Strategies for Reducing Risk Within Your Financial Institution

The Association of Fraud Examiners (ACFE) reported that in 2024, banking and financial services experienced the most occupational fraud cases compared to other industries.

Fraud impacts your institution's financial health and erodes the trust and security of the individuals who rely on you to safeguard their assets. In an environment of tightening regulations and evolving technology, prioritizing risk management is vital for maintaining a competitive edge.

Understanding Fraud within Financial Institutions

Fraud encompasses any deceptive practice aimed at unlawfully obtaining money, assets, or sensitive information. The most common forms of fraud include asset misappropriation, corruption, and financial statement fraud.

Asset Misappropriation

Asset misappropriation accounted for 89% of fraud cases in 2024. Within a financial institution, asset misappropriation can look like:

• Embezzlement
• Payroll Fraud
• Investment Fraud

Corruption

Nearly half of fraud cases reported in 2024 involved corruption, which is the misuse of power or authority for personal gain. Examples include:

• Bribery
• Conflict of Interest
• Fraudulent Accounting Practices

Financial Statement Fraud

Financial statement fraud occurs when an individual intentionally causes a misstatement or omission within financial statements. While this type of fraud was the least common in 2024 — accounting for only 5% of all cases — it was also the costliest, with the median loss reaching $766,000 per case. Financial statement fraud can appear as:

• Revenue Recognition Manipulation
• Off-Balance Sheet Financing
• Fictitious Transactions

Perpetrators do not always limit their schemes to just one category. 38% of the cases reported by the ACFE involved two or more types of occupational fraud.

Strategies for Reducing Fraud Risk

A typical fraud case lasts 12 months before detection, and organizations lose an estimated 5% of revenue to fraud every year. By taking a proactive approach to risk management, financial institutions can lower their risk and learn how to detect suspicious activity.

Implement Robust Internal Controls

Internal controls include the policies, procedures, and practices designed to safeguard your organization’s assets, ensure the accuracy of financial information, and prevent fraudulent activities.

Segregation of Duties: It’s easier for employees to hide their dishonesty when they have sole control over customer accounts. One example of segregating duties would be to have separate individuals reconcile accounts and review financial records.

Regular Audits and Reviews: Mandatory rotations and paid time off are essential for fraud prevention. Not only does time away from work help alleviate stress — which can help reduce motive and opportunity — but having a different employee fill in can disrupt patterns.

A fresh perspective will help you spot something unusual or hear a concern directly from one of your customers and report it.

Record Keeping: By documenting all monetary transactions and activities, institutions create transparency and accountability. These records help detect irregularities, provide evidence for investigations, and ensure compliance with regulations.

Abide by Know Your Customer (KYC) Regulations

KYC is crucial for managing risk in banking. It involves thoroughly verifying a client’s identity, the source of their funds, and assessing potential risks. By adhering to KYC practices, banks can ensure that their clients' financial activities are both legitimate and secure.

The KYC process typically includes:

• Checking official government identification documents.
• Using biometric technology for customer verification.
• Understanding the customer's financial activities.
• Evaluating the risks of doing business with the client.

KYC isn't a one-time task; it requires ongoing updates and maintenance of customer information since risk profiles can change over time.

Provide Employee Training and Awareness

Forty-three percent of cases reported by the ACFE in 2024 were identified by tips, over half of which came from employees. Your employees can and should serve as your first line of defense against fraud.

Training should begin during the onboarding process and continue each year. Be sure to cover how fraud is committed, what internal controls are in place, and the steps employees can take if they notice something suspicious.

Leverage Technology for Fraud Detection and Prevention

Technology empowers financial institutions to implement robust fraud prevention and detection measures, keeping them ahead of evolving threats and protecting their customers' assets and data from fraudulent activities. Here are some examples of how technology can assist:

Advanced Analytics and AI: Advanced analytics and artificial intelligence (AI) can analyze transactional data in real time. These systems can identify patterns, trends, and anomalies that may indicate fraudulent activity, allowing institutions to detect and prevent fraud before it occurs.

Secure Authentication: Things like multi-factor authentication (MFA) add an extra layer of protection to online transactions and account access. These methods require users to provide multiple forms of identification or temporary codes generated in real time, making it more difficult for fraudsters to compromise accounts through phishing or social engineering attacks.

Data Encryption: Encryption technologies help safeguard sensitive data, such as payment card information or personal identifiable information (PII), from unauthorized access or interception. By encrypting data at rest and in transit, financial institutions can prevent data breaches and protect customer information from falling into the wrong hands.

Next Steps for Financial Institutions

All organizations are susceptible to fraud risks, and any individual can commit fraud. While removing risk entirely is not possible, taking a proactive stance can help your financial institution minimize threats and navigate concerns.

Eide Bailly’s forensic accountants use investigative techniques to examine financial data, uncover unusual patterns, and conduct interviews to reveal fraud and misconduct. No matter where you are in your fraud journey — we can help.