CFCI Study Guide – Updated

CFCI Study Guide – Updated Fraud "Any illegal acts characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the perpetrated by individuals and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business ad-vantage." Main types of fraud Internal Fraud Internal Fraud and External Fraud Activities that may be criminal, committed within an organization, typically by the employee against the employer. External Fraud Deceptive conduct by non-employees that deprives the organization of value, and/or is undertaken for financial gain. Embezzlement The theft of money, property, or other assets of the employer. Larceny use. The taking away of the property of another, with the intent to convert it to his/her own Financial Fraud "Cooking the books." This type of fraud generally refers to falsely representing the f inancial condition of the company, so as to inflate the value of stock, fraudulently boost executive bonuses, or otherwise mislead shareholders, lenders, employees, investment analysts, or other users of the information. Skimming (cash larceny) Accounts receivable fraud, this involves simply stealing cash before it enters the organization's accounting system. Billing Schemes Using false documentation to cause a targeted organization to issue a payment for false services and/or purchases. Check Tampering Common method (Taking advantage of employee access to blank company checks, using a password to steal computer-generated checks or producing counterfeit checks). Employee reimbursement scheme Making false claims for reimbursement or inflating or creating f ictitious business expenses. (Travel /meal reimbursement. Corruption Bribery, illegal gratuities, and/or extortion. Bribery When something of value is offered or given to influence a business decision. Illegal Gratuities When something of value is given to an employee to reward a business decision. Extortion When a person demands payment or seeks to influence a business decision by threat of harm through loss of business or personal injury. Kickback Schemes Forms of corruption involving employees and vendors, often using inflated billing or invoices for which the employee is paid a portion of the inflated or fictitious invoice. Credit Card Fraud credit or debit card. C.N.P The creation, sale, or use of a counterfeit credit card, or the use of a stolen Card not present transactions Identity Theft The fraudulent acquisition or stealing of confidential personal information through social engineering. Identity Fraud Involves the unauthorized use of another person's personal data for illegal financial benefit. Involves abusing the stolen information to transact personal business in the victim's name. Wildcat Banking An extreme form of what was called free banking. "A bank that issued notes without adequate security in the period before the establishment of the national banking system in 1864". 2 categories that encompass Fraud Theft (stealing money, ID, or assets) and deception (cooking the books, lying to shareholders, employees or partners) Savings and Loan Crisis The failure of about 1000 savings and loan banks as a result of risky business practices. The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees. Myth #1 of the Financial Services Myth #2 of Financial Services "We have very little fraud here" ex: subprime mortgage fraud "Ethics and training compliance has us covered" Fraud is not always covered in ethics policy or training. Myth #3 of Financial Services "Fraud is an unavoidable cost of doing business" Fraud is usually not serious enough to destroy a financial service firm, it is much more than necessary cost of doing business. Chapter 1 review points • Statistical picture of fraud. The numbers do not lie: Fraud is a huge worldwide problem—for all organizations. • Financial services fraud. Seventy-four percent of financial institutions experienced attempted payment fraud (check fraud, ACH fraud, or credit card fraud in 2020). • Definitions of fraud. The broad definition of fraud is illegal activity representing either theft or deception, or a combination of both. • Myths about fraud. It is easy to become complacent about fraud but doing so can be very costly. Fraud does occur in every organization and is potentially serious enough to cause major long-term damage. • Main types of fraud. Countless varieties of fraud threaten financial institutions. Fraudsters are constantly thinking up new ways to target financial services institutions. 20-60-20 rule of human component of fraud 20% of people will never commit fraud 60% are fence sitters and may commit fraud if given the opportunity 20% of people are inherently dishonest 2 types of insider fraud threat Employee level fraud and management level fraud True or False: Managment Level Fraud is committed less frequently than employee level fraud? True: Management level fraud is committed less frequently than employee level fraud however the financial loss is almost always greater. Fraud Triangle Created by leading criminologist Donald Cressey. The three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization. Financial pressure Financial difficulties, such as large amounts of credit card debt, an overwhelming burden of unpaid medical bills, large gambling debts, extended unemployment, or similar financial difficulties. Opportunity Employee identifies a weakness in the organization's anti-fraud controls. For example, if an employee is able to set up a phony vendor, have fraudulent invoices approved, and have payment sent to an address that he or she controls. Rationalization Persons who have committed fraud convince themselves that the act is either not wrong or that even though it may be wrong, it will be corrected because they will eventually return the money. Another, often more damaging form of rationalization occurs when employees justify the fraud by taking the attitude that they deserve the stolen money—because the company unfairly denied them a raise or promotion, or because some other form of mistreatment made them "victims." Remember: The opportunity element of the Fraud Triangle helps to explain the ways in which many frauds are committed by employees, middle managers, and executives of financial services organizations. What caused the Fraud Triangle to morph into the Fraud Diamond? A reevaluation for peoples unadorned lust for money caused personal Greed to become the 4th side, morphing the triangle into the diamond. Chapter 2 Review points • External fraudsters are a varied and demographically diverse group, which makes it difficult for fraud fighters to profile these criminals. The best approach to detecting