How to Protect Your Business From Fraud
Fraud is one of the most common ways that businesses lose money. But you can take steps to avoid being the victim of fraud. According to the Federal Bureau of Investigations (FBI), business fraud is:
Dishonest and illegal activities perpetrated by individuals or companies in order to provide an advantageous financial outcome to those persons or establishments.
According to Black's Law Dictionary, fraud is "knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment." Notice that fraud is intentional; the person committing the fraud knows that the statement or omission is not factual.
Civil and Criminal Crime
Fraud is usually a civil crime—one person or entity against another. However, in some cases, especially willful acts, it can be criminal and is prosecuted by a government entity. It should also be noted that for a charge of fraud to be brought, there must be a loss.
If you buy a car from that guy who says, "that car was never in an accident," and you find out it was in an accident, you must prove that somehow you were harmed, maybe because the car doesn't run right or that it is worthless because of damage that you didn't notice.
Omission and Commission
When someone states a fact that they know it is not true they are committing a fraud of commission. As an example, if someone said, "That car has never been in an accident," when they know that it has been they are committing fraud. When someone conceals a material or important fact, as in knowing that a car has been in an accident and not disclosing it is also a fraud of omission.
Types of Business Fraud
The media are full of stories about fraud against individuals, but businesses are just as likely to be the victims of fraud, and maybe even more so, because business deals with many employees, vendors, and customers every day, any one of whom can be attempting to defraud the company.
Fraud can take many forms. Some of the common types of business fraud include charity fraud and nonpayment of funds fraud. Charity fraud uses deception to act as a business that is a legitimate charity to get money from individuals or businesses. Nonpayment fraud includes when a company receives products or services and then refuses to pay for those items. However, these schemes can take many other forms.
Bankruptcy fraud might include hiding or undervaluing assets, concealing information about the company or destroying documents. This fraud happens when a borrower purposefully hides assets to avoid paying a debt during a bankruptcy proceeding. It can include giving false records or information before or during the bankruptcy.
Employment fraud can be from the employer or the employee side of the equation. If a person falsifies information on an employment application or not report convictions and felony charges before being hired they are committing employment fraud. If a business gives an employee the false hope of better pay or promotions they are defrauding the employee.
Insurance fraud can happen when a person claims an injury or falsifies insurance claims documents. They may do this in hopes of getting a large financial settlement from the insurance provider.
Mail and Wire Scams
Both wire and mail fraud are federal offenses. Mail fraud happens when a person uses the U.S. Postal Service (USPS), FedEx, United Parcel Service (UPS), or electronic transmissions to make false representations. Electronic communications—including internet, TV, or radio—are used to make these false representations. These scams can take the form of sweepstakes and telemarketing attempts.
Identity theft is the stealing of individual or business information—usually electronically but not exclusively—and can include tax information and credit card fraud. Employees can steal credit card or other private information when working with a customer. The theft of identity information is a planned use of another person's personal and private information to gain financial benefits.
Employee and Insider Fraud
The most common types of insider fraud are theft of assets and accounting fraud; if these are done by employees, this type of fraud is often termed embezzlement. Other ways employees and other insiders defraud a company is by skimming cash, writing fake checks to themselves, or taking goods or supplies from the company.
Customers or buyers can defraud a business in a variety of ways, including writing bad checks, using bad credit cards, shoplifting, returning items not purchased to get a refund—called return fraud, or filing a false claim for an injury or accident on your property.
Contractor or Vendor Fraud
Independent contractors or subcontractors who do work for your company can shortchange you on work, over-charge, or bill for work never done.
Preventing Fraud Losses to Your Business
While you can't prevent every instance of fraud from happening to your business, you can take precautions to minimize fraudulent activity. To prevent employee fraud and embezzlement conduct background checks on all new employees, particularly those who have financial responsibilities.
Keep financial duties separate, so no one person has control of all financial decisions. Don't give up your financial responsibilities to any employee. For example, avoid having an employee control all check-writing.
Also, let employees know you are watching.
Preventing Other Types of Fraud
To avoid losses of cash, train your employees on how to spot counterfeit money, bad checks, and stolen credit cards. Institute specific policies in dealing with these situations. Prevent identity theft by monitoring your business accounts.
Review accounts payable, invoices, and purchase orders periodically to make sure they are from real vendors and that you are getting the items you order. Set up inventory control policies to keep track of supplies and inventory, so it doesn't walk out the door. You may not be able to count every pencil, but you should know what's in the supply cabinet or inventory at all times.
Institute data policies and back up your sensitive company data continuously. In this way, even if you are breached, you will have access to this information. You may want to consider setting up a surveillance system to keep an eye on customers and employees.
In general, the best ways to prevent and detect fraud against your company are:
- Carefully screen employees and use reputable vendors
- Set up monitoring systems in all critical areas to watch employees, customers, and vendors
- Review the monitoring, so you know what's going on