With insider fraud threats accounting for 40% of all fraud losses, reducing the risk of occupational fraud is critical. Does creating a solid system of internal controls and promoting a transparent and accountable organizational culture appeal to you?

Fintech is a common term for financial technology, which encompasses any technology used in the financial services industry. Online payment systems such as PayPal, Apple Pay, Transferwise, and Payoneer are among the first that come to mind. Fintech, on the other hand, has far broader applications.

Fintech has changed the way people pay for goods and services by enabling them to conduct transactions using computers and mobile devices. According to Statista, approximately 950 million global mobile payment transaction users were recorded in 2019, with that number expected to grow to 1.31 billion by 2023. Underbanked sectors in several Asian, Latin American, and African countries are driving growth.

Fintech startups are experiencing exponential growth at an astonishing rate. One of the reasons for this growth is that they provide alternatives to existing financial solutions. These alternatives offer greater convenience, advanced services, and a better user experience.

The threat of fraud is always present. Unfortunately, fraud is being committed by insiders, the very people who are meant to be supporting and defending an organization, today more than ever before. Despite the fact that the financial industry is one of the most regulated, fintech companies have the highest rate of internal fraud.

What exactly is insider fraud?

Insider fraud is defined as "the deliberate misuse or misappropriation of the employing organization's resources or assets for the purpose of personal benefit."

Insider fraud is committed by a malicious insider, who is a current or former employee, contractor, or other business partners who has or had authorized access to an organization's network, system, or data and purposefully exceeded or misused that access in a way that jeopardized the confidentiality of the information. Insider fraud occurs when a person exploits his or her position within a company to steal money or information while also posing a security risk.

These insiders frequently have unique opportunities, such as access to valuable data or tasks such as payment processing.

Insider threats within financial institutions are sometimes committed by people with criminal intent, but they can also be the result of human error or negligence.

Impact of insider fraud threat

On a global scale, the Association of Certified Fraud Examiners estimates that fraud costs organizations 5% of their yearly sales. On a yearly basis, this equates to roughly $5 trillion lost to fraud.

Insider or occupational fraud could account for up to 40% of these costs, amounting to a $2 trillion annual loss. Organizations are especially vulnerable to incidents, with the average cost of an incident reaching $412,000.

Furthermore, according to a recent Ponemon Institute report, insider fraud has become more widespread. Between 2018 and 2020, this sort of fraud increased by 47%.

The cost of investigating this form of fraud has climbed by 86% in the last three years, according to the survey, and losses tend to increase if the company is unable to recognize and handle the problem quickly.

Insider fraud's effects on financial institutions could additionally include the following:

  • Misallocation of resources (financial, human resources, and other assets).
  • Damage to reputation and brand.
  • Negative corporate culture.
  • Damage to relationships between financial firms and their partners and stakeholders.
  • Disruption in the delivery of services.

Types of Insider Fraud at Financial Institutions

  • The most common type of insider threat is simple negligence, which is also the most significant category of employee risk. Insider threats in this category may display secure behavior and follow policy in general, yet they may cause breaches due to isolated failures. Basic blunders — such as putting confidential information on unprotected personal devices or falling for phishing scams — are all too common.

  • Non-responders to awareness training activities make up a tiny but significant percentage of the employee population. While these users may not want to be irresponsible, they are among the most vulnerable segments of the population since their actions can fit into predictable patterns that lead to insecure behavior.

  • Insider collaboration with harmful external threat actors is perhaps the rarest type of insider fraud at financial institutions, but it's still a serious issue.

  • Disgruntled employees who perpetrate deliberate sabotage or intellectual property theft, as the last type of criminal insiders, are also among the most costly dangers to a financial institution. According to a Gartner study of criminal insiders, 29% of employees stole information after departing or being dismissed for future profit, while 9% were motivated by basic sabotage.

Preventing the Threat of Insider Fraud at Financial Institutions

Insider fraud management for financial institutions should focus on developing a corporate anti-fraud culture and preventing fraud by establishing, implementing, and regularly reviewing regulations.

Insider fraud should be managed at financial institutions by:

Training and awareness

Financial institutions should make it a priority to make sure that their employees and management understand their roles in preventing fraud. To that end, it should guarantee that employees are trained on how to reduce the risk of fraud on a regular basis.

Investigation, prevention, detection, and correction

Financial institutions should be committed to investigating any suspected cases of insider fraud, and they should also understand that the most effective method to protect their assets is to follow a pre-planned preventative strategy. This approach will include a work program aimed at preventing fraud. It should also involve work on insider fraud evaluation. To avoid recurrence, corrective actions are made based on lessons learned from fraud incidents.

Log, monitor, and audit employee online actions

To link online acts to the employees who performed them, enforce account and password regulations and procedures. To detect and examine suspicious insider behaviors early, use logging, frequent monitoring, and auditing. Detect illegal system changes and the download of confidential or sensitive information, such as intellectual property, customer or client data, using data-leakage technologies.

Restrict access to personally identifiable information

Allowing employees to accumulate privileges over time by moving between projects, departments, or adopting new roles is not a good idea. Ascertain if the employee's privileges are required for their current work duties.

Develop an insider incident response plan

Create an insider incident response plan to limit the damage caused by malicious insider activity. Ensure that only those who will be responsible for carrying out the plan are aware of it and have received training on how to carry it out. If an insider is suspected of fraud, make sure you have enough proof to identify the insider and follow up properly.

Sanctions and criminal charges

Financial institutions should be dedicated to pursuing all potential sanctions in incidents of insider fraud that have been proven. Where there is evidence to prove the incidence of the fraud, they should pursue disciplinary, civil, and criminal punishments.

Recovery of losses

Financial institutions should be committed to limiting possible fraud losses and, in cases of suspected fraud, taking steps to reduce the risk of additional loss by recovering any funds lost due to insider fraud in accordance with the Financial Institutions Insider Fraud Policy and Response.

In Conclusion

To combat insider fraud, financial institutions must ensure that their first priority is to preserve their employees' privacy as well as the integrity and confidentiality of their company's data. Because the global economy is increasingly based on the storage and leverage of intangible assets, businesses must go to tremendous measures to safeguard their data.

Using an AML compliance platform is a wise precaution to take. Flagright, for example, has a track record of providing anti-money laundering compliance services to fintechs and neobanks of all sizes.

The technology provided by Flagright has the advantage of examining large amounts of data and recognizing patterns that indicate questionable financial activity.

The software used does not monitor people and maintains them under constant surveillance. Instead, it keeps track of financial transactions and intervenes when mistakes or neglect arise. The key focus is on recognizing these behaviors in advance. As a result, using Flagright is an excellent strategy to safeguard your business and your employees.

If you turn fraud protection into a process that spans the whole client lifecycle, you'll be able to spot anything out of the norm, whether it's due to leaking data, unauthorized access, suspicious payments, or human mistake.

Contact Flagright to learn more about how we can assist you and to begin reducing the risk of insider fraud now.