurity incidents targeting customer data occurred at almost twice the global average. In fact, when we look across industries, we see that customer data is one of the main targets of cyberattacks in all industries with the single exception of the telecom industry.

The Global Fraud & Risk Report survey results demonstrated that in many industries, including financial services, consumer goods, retail and health care, customer records are the most commonly targeted asset of a corporation, ahead of physical assets and trade secrets. The types of cyber incidents reported by respondents complicate the picture since the motivation behind data theft can be much more complex than the motivation to steal physical assets. The question of what motivates cyber criminals to target customer data has different implications for each industry and the customers whose data is at risk.

Health care records, financial records, travel records – all reveal different aspects of the customer profile that in turn expose those customers to different types of risk. Therefore, perpetrators in different industries differ in their methodologies: a former employee who steals customer data from a retailer may be looking to financially profit from the resale of the customer database, whereas an individual who hacks into a transportation company’s network to access and alter travel records of customers may be attempting to disguise traces of a serious international crime.

Confronted by insider threats from negligent and malicious former and current employees and tasked with the responsibility of protecting an ever-increasing volume of highly sensitive customer data, corporations around the globe are facing a tough balancing act. The compliance challenges become even greater for multinational corporations, who must also respond to the nuances of corporate culture and local laws in each jurisdiction they operate in. The stakes are high, because both insider threats and breaches of customer data can cause great harm to a company’s reputation. It turns out that the ever-increasing reliance on technical tools only emphasizes the need to focus on the human factor.

Meanwhile, law enforcement has begun to acknowledge the personal aspects of corporate crime. The Department of Justice took an important step toward holding individuals accountable for corporate wrongdoing with the September 2015 release of a memorandum in titled “Individual Accountability for Corporate Wrongdoing.”  According to the regulatory guidance put forth by the so-called “Yates Memo” that is still in effect, corporations are expected to cooperate with law enforcement, whereby they must at minimum provide all relevant facts about the individuals involved in corporate misconduct. In other words, law enforcement’s expectation of individual accountability does not relieve corporations of their compliance duties; it rather gives companies further reasons to address insider threats in a timely and effective manner.