Fraud risk management guide: Identify, assess & mitigate risks

Due to economic pressures, businesses have undergone both external and internal changes that can make them susceptible to exploitation. The numbers are evidence of this, as the total amount of global e-commerce fraud losses for 2022 reached a staggering $41 billion. North America accounted for 42 percent of these losses, while Europe made up 26 percent. Forecasts predict that these losses will only continue to increase, with an estimated total of $343 billion by 2027. 

To safeguard against this escalating threat, a robust fraud risk management strategy is paramount. By adopting tailored measures, businesses can fortify their defenses and contribute to the global fight against financial crime, offering a safer digital environment for all stakeholders.

What is fraud risk management?

Fraud risk management is a holistic and proactive fraud mitigation approach that is embedded within an organization. A successful strategy requires robust internal controls plus investment in anti-fraud technology. It also needs to consider the current and future fraud landscape.

Organizations lose an estimated 5 percent of their revenues to fraud, according to the Association of Certified Fraud Examiners, with the median cost of each case being $117,000. KPMG found that, although fraud cases against financial institutions halved in 2022, the value of fraud committed against financial institutions increased by 2204 percent to £609 million.

Why is fraud risk management important?

Industry professionals know that fraud cannot be ignored and will not disappear on its own. To combat the rising risks, organizations should address fraud strategically and benefit from taking a proactive approach rather than a reactive one. This is where an effective fraud risk management strategy plays a crucial role.

Risk assessments are therefore vital, as they allow firms to pinpoint possible weak areas where fraudulent activities might occur. Knowing there these areas are can help companies develop the right kind of measures and controls to effectively mitigate any risk.

Furthermore, effective fraud risk management can help firms enhance their regulatory compliance during a time when regulations are continually changing and becoming increasingly rigorous.

Steps to implement an effective fraud risk management program

Senior fraud and compliance professionals can refer to the following steps as a list of best practices to enhance their firm’s fraud risk management programs.

1. Assess risk and vulnerabilities 

First, compliance teams should conduct a comprehensive risk assessment to uncover potential areas of fraud. To do this effectively, there should be collaboration between stakeholders across multiple departments. During this process, historical incidents of fraud should be analyzed and industry best practices – like those detailed by the Financial Action Task Force (FATF) – should be reviewed. Questions to ask when assessing potential fraud risks include:

• What does the firm’s past fraud detection performance look like?
• What is the culture of the organization? Does it already demonstrate a risk-based approach to fraud, anti-money laundering and counter-terrorist financing (AML/CTF)? Are anti-fraud policies and attitudes embedded?
• What technology is being used, and does it need to be upgraded?
• Are recommendations from audits and assessments promptly actioned?

2. Establish clear policies and procedures 

These policies should outline acceptable conduct, reporting mechanisms, and consequences for fraudulent behavior. Senior compliance leaders should also ensure that all employees are aware of and understand these policies through regular training and communication.

3. Implement internal controls

Internal controls – including things like the segregation of duties, access controls, and authorization mechanisms – are essential components of a robust control framework. They play a crucial role in minimizing fraud risks. Regularly review and update these controls to adapt to changing business needs and emerging fraud threats.

4. Conduct regular fraud awareness training

Up-to-date and relevant training is vital in preventing and mitigating the risk of fraud. This training should be provided regularly so as to keep up with emerging trends and changing tactics utilized by fraudsters. In particular, front line staff should be kept informed on key red flag indicators related to particular fraud types the business may be vulnerable to (as identified in the company’s risk assessment).

5. Establish monitoring and detection mechanisms 

Advanced fraud detection solutions – including those that analyze transaction and behavior patterns – can help firms detect potential fraudulent activity before it happens, allowing them to be proactive instead of reactive in their fraud prevention activities.

6. Respond and investigate fraud incidents 

Response plans are also vital when handling potential fraudulent incidents. These plans will often include protocols for investigation, who is involved – both internally and externally – and specifics on how to comply with legal and regulatory obligations. These plans are crucial as they can allow swift action to be taken to mitigate potential damages.

Fraud risk management solutions

In the fight against fraud, the right tools can help equip firms to better detect and prevent fraudulent activity. Artificial intelligence (AI) and machine learning (ML) has been highlighted by the Financial Action Task Force (FATF) as able to help firms detect abnormalities, provide alert prioritization to make remediation more efficient, and intuitively set fraud transaction monitoring thresholds. Forensic and behavioral analytics can connect seemingly unrelated data in a customer’s profile – even among multiple accounts (known as identity clustering). 

The key is to create a holistic, fraud-aware culture, reduce silos, and encourage transparency. Businesses have the best chance of preventing fraud if they are proactive, take fraud seriously and invest in a market-leading fraud detection solution.