1 “insurance fraud, from the perspective of asset protection” presenter: winston delahaye; cfe,...

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““Insurance Fraud, from Insurance Fraud, from the Perspective of the Perspective of Asset Protection”Asset Protection”Presenter: Winston Delahaye; CFE, M.Sc.Presenter: Winston Delahaye; CFE, M.Sc.

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Fraud is a common risk that should not be ignored. The incidence of fraud is now so common that its occurrence is no longer remarkable, only its scale.

Any entity that fails to protect itself appropriately from fraud should expect to become a victim of fraud, or rather, should expect to discover that it is a victim of fraud.

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What is Fraud?What is Fraud?

• It is any illegal acts characterized by deceit, It is any illegal acts characterized by deceit, concealment or violation of trust.concealment or violation of trust.

• These acts are not dependent upon the These acts are not dependent upon the application of threat of violence or of physical application of threat of violence or of physical force.force.

• Frauds are perpetuated by individuals and Frauds are perpetuated by individuals and organizations to obtain money, property or organizations to obtain money, property or services; to avoid payment or loss of services; services; to avoid payment or loss of services; or to secure personal or business advantage. or to secure personal or business advantage.

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Historical PerspectiveHistorical Perspective The oldest available recorded instances of fraud The oldest available recorded instances of fraud

occur in the Bible:occur in the Bible:

1.1. Genesis 3:13 Genesis 3:13 ‘‘Inter alia’…….and the woman said, ‘the serpent Inter alia’…….and the woman said, ‘the serpent trickedtricked me, and I did eat.’ me, and I did eat.’

2.2. Genesis 27:11-12Genesis 27:11-1211 - And Jacob said to ……his mother, ‘Behold, 11 - And Jacob said to ……his mother, ‘Behold, Esau my brother is a hairy man, and I am a Esau my brother is a hairy man, and I am a smooth mansmooth man12 - My father peradventure will feel me, and I 12 - My father peradventure will feel me, and I shall seem to him as a shall seem to him as a deceiverdeceiver……..’. ……..’.

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The Impact of Fraud on The Impact of Fraud on Insurance Insurance GloballyGlobally

According to a recent Federal Bureau of According to a recent Federal Bureau of Investigations report on financial crimes, Investigations report on financial crimes, approximately US$1 trillion dollars is collected in approximately US$1 trillion dollars is collected in insurance premiums annually.insurance premiums annually.

The report also stated that health care The report also stated that health care expenditures represented approximately 16.5% of expenditures represented approximately 16.5% of Gross Domestic Product of the US economy and Gross Domestic Product of the US economy and that by 2012 the total health care spending will that by 2012 the total health care spending will exceed US$ 3.3 trillion.exceed US$ 3.3 trillion.

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INSURANCE FRAUD STATISTICS:INSURANCE FRAUD STATISTICS:

• Billions of dollars are lost every year in insurance fraud. Billions of dollars are lost every year in insurance fraud.

• Some countries including the US have compiled some statistics in Some countries including the US have compiled some statistics in their attempt to combat this expensive economic crime. their attempt to combat this expensive economic crime.

• For example, the For example, the INSURANCE INFORMATION INSTITUTE FACT INSURANCE INFORMATION INSTITUTE FACT BOOK 2004BOOK 2004,, claims that insurance fraud cost insurers and claims that insurance fraud cost insurers and corporate buyers of insurance more than US $80 billion.corporate buyers of insurance more than US $80 billion.

• The The COALITION AGAINST INSURANCE FRAUD COALITION AGAINST INSURANCE FRAUD (CAIF)(CAIF) contends contends that although it is hard to determine how big insurance fraud has that although it is hard to determine how big insurance fraud has gotten because so much goes undetected, and a complete gotten because so much goes undetected, and a complete research has yet to be done, they do know that : research has yet to be done, they do know that :

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INSURANCE FRAUD STATISTICS:INSURANCE FRAUD STATISTICS:• HealthHealth care fraud costs Americans $54 billion a year.care fraud costs Americans $54 billion a year.

• According to a study by the According to a study by the RAND INSTITUTE FOR CIVIL JUSTICERAND INSTITUTE FOR CIVIL JUSTICE, , more than a third of people hurt in auto accidents exaggerate their more than a third of people hurt in auto accidents exaggerate their injuries to the tune of an extra $13 – $15 billion in insurance costs.injuries to the tune of an extra $13 – $15 billion in insurance costs.

• The The JOURNAL OF THE AMERICAS MEDICAL ASSOCIATIONJOURNAL OF THE AMERICAS MEDICAL ASSOCIATION states states that, Nearly a 3that, Nearly a 3rdrd of doctors inflate the severity of a patient’s illness of doctors inflate the severity of a patient’s illness to help them avoid early hospital discharge.to help them avoid early hospital discharge.

• The The CAIFCAIF states that fraud schemes result in;states that fraud schemes result in;-- the loss of a person’s savings, the loss of a person’s savings,-- endangering their health, endangering their health, -- constant increase in premiums and consumer goods, constant increase in premiums and consumer goods, -- loss of jobs and,loss of jobs and,-- in some Instances, loss of life or quality of life. in some Instances, loss of life or quality of life.

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The Impact of Fraud on The Impact of Fraud on Insurance Insurance RegionallyRegionally

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• St. John’s, Antigua, April 2002 - St. John’s, Antigua, April 2002 - three investigating judges have three investigating judges have been charged with figuring out where $230 million or more in state been charged with figuring out where $230 million or more in state health insurance money has gone.health insurance money has gone.

• Kingston, JamaicaKingston, Jamaica, , July 2005July 2005 - MARK Thwaites, the former chief - MARK Thwaites, the former chief operating officer of the bankrupt Dyoll Insurance Company, faced operating officer of the bankrupt Dyoll Insurance Company, faced the …..Court …on charges of insurance fraud.the …..Court …on charges of insurance fraud.

• Kingston, Jamaica, Sept. 2006 - Insurance fraud exposes Kingston, Jamaica, Sept. 2006 - Insurance fraud exposes firms and motorists: firms and motorists: The insurance industry is losing millions of The insurance industry is losing millions of dollars in premiums due to a mushrooming cover note racket, major dollars in premiums due to a mushrooming cover note racket, major players in the market have revealed. While unable to place an players in the market have revealed. While unable to place an exact dollar figure on the losses, stakeholders said that it has long exact dollar figure on the losses, stakeholders said that it has long passed 6 figures.passed 6 figures.

• Guyana, Feb. 2007 -Guyana, Feb. 2007 - Guyanese police are questioning five Guyanese police are questioning five employees of Clico Life Insurance in Guyana and seeking two others employees of Clico Life Insurance in Guyana and seeking two others in connection with a $16 million fraud detected at the company. in connection with a $16 million fraud detected at the company.

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• Trinidad & Tobago, May 2008 - Trinidad & Tobago, May 2008 - Chairman of the Inter-Insurance Fraud Chairman of the Inter-Insurance Fraud Committee of the Association of Trinidad and Tobago Insurance Committee of the Association of Trinidad and Tobago Insurance Companies (Attic) Philip De Silva, said yesterday that incidents of fraud Companies (Attic) Philip De Silva, said yesterday that incidents of fraud could hurt T&T’s chances of becoming the international financial centre could hurt T&T’s chances of becoming the international financial centre of the region.of the region.

• Trinidad, January 2007 - The Goodwill Scandal: No 'goodwill‘ at Trinidad, January 2007 - The Goodwill Scandal: No 'goodwill‘ at GoodwillGoodwill - Goodwill General Insurance Company Ltd and its brokers and - Goodwill General Insurance Company Ltd and its brokers and agents continued to issue new motor insurance policies in violation of a agents continued to issue new motor insurance policies in violation of a March 7, 2006 directive from the Central Bank to not write new business March 7, 2006 directive from the Central Bank to not write new business or renew policies. or renew policies.

• Barbados, October 2005 -Barbados, October 2005 - While not admitting that it did anything While not admitting that it did anything wrong, Doctors Benefit Insurance Company Limited (DBIC) of Barbados wrong, Doctors Benefit Insurance Company Limited (DBIC) of Barbados has agreed to pay the United States Internal Revenue Service (IRS) has agreed to pay the United States Internal Revenue Service (IRS) US$2.3 million (BDS$4.6 million) for selling supplemental disability US$2.3 million (BDS$4.6 million) for selling supplemental disability policies to 2,800 doctors in the United States under the guise that the policies to 2,800 doctors in the United States under the guise that the premiums were fully tax deductible. premiums were fully tax deductible.

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Types of Insurance FraudTypes of Insurance Fraud

• Insurance fraud may be classified as “hard” or “soft.” Insurance fraud may be classified as “hard” or “soft.”

• Hard fraudHard fraud - is a deliberate attempt either to stage or - is a deliberate attempt either to stage or invent an accident, injury, theft, arson or other type of loss invent an accident, injury, theft, arson or other type of loss that would be covered under an insurance policy.that would be covered under an insurance policy.

• Soft fraudSoft fraud is sometimes called is sometimes called opportunity fraudopportunity fraud and and occurs when a policyholder or claimant exaggerates a occurs when a policyholder or claimant exaggerates a legitimate claim. legitimate claim. – For example, A car owner involved in a “fender bender” who For example, A car owner involved in a “fender bender” who

pads the claim to cover the policy deductible is committing pads the claim to cover the policy deductible is committing soft fraud. soft fraud.

– Another example is exaggerating the number and value of Another example is exaggerating the number and value of items stolen from a home or business. items stolen from a home or business.

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Types of Insurance FraudTypes of Insurance Fraud• Soft fraud may also occur when people purposely Soft fraud may also occur when people purposely

provide false information to influence the provide false information to influence the underwriting process in their favour when underwriting process in their favour when applying for insurance.applying for insurance.

– To lower insurance premiums or increase the likelihood To lower insurance premiums or increase the likelihood

that the application for insurance will be accepted, that the application for insurance will be accepted, people may underreport the number of miles driven, people may underreport the number of miles driven,

– misrepresent where a car is garaged, misrepresent where a car is garaged,

– fail to provide an accurate medical history when fail to provide an accurate medical history when applying for health insurance or, applying for health insurance or,

– falsify the number of employees and the nature of their falsify the number of employees and the nature of their work for workers compensation coverage.work for workers compensation coverage.

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TYPES OF INSURANCE FRAUD TYPES OF INSURANCE FRAUD (CONTD.)(CONTD.)

AGENT/BROKER FRAUDAGENT/BROKER FRAUD

Cash, Loan, and Dividend ChecksCash, Loan, and Dividend Checks

A company employee without the knowledge of an insuredA company employee without the knowledge of an insuredor contract holder requests cash, loan or a dividend chequeor contract holder requests cash, loan or a dividend chequeand either deposits the cheque into his bank account orand either deposits the cheque into his bank account orinto a fictitious account. The employee, in order tointo a fictitious account. The employee, in order tominimize his chances of being detected committing aminimize his chances of being detected committing afraudulent act, might change the company policyholder’sfraudulent act, might change the company policyholder’saddress of record to either his address or a fictitiousaddress of record to either his address or a fictitiousaddress. Once the cheque is issued, the address is thenaddress. Once the cheque is issued, the address is thenchanged back to the previous address.changed back to the previous address.

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TYPES OF INSURANCE FRAUD TYPES OF INSURANCE FRAUD (CONTD.)(CONTD.)

Settlement ChequesSettlement Cheques

Company employees can misdirect settlement cheques such as Company employees can misdirect settlement cheques such as Matured Endowment, paid Up, etc., to the branch office, to theirMatured Endowment, paid Up, etc., to the branch office, to theirhomes, or to a fictitious address. The employee can easily create ahomes, or to a fictitious address. The employee can easily create acheque defalcation by changing the address of record prior to thecheque defalcation by changing the address of record prior to thesettlement date then replacing the contract holder’s correct addresssettlement date then replacing the contract holder’s correct addressafter the settlement cheque has been received and fraudulently issued.after the settlement cheque has been received and fraudulently issued.This is particularly possible with Orphan policy/contract holders whoseThis is particularly possible with Orphan policy/contract holders whosewhereabouts are unknown, agents have left, or/and they have been whereabouts are unknown, agents have left, or/and they have been assigned to a servicing agent. assigned to a servicing agent.

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AGENT / BROKER TYPES (CONTD)AGENT / BROKER TYPES (CONTD)

Premium FraudPremium FraudAgent collects the premium, but doesn’t remit the cheque to the insurance Agent collects the premium, but doesn’t remit the cheque to the insurance company. The insured has no coverage.company. The insured has no coverage.

Fictitious PayeesFictitious PayeesAn agent or a clerk can change the beneficiary of record to a fictitious personAn agent or a clerk can change the beneficiary of record to a fictitious personand subsequently submit the necessary papers to authorize the issuance of a and subsequently submit the necessary papers to authorize the issuance of a cheque.cheque.

Fictitious Death ClaimsFictitious Death ClaimsAn agentAn agent or employee obtains a fictitious death certificate and requests that a or employee obtains a fictitious death certificate and requests that a death claim cheque be issued. The agent receives the cheque and cashes it. death claim cheque be issued. The agent receives the cheque and cashes it. The sales representative can also write a fictitious application and, after theThe sales representative can also write a fictitious application and, after thecontestable period (usually two years), submit a phony death claim form and contestable period (usually two years), submit a phony death claim form and obtain the proceeds. The agent therefore, by investing a few thousand dollarsobtain the proceeds. The agent therefore, by investing a few thousand dollarscould obtain far more from this fraudulent claim. could obtain far more from this fraudulent claim.

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UNDERWRITNG UNDERWRITNG IRREGULARITIESIRREGULARITIES

Equity fundingEquity fundingThisThis is the process of using existing premium / policy values to finance new is the process of using existing premium / policy values to finance new

businesses. As long as the insured is aware of what is being done by the agent businesses. As long as the insured is aware of what is being done by the agent

and fully understands the long range method of payment on the new payment and fully understands the long range method of payment on the new payment

contract, there is no apparent underwriting irregularity. contract, there is no apparent underwriting irregularity.

Equity funding techniques, also known as piggybacking, usually do not Equity funding techniques, also known as piggybacking, usually do not produce produce

Quality business. Furthermore, the company increases the amount of life Quality business. Furthermore, the company increases the amount of life

Insurance on the books but receives little or no new funds while incurring Insurance on the books but receives little or no new funds while incurring

increased sales and administrative expenses associated with the issue of that increased sales and administrative expenses associated with the issue of that

new business. Equity funding irregularities might involve improper financial new business. Equity funding irregularities might involve improper financial

benefits to field personnel as well as annual incentive bonuses paid to benefits to field personnel as well as annual incentive bonuses paid to

management if applicable. management if applicable.

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UNDERWRITING UNDERWRITING IRREGULARITIES (CONTD.)IRREGULARITIES (CONTD.)MisrepresentationMisrepresentationThis might occur if a sales representative makes a false statement This might occur if a sales representative makes a false statement

with with the intent to deceive the prospective insured in order to knowingly the intent to deceive the prospective insured in order to knowingly obtain an unlawful gain. obtain an unlawful gain.

False InformationFalse InformationA company employee might submit the following false information to A company employee might submit the following false information to obtain an unlawful gain :obtain an unlawful gain :• Improper medical information to obtain a better insurable rate for Improper medical information to obtain a better insurable rate for

the prospective policyholder, i.e. standard to preferred rate. the prospective policyholder, i.e. standard to preferred rate. • Improper date of birth to obtain a cheaper premium on the new Improper date of birth to obtain a cheaper premium on the new

policy.policy.• Improper home address to obtain a cheaper premium for home or Improper home address to obtain a cheaper premium for home or

automobile insurance.automobile insurance.

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UNDERWRITING UNDERWRITING IRREGULARITIES IRREGULARITIES

(CONTD.)(CONTD.)Fictitious PoliciesFictitious Policies A salesman, in order to keep his position, or improve his writing record, A salesman, in order to keep his position, or improve his writing record, submits fictitious policies. Prior to leaving a company, an individual writes submits fictitious policies. Prior to leaving a company, an individual writes fictitious policies called fictitious policies called TOMBSTONE CASESTOMBSTONE CASES to improve his commission pool to improve his commission pool so that his compensation will be greater. so that his compensation will be greater. TOMBSTONETOMBSTONE means an agent means an agent literally takes names from tombstones in a cemetery and writes new policies. literally takes names from tombstones in a cemetery and writes new policies. Some Jamaican companies call them Some Jamaican companies call them LIGHTPOSTS.LIGHTPOSTS.

Sliding Sliding The term used for including additional coverages in the insurance policyThe term used for including additional coverages in the insurance policywithout the knowledge of the insured. The extra charges are hidden in thewithout the knowledge of the insured. The extra charges are hidden in theTotal premium and since the insured is unaware of the coverage, few claims Total premium and since the insured is unaware of the coverage, few claims are ever filed. For example, accidental death and travel accident coverages are ever filed. For example, accidental death and travel accident coverages

can can usually be slipped into the policy without the knowledge of the insured. usually be slipped into the policy without the knowledge of the insured.

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UNDERWRITING UNDERWRITING IRREGULARITIES IRREGULARITIES

(CONTD.)(CONTD.)TWISTINGTWISTING

This is the replacement, usually by high pressure sales techniques, ofThis is the replacement, usually by high pressure sales techniques, of

existing policies for new ones. The primary reason, of course, is for theexisting policies for new ones. The primary reason, of course, is for the

agent to profit since first year sales commissions are much higher than agent to profit since first year sales commissions are much higher than

commissions for existing policies. commissions for existing policies.

ChurningChurning

This occurs when agents falsely tell customers that they can buyThis occurs when agents falsely tell customers that they can buy

additional insurance for nothing by using built-up value in their current additional insurance for nothing by using built-up value in their current

policies. In reality, the cost of the new policies frequently exceeds the policies. In reality, the cost of the new policies frequently exceeds the

value of the old ones. value of the old ones.

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VEHICLE INSURANCE SCHEMESVEHICLE INSURANCE SCHEMES

DitchingDitchingAlso known as Also known as owner give-upsowner give-ups, is getting rid of a vehicle to cash in on an , is getting rid of a vehicle to cash in on an insurance policy or to settle an outstanding loan. The vehicle is normally insurance policy or to settle an outstanding loan. The vehicle is normally expensive and purchased with a small down payment. The vehicle is expensive and purchased with a small down payment. The vehicle is

reported reported stolen, stripped for parts or taken to a pound and destroyed. The scheme stolen, stripped for parts or taken to a pound and destroyed. The scheme sometimes involves homeowner’s insurance for the property that was sometimes involves homeowner’s insurance for the property that was

“stolen” “stolen” in the vehicle. in the vehicle.

Past PostingPast Posting This is a scheme in which a person becomes involved in an automobile This is a scheme in which a person becomes involved in an automobile accident, but doesn’t have insurance. The person gets insurance, waits a accident, but doesn’t have insurance. The person gets insurance, waits a

littlelittlebit of time, and then reports the vehicle as being in an accident, thus bit of time, and then reports the vehicle as being in an accident, thus

collecting collecting for the damages. for the damages.

mailto:[email protected]

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VEHICLE INSURANCE SCHEMES VEHICLE INSURANCE SCHEMES (CONTD.)(CONTD.)

Vehicle SmugglingVehicle SmugglingThis scheme involves the purchase of a new vehicle with maximum This scheme involves the purchase of a new vehicle with maximum financing. A counterfeit certificate of the vehicle’s title is made showingfinancing. A counterfeit certificate of the vehicle’s title is made showingthat it is free and clear. The vehicle is insured to the maximum, with that it is free and clear. The vehicle is insured to the maximum, with minimum deductible theft coverage. It is then shipped to a foreign port minimum deductible theft coverage. It is then shipped to a foreign port and reported stolen. The car is sold at its new location and insurance isand reported stolen. The car is sold at its new location and insurance isalso collected for the “theft.”also collected for the “theft.”

Vehicle RepairVehicle RepairThis involves the billing of new parts on a vehicle when used parts This involves the billing of new parts on a vehicle when used parts were actually replaced in the vehicle. Sometimes this involves collusion were actually replaced in the vehicle. Sometimes this involves collusion between the adjuster and the body repair shop. between the adjuster and the body repair shop.

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VEHICLE INSURANCE SCHEMES VEHICLE INSURANCE SCHEMES (CONTD.)(CONTD.)Phantom VehiclesPhantom VehiclesThe certificate of title is a document that shows the legal ownership The certificate of title is a document that shows the legal ownership

of a of a vehicle, even though it is not absolute proof that a vehicle exists, it is vehicle, even though it is not absolute proof that a vehicle exists, it is

the basisthe basisfor the issuance of insurance policies. Collecting on a phantom for the issuance of insurance policies. Collecting on a phantom

vehicle hasvehicle hasBeen shown to be easy to do. Been shown to be easy to do.

Staged AccidentsStaged AccidentsTwo drivers purposely collide where they will not be observed. Two drivers purposely collide where they will not be observed.

AdditionalAdditionaldamage may be added to the vehicles after impact. The cars are then damage may be added to the vehicles after impact. The cars are then

driven todriven toa road or highway and arranged so that the accident appears to have a road or highway and arranged so that the accident appears to have

occurredoccurredthere. The police are then notified. there. The police are then notified.

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VEHICLE INSURANCE SCHEMES VEHICLE INSURANCE SCHEMES (CONTD.)(CONTD.)

Two Vehicle AccidentTwo Vehicle AccidentPerpetrators cause an accident and then lead the innocent driver to believePerpetrators cause an accident and then lead the innocent driver to believethat it was their fault. that it was their fault.

Swoop & SquatSwoop & SquatThe victim is passed by two cars while driving. The car in the lead will cut in The victim is passed by two cars while driving. The car in the lead will cut in

front offront ofthe second, forcing it to stop abruptly. The victim rear-ends the second car the second, forcing it to stop abruptly. The victim rear-ends the second car

while the while the other driver speeds away. Victims usually accept responsibility for the other driver speeds away. Victims usually accept responsibility for the

accident,accident,thinking it is their fault for not paying attention. The rear-ended vehicle thinking it is their fault for not paying attention. The rear-ended vehicle

usually usually contains the maximum amount of passengers possible, all with injuries. contains the maximum amount of passengers possible, all with injuries.

Vehicle Identification Number (VIN) – SwitchVehicle Identification Number (VIN) – SwitchThese are the works of professionals who switch VIN numbers from vehicles wThese are the works of professionals who switch VIN numbers from vehicles wwrecked, sold and reported as being repaired, to a stolen vehicle of the same wrecked, sold and reported as being repaired, to a stolen vehicle of the same

make make and model. and model.

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““RED FLAGS” OF INSURANCE FRAUDRED FLAGS” OF INSURANCE FRAUD

• Claim made immediately after policy inception or increase in Claim made immediately after policy inception or increase in coverage.coverage.

• Insured has history of many claims and losses.Insured has history of many claims and losses.

• At inception, insured asked hypothetical questions about coverage At inception, insured asked hypothetical questions about coverage in the event of a loss, similar to the actual claim.in the event of a loss, similar to the actual claim.

• Claim is not well documented, the insured is pushy, insistent on Claim is not well documented, the insured is pushy, insistent on fast settlement, and is unusually well informed about insurance fast settlement, and is unusually well informed about insurance coverage and claims procedures.coverage and claims procedures.

• Burglary loss claim include large, bulky property which is unusual Burglary loss claim include large, bulky property which is unusual for a burglary.for a burglary.

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““RED FLAGS” OF INSURANCE RED FLAGS” OF INSURANCE FRAUD (CONTD.)FRAUD (CONTD.)

• Personal or sentimental property normally seen among the lost property of a fire loss Personal or sentimental property normally seen among the lost property of a fire loss claim, is conspicuously absent. claim, is conspicuously absent.

• Insured cannot remember, does not know, where claimed property was acquired, and Insured cannot remember, does not know, where claimed property was acquired, and cannot provide adequate descriptions.cannot provide adequate descriptions.

• Claim too perfect – insured already has receipts, other documentation, witnesses, and Claim too perfect – insured already has receipts, other documentation, witnesses, and duplicate photographs.duplicate photographs.

• Fire and theft loss claims involves recently purchased, expensive property, especially Fire and theft loss claims involves recently purchased, expensive property, especially where insured cannot provide receipts, owner’s manuals, etc. where insured cannot provide receipts, owner’s manuals, etc.

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• Amount on claim differs from value given to police.Amount on claim differs from value given to police.

• Insured is able to give police complete list of lost property on the day Insured is able to give police complete list of lost property on the day of the burglary or shortly afterwards.of the burglary or shortly afterwards.

• Documentation provided by insured is irregular or questionable such Documentation provided by insured is irregular or questionable such as:as:- numbered receipts from the same store and dated differently or non-- numbered receipts from the same store and dated differently or non-

sequentially;sequentially;- documents show signs of alteration of dates, descriptions or- documents show signs of alteration of dates, descriptions or amounts;amounts;

- insured apparent handwriting on receipts, invoices or appraisals;- insured apparent handwriting on receipts, invoices or appraisals;- incorrect computation of tax;- incorrect computation of tax;- receipts, invoices, or shipping documents not stamped “paid,” or- receipts, invoices, or shipping documents not stamped “paid,” or “ “received”.received”.

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• Physical evidence is inconsistent with the loss claimed by the insured, Physical evidence is inconsistent with the loss claimed by the insured, for example, in burglary loss there is no evidence of breaking and for example, in burglary loss there is no evidence of breaking and entering; in fire loss there is evidence of accelerant or remains do not entering; in fire loss there is evidence of accelerant or remains do not match claimed property; physical damage to insured’s car is match claimed property; physical damage to insured’s car is inconsistent with having being in a collision; etc. inconsistent with having being in a collision; etc.

• Information on life application is vague, ambiguous as to details of Information on life application is vague, ambiguous as to details of health, history, dates, places of treatment, names of physicians / health, history, dates, places of treatment, names of physicians / hospitals, or specific diagnosis.hospitals, or specific diagnosis.

• Application not signed or pertinent questions not answered such as Application not signed or pertinent questions not answered such as income, other insurance carried, hazardous duties, or aviation or flying income, other insurance carried, hazardous duties, or aviation or flying activity, etc.activity, etc.

• Insured has “excess” insurance at the time of insurance or earned Insured has “excess” insurance at the time of insurance or earned income does not warrant amount of insurance being applied for.income does not warrant amount of insurance being applied for.

• Signature at the date of the application, differs from the signature at the Signature at the date of the application, differs from the signature at the date of the claim. date of the claim.

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““RED FLAGS” OF INSURANCE RED FLAGS” OF INSURANCE FRAUD (CONTD.)FRAUD (CONTD.)• Patient’s records missing from hospital or doctor’s office. Patient’s records missing from hospital or doctor’s office.

• Pressure for speed of handling – claimant wants to stop by the office to Pressure for speed of handling – claimant wants to stop by the office to pick up his cheque “as we’re leaving for vacation in the morning.”pick up his cheque “as we’re leaving for vacation in the morning.”

• Series of prescription numbers from the same drugs store don’t Series of prescription numbers from the same drugs store don’t coincide chronologically with the dates of the prescriptions. coincide chronologically with the dates of the prescriptions.

• Preliminary information for a business fire loss or home fire loss Preliminary information for a business fire loss or home fire loss indicates considerable financial difficulties and financial pressures indicates considerable financial difficulties and financial pressures being brought upon the owner and the fire is suspicious in nature and / being brought upon the owner and the fire is suspicious in nature and / or origin. or origin.

• Burglary loss claim investigator observes that the remaining contents Burglary loss claim investigator observes that the remaining contents of the scene are of inferior quality than the alleged stolen ones, there is of the scene are of inferior quality than the alleged stolen ones, there is no indentation in the carpet where heavy items of furniture or no indentation in the carpet where heavy items of furniture or equipment were allegedly placed, no hooks or nails in walls that equipment were allegedly placed, no hooks or nails in walls that allegedly hung valuable pictures, and / or entrances or exits too small allegedly hung valuable pictures, and / or entrances or exits too small to take large items through without laboriously disassembling it.to take large items through without laboriously disassembling it.

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Guidance to Help Prevent and Guidance to Help Prevent and Deter Fraud - Protecting AssetsDeter Fraud - Protecting Assets

1.1. Creating A Culture of Honesty and Creating A Culture of Honesty and High Integrity.High Integrity.

2.2. Evaluating Anti-Fraud Processes Evaluating Anti-Fraud Processes and Controls.and Controls.

3.3. Developing an Appropriate Developing an Appropriate Oversight ProcessOversight Process

4.4. DocumentationDocumentation

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICS

-- Setting the Tone at the TopSetting the Tone at the Top

-- Creating a Positive Workplace Creating a Positive Workplace EnvironmentEnvironment-- Hiring and Promoting AppropriateHiring and Promoting Appropriate

EmployeesEmployees-- TrainingTraining-- ConfirmationConfirmation-- DisciplineDiscipline

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Setting the Tone at the TopSetting the Tone at the Top

1.1. Directors and officers of corporations set the “tone at Directors and officers of corporations set the “tone at the top” for ethical behavior within any organization.the top” for ethical behavior within any organization.

2.2. Research in moral development strongly suggests that Research in moral development strongly suggests that honesty can best be reinforced when a proper example honesty can best be reinforced when a proper example is set—sometimes referred to as the tone at the top.is set—sometimes referred to as the tone at the top.

3.3. The management of an entity cannot act one way and The management of an entity cannot act one way and expect others in the entity to behave differently.expect others in the entity to behave differently.

4.4. It is always necessary for management to both behave It is always necessary for management to both behave ethically and openly communicate its expectations for ethically and openly communicate its expectations for ethical behavior because most employees are not in a ethical behavior because most employees are not in a position to observe management’s actions.position to observe management’s actions.

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSSetting the Tone at the TopSetting the Tone at the Top

5.5. Management must show employees through its words and Management must show employees through its words and actions that dishonest or unethical behavior will not be actions that dishonest or unethical behavior will not be tolerated, even if the result of the action tolerated, even if the result of the action benefits the entity.benefits the entity.

6.6. It should be evident that all employees will be treated It should be evident that all employees will be treated equally, regardless of their position. equally, regardless of their position.

For example, statements by management regarding the For example, statements by management regarding the absoluteabsolute

need to meet operating and financial targets can create undueneed to meet operating and financial targets can create unduepressures that may lead employees to commit fraud to achieve pressures that may lead employees to commit fraud to achieve

them. them. Setting unachievable goals for employees can give them two Setting unachievable goals for employees can give them two unattractive choices: fail or cheat. In contrast, a statement fromunattractive choices: fail or cheat. In contrast, a statement frommanagement that says,management that says,

3535

CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSSetting the Tone at the TopSetting the Tone at the Top““We are aggressive in pursuing our targets, while requiring truthful We are aggressive in pursuing our targets, while requiring truthful

financialfinancialreporting at all times,” clearly indicates to employees that integrity is a reporting at all times,” clearly indicates to employees that integrity is a requirement. This message also conveys that the entity has “zero requirement. This message also conveys that the entity has “zero

tolerance”tolerance”for unethical behavior.for unethical behavior.

7.7. The cornerstone of an effective antifraud environment is a culture The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity.with a strong value system founded on integrity.

8.8. This value system often is reflected in a code of conduct.This value system often is reflected in a code of conduct.9.9. The code of conduct should reflect the core values of the entity and The code of conduct should reflect the core values of the entity and

guide employees in making appropriate decisions during their guide employees in making appropriate decisions during their workday.workday.

10.10. The code of conduct might include such topics as ethics, The code of conduct might include such topics as ethics, confidentiality, conflicts of interest, intellectual property, sexual confidentiality, conflicts of interest, intellectual property, sexual harassment, and fraud.harassment, and fraud.

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSSetting the Tone at the TopSetting the Tone at the Top • For a code of conduct to be effective, it should For a code of conduct to be effective, it should

be communicated to all personnel in an be communicated to all personnel in an understandable fashion.understandable fashion.

• It also should be developed in a participatory It also should be developed in a participatory and positive manner that will result in both and positive manner that will result in both management and employees taking ownership management and employees taking ownership of its content.of its content.

• The code of conduct should be included in an The code of conduct should be included in an employee handbook or policy manual, or in employee handbook or policy manual, or in some other formal document or location – the some other formal document or location – the intranet so it can be referred to when needed intranet so it can be referred to when needed

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSCreating a Positive Workplace EnvironmentCreating a Positive Workplace Environment1.1. Research results indicate that wrongdoing occurs less frequently Research results indicate that wrongdoing occurs less frequently

when employees have positive feelings about an entity than when employees have positive feelings about an entity than when they feel abused, threatened, or ignored.when they feel abused, threatened, or ignored.

2.2. Without a positive workplace environment, there are more Without a positive workplace environment, there are more opportunities for poor employee morale, which can affect an opportunities for poor employee morale, which can affect an employee’s attitude about committing fraud against an entity.employee’s attitude about committing fraud against an entity.

Factors that detract from a positive work environment and may Factors that detract from a positive work environment and may increase the increase the

risk of fraud include:risk of fraud include:• Top management that does not seem to care about or reward Top management that does not seem to care about or reward

appropriate behaviorappropriate behavior• Negative feedback and lack of recognition for job performanceNegative feedback and lack of recognition for job performance• Perceived inequities in the organizationPerceived inequities in the organization• Autocratic rather than participative managementAutocratic rather than participative management

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSCreating a Positive Workplace EnvironmentCreating a Positive Workplace Environment• Low organizational loyalty or feelings of ownershipLow organizational loyalty or feelings of ownership• Unreasonable budget expectations or other financial targetsUnreasonable budget expectations or other financial targets• Fear of delivering “bad news” to supervisors and/or managementFear of delivering “bad news” to supervisors and/or management• Less-than-competitive compensationLess-than-competitive compensation• Poor training and promotion opportunitiesPoor training and promotion opportunities• Lack of clear organizational responsibilitiesLack of clear organizational responsibilities• Poor communication practices or methods within the organizationPoor communication practices or methods within the organization

The human resources department often is instrumental in helping toThe human resources department often is instrumental in helping tobuild a corporate culture and a positive work environment. Humanbuild a corporate culture and a positive work environment. Humanresource professionals are responsible for implementing specificresource professionals are responsible for implementing specificprograms and initiatives, consistent with management’s strategies programs and initiatives, consistent with management’s strategies

thatthatcan help to mitigate many of the detractors mentioned above. can help to mitigate many of the detractors mentioned above.

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSCreating a Positive Workplace EnvironmentCreating a Positive Workplace EnvironmentMitigating factors that help create a positive work environment and reduce the Mitigating factors that help create a positive work environment and reduce the

risk ofrisk offraud may include:fraud may include:• Recognition and reward systems that are in tandem with goals and resultsRecognition and reward systems that are in tandem with goals and results• Equal employment opportunitiesEqual employment opportunities• Team-oriented, collaborative decision-making policiesTeam-oriented, collaborative decision-making policies• Professionally administered compensation programsProfessionally administered compensation programs• Professionally administered training programs and an organizational priority Professionally administered training programs and an organizational priority

of career developmentof career development

Employees should be empowered to help create a positive workplace Employees should be empowered to help create a positive workplace environment and support the entity’s values and code of conduct. They shouldenvironment and support the entity’s values and code of conduct. They shouldbe given the opportunity to provide input to the development and updating ofbe given the opportunity to provide input to the development and updating ofthe entity’s code of conduct, to ensure that it is relevant, clear, and fair.the entity’s code of conduct, to ensure that it is relevant, clear, and fair.Involving employees in this fashion also may effectively contribute to theInvolving employees in this fashion also may effectively contribute to theoversight of the entity’s code of conduct and an environment of ethicaloversight of the entity’s code of conduct and an environment of ethicalbehaviour.behaviour.

4040

CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSCreating a Positive Workplace EnvironmentCreating a Positive Workplace Environment• Employees should be given the means to obtain advice internally Employees should be given the means to obtain advice internally

before making decisions that appear to have significant legal or before making decisions that appear to have significant legal or ethical implications. They should also be encouraged and given ethical implications. They should also be encouraged and given the means to communicate concerns, anonymously if preferred, the means to communicate concerns, anonymously if preferred, about potential violations of the entity’s code of conduct, without about potential violations of the entity’s code of conduct, without fear of retribution.fear of retribution.

• Many organizations have implemented a process for employees to Many organizations have implemented a process for employees to report on a confidential basis any actual or suspected wrongdoing, report on a confidential basis any actual or suspected wrongdoing, or potential violations of the code of conduct or ethics policy. or potential violations of the code of conduct or ethics policy.

Some examples - a telephone “hotline” that is directed to or Some examples - a telephone “hotline” that is directed to or monitored by an ethics officer, fraud officer, general counsel, monitored by an ethics officer, fraud officer, general counsel, internal audit director, or another trusted individual responsible internal audit director, or another trusted individual responsible for investigating and reporting incidents of fraud or illegal acts.for investigating and reporting incidents of fraud or illegal acts.

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Hiring and Promoting Appropriate EmployeesHiring and Promoting Appropriate Employees

Each employee has a unique set of values and personal code of ethics. When faced Each employee has a unique set of values and personal code of ethics. When faced withwith

sufficient pressure and a perceived opportunity, some employees will behave sufficient pressure and a perceived opportunity, some employees will behave dishonestlydishonestly

rather than face the negative consequences of honest behavior. If an entity is to berather than face the negative consequences of honest behavior. If an entity is to besuccessful in preventing fraud, it must have effective policies that minimize the chance successful in preventing fraud, it must have effective policies that minimize the chance

ofofhiring or promoting individuals with low levels of honesty, especially for positions of hiring or promoting individuals with low levels of honesty, especially for positions of

trust.trust.Proactive hiring and promotion procedures may include:Proactive hiring and promotion procedures may include:

• Conducting background investigations on individuals being considered for Conducting background investigations on individuals being considered for employment or for promotion to a position of trustemployment or for promotion to a position of trust

• Thoroughly checking a candidate’s education, employment history, and personal Thoroughly checking a candidate’s education, employment history, and personal referencesreferences

• Periodic training of all employees about the entity’s values and code of conductPeriodic training of all employees about the entity’s values and code of conduct• Incorporating into regular performance reviews an evaluation of how each individual Incorporating into regular performance reviews an evaluation of how each individual

has contributed to creating an appropriate workplace environment in line with the has contributed to creating an appropriate workplace environment in line with the entity’s values and code of conduct.entity’s values and code of conduct.

• Continuous objective evaluation of compliance with the entity’s values and code of Continuous objective evaluation of compliance with the entity’s values and code of conduct, with violations being addressed immediatelyconduct, with violations being addressed immediately..

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSTrainingTraining• New employees should be trained at the time of hiring about the entity’s New employees should be trained at the time of hiring about the entity’s

values and its code of conduct. This training should explicitly cover values and its code of conduct. This training should explicitly cover expectations of all employees regarding: expectations of all employees regarding:

• their duty to communicate certain matters; their duty to communicate certain matters; • a list of the types of matters, including actual or suspected fraud, to be a list of the types of matters, including actual or suspected fraud, to be

communicated along with specific examples; andcommunicated along with specific examples; and• information on how to communicate those matters. information on how to communicate those matters. • There also should be an affirmation from senior management regarding There also should be an affirmation from senior management regarding

employee expectations and communication responsibilities. Such training employee expectations and communication responsibilities. Such training should include an element of “fraud awareness,” the tone of which should be should include an element of “fraud awareness,” the tone of which should be positive but nonetheless stress that fraud can be costly (and detrimental in positive but nonetheless stress that fraud can be costly (and detrimental in other ways) to the entity and its employees.other ways) to the entity and its employees.

• In addition to training at the time of hiring, employees should receive In addition to training at the time of hiring, employees should receive refresher training periodically thereafter. Ongoing training for certain refresher training periodically thereafter. Ongoing training for certain positions, maybe considered for purchasing agents or employees with positions, maybe considered for purchasing agents or employees with financial reporting responsibilities. Training should be specific to an financial reporting responsibilities. Training should be specific to an employee’s level within the organization, geographic location, and assigned employee’s level within the organization, geographic location, and assigned responsibilities. For example, training for senior manager level personnel responsibilities. For example, training for senior manager level personnel would normally be different from that of non-supervisory employees, and would normally be different from that of non-supervisory employees, and training for purchasing agents would be different from that of sales training for purchasing agents would be different from that of sales representatives.representatives.

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CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSConfirmationConfirmation• Management needs to clearly articulate that all employees will be held Management needs to clearly articulate that all employees will be held

accountable to act within the entity’s code of conduct. All employees within accountable to act within the entity’s code of conduct. All employees within senior management and the finance function, as well as other employees in senior management and the finance function, as well as other employees in areas that might be exposed to unethical behavior (for example, procurement, areas that might be exposed to unethical behavior (for example, procurement, sales and marketing) should be required to sign a code of conduct statement sales and marketing) should be required to sign a code of conduct statement annually, at a minimum.annually, at a minimum.

• Requiring periodic confirmation by employees of their responsibilities will not Requiring periodic confirmation by employees of their responsibilities will not only reinforce the policy but may also deter individuals from committing fraud only reinforce the policy but may also deter individuals from committing fraud and other violations and might identify problems before they become and other violations and might identify problems before they become significant. significant.

• Such confirmation may include statements that the individual understands the Such confirmation may include statements that the individual understands the entity's expectations, has complied with the code of conduct, and is not aware entity's expectations, has complied with the code of conduct, and is not aware of any violations of the code of conduct other than those the individual lists in of any violations of the code of conduct other than those the individual lists in his or her response.his or her response.

• Although people with low integrity may not hesitate to sign a false confirmation, Although people with low integrity may not hesitate to sign a false confirmation, most people will want to avoid making a false statement in writing. Honest most people will want to avoid making a false statement in writing. Honest individuals are more likely to return their confirmations and to disclose what individuals are more likely to return their confirmations and to disclose what they know (including any conflicts of interest or other personal exceptions to the they know (including any conflicts of interest or other personal exceptions to the code of conduct). Thorough follow-up by internal auditors or others regarding code of conduct). Thorough follow-up by internal auditors or others regarding non-replies may uncover significant issues.non-replies may uncover significant issues.

4444

CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSDisciplineDisciplineThe way an entity reacts to incidents of alleged or suspected fraud will The way an entity reacts to incidents of alleged or suspected fraud will

send asend astrong deterrent message throughout the entity, helping to reduce the strong deterrent message throughout the entity, helping to reduce the

numbernumberof future occurrences. The following actions should be taken in response of future occurrences. The following actions should be taken in response

to anto analleged incident of fraud:alleged incident of fraud:

• A thorough investigation of the incident should be conducted.A thorough investigation of the incident should be conducted.• Appropriate and consistent actions should be taken against violators.Appropriate and consistent actions should be taken against violators.• Relevant controls should be assessed and improved.Relevant controls should be assessed and improved.• Communication and training should occur to reinforce the entity’s Communication and training should occur to reinforce the entity’s

values, code of conduct, and expectations.values, code of conduct, and expectations.

Expectations about the consequences of committing fraud must be clearlyExpectations about the consequences of committing fraud must be clearlyCommunicated throughout the entity. Communicated throughout the entity.

4545

CREATING A CULTURE OF CREATING A CULTURE OF HONESTY AND HIGH ETHICSHONESTY AND HIGH ETHICSDisciplineDiscipline

For example, a strong statement from management that dishonestFor example, a strong statement from management that dishonestactions will not be tolerated, and that violators may be terminated andactions will not be tolerated, and that violators may be terminated andreferred to the appropriate authorities, clearly establishes referred to the appropriate authorities, clearly establishes consequences and can be a valuable deterrent to wrongdoing. If consequences and can be a valuable deterrent to wrongdoing. If wrongdoing occurs and an employee is disciplined, it can be helpful to wrongdoing occurs and an employee is disciplined, it can be helpful to communicate that fact, on a no-name basis, in an employee newslettercommunicate that fact, on a no-name basis, in an employee newsletteror other regular communication to employees. Seeing that other peopleor other regular communication to employees. Seeing that other peoplehave been disciplined for wrongdoing can be an effective deterrent,have been disciplined for wrongdoing can be an effective deterrent,increasing the perceived likelihood of violators being caught andincreasing the perceived likelihood of violators being caught andpunished. It also can demonstrate that the entity is committed to anpunished. It also can demonstrate that the entity is committed to anenvironment of high ethical standards and integrity.environment of high ethical standards and integrity.

4646

EVALUATING ANTIFRAUD EVALUATING ANTIFRAUD PROCESSES AND CONTROLSPROCESSES AND CONTROLS

-- Identifying and Measuring Fraud RisksIdentifying and Measuring Fraud Risks

-- Mitigating Fraud RisksMitigating Fraud Risks

-- Implementing and Monitoring Appropriate Implementing and Monitoring Appropriate Internal Internal ControlsControls

4747

EVALUATING ANTIFRAUD EVALUATING ANTIFRAUD PROCESSES AND CONTROLSPROCESSES AND CONTROLSMisappropriation of assets cannot occur without aMisappropriation of assets cannot occur without aperceived opportunity to commit and conceal theperceived opportunity to commit and conceal theact. Organizations should be proactive in reducingact. Organizations should be proactive in reducingfraud opportunities by; fraud opportunities by;

• (1) Identifying and measuring fraud risks, (1) Identifying and measuring fraud risks,

• (2) Taking steps to mitigate identified risks, and (2) Taking steps to mitigate identified risks, and

• (3) Implementing and monitoring appropriate preventive (3) Implementing and monitoring appropriate preventive and detective internal controls and other deterrent and detective internal controls and other deterrent measures.measures.

4848


Identifying and Measuring Fraud RisksIdentifying and Measuring Fraud Risks

– Management has primary responsibility for establishing and Management has primary responsibility for establishing and monitoring all aspects of the entity’s fraud risk-assessment and monitoring all aspects of the entity’s fraud risk-assessment and prevention activities.prevention activities.

– Fraud risks often are considered as part of an enterprise-wide risk Fraud risks often are considered as part of an enterprise-wide risk management program, though they may be addressed separately.management program, though they may be addressed separately.

– The fraud risk-assessment process should consider the vulnerability The fraud risk-assessment process should consider the vulnerability of the entity to fraudulent activity and whether any of those of the entity to fraudulent activity and whether any of those exposures could result in a material loss to the organization. exposures could result in a material loss to the organization.

– In identifying fraud risks, consideration should be given to industry, In identifying fraud risks, consideration should be given to industry, and country-specific characteristics that influence the risk of fraud.and country-specific characteristics that influence the risk of fraud.

– The nature and extent of management’s risk assessment activities The nature and extent of management’s risk assessment activities should be commensurate with the size of the entity and complexity should be commensurate with the size of the entity and complexity of its operations.of its operations.

For example, the risk assessment process is likely to be less formal and For example, the risk assessment process is likely to be less formal and lessless

structured in smaller entities. structured in smaller entities.

4949


Identifying and Measuring Fraud RisksIdentifying and Measuring Fraud Risks However, management should recognize that fraud canHowever, management should recognize that fraud canoccur in organizations of any size or type, and thatoccur in organizations of any size or type, and thatalmost any employee may be capable of committingalmost any employee may be capable of committingfraud given the right set of circumstances. fraud given the right set of circumstances.

Accordingly, management should develop a heightenedAccordingly, management should develop a heightened““fraud awareness” and an appropriate fraud risk- fraud awareness” and an appropriate fraud risk- management program, with oversight from the board ofmanagement program, with oversight from the board ofdirectors or audit committee.directors or audit committee.

5050

EVALUATING ANTIFRAUD EVALUATING ANTIFRAUD PROCESSES AND CONTROLSPROCESSES AND CONTROLSMitigating Fraud RisksMitigating Fraud Risks

• It may be possible to reduce or eliminate certain fraud risks It may be possible to reduce or eliminate certain fraud risks by making changes to the entity’s activities and processes. by making changes to the entity’s activities and processes.

• An entity may choose to sell certain segments of its An entity may choose to sell certain segments of its operations, cease doing business in certain locations, or operations, cease doing business in certain locations, or reorganize its business processes to eliminate reorganize its business processes to eliminate unacceptable risks. unacceptable risks.

• For example, the risk of misappropriation of funds may be For example, the risk of misappropriation of funds may be reduced by implementing a central lockbox at a bank to reduced by implementing a central lockbox at a bank to receive payments instead of receiving money at the receive payments instead of receiving money at the entity’s various locations. The risk of corruption may be entity’s various locations. The risk of corruption may be reduced by closely monitoring the entity’s procurement reduced by closely monitoring the entity’s procurement process. process.

5151

EVALUATING ANTIFRAUD EVALUATING ANTIFRAUD PROCESSES AND CONTROLSPROCESSES AND CONTROLSImplementing and Monitoring Appropriate Internal ControlsImplementing and Monitoring Appropriate Internal Controls• Some risks are inherent in the environment of the entity, but most can be Some risks are inherent in the environment of the entity, but most can be

addressed with an appropriate system of internal control.addressed with an appropriate system of internal control.

• Once fraud risk assessment has taken place, the entity can identify the Once fraud risk assessment has taken place, the entity can identify the processes, controls, and other procedures that are needed to mitigate processes, controls, and other procedures that are needed to mitigate the identified risks.the identified risks.

• Effective internal control will include a well-developed control Effective internal control will include a well-developed control environment, an effective and secure information system, and environment, an effective and secure information system, and appropriate control and monitoring activities.appropriate control and monitoring activities.

• Because of the importance of information technology in supporting Because of the importance of information technology in supporting operations and the processing of transactions, management also needs operations and the processing of transactions, management also needs to implement and maintain appropriate controls, whether automated or to implement and maintain appropriate controls, whether automated or manual, over computer-generated information.manual, over computer-generated information.

• In particular, management should evaluate whether appropriate internal In particular, management should evaluate whether appropriate internal controls have been implemented in any areas management has controls have been implemented in any areas management has identified as posing a higher risk of fraudulent activity.identified as posing a higher risk of fraudulent activity.

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DEVELOPING AN DEVELOPING AN APPROPRIATE APPROPRIATE

OVERSIGHT PROCESSOVERSIGHT PROCESS-- Audit Committee or Board of DirectorsAudit Committee or Board of Directors

-- ManagementManagement

-- Internal AuditorsInternal Auditors

-- Independent AuditorsIndependent Auditors

-- Certified Fraud ExaminersCertified Fraud Examiners

5353

DEVELOPING AN DEVELOPING AN APPROPRIATE OVERSIGHT APPROPRIATE OVERSIGHT

PROCESSPROCESSTo effectively prevent or deter fraud, To effectively prevent or deter fraud, an entity should have an appropriate an entity should have an appropriate oversight function in place. Oversight oversight function in place. Oversight can take many forms and can be can take many forms and can be performed by many within and performed by many within and outside the entity, under the overall outside the entity, under the overall oversight of the audit committee of oversight of the audit committee of the board of directors.the board of directors.

5454


PROCESSPROCESSAudit Committee or Board of DirectorsAudit Committee or Board of Directors• The audit committee should evaluate management’s The audit committee should evaluate management’s

identification of fraud risks, implementation of antifraud identification of fraud risks, implementation of antifraud measures, and creation of the appropriate “tone at the top.” measures, and creation of the appropriate “tone at the top.”

• Active oversight by the audit committee can help to re-inforce Active oversight by the audit committee can help to re-inforce management’s commitment to creating a culture with “zero management’s commitment to creating a culture with “zero tolerance” for fraud. The audit committee typically has the tolerance” for fraud. The audit committee typically has the ability and authority to investigate any alleged or suspected ability and authority to investigate any alleged or suspected wrongdoing brought to its attention. wrongdoing brought to its attention.

• Most audit committee charters empower the committee to Most audit committee charters empower the committee to investigate any matters within the scope of its responsibilities, investigate any matters within the scope of its responsibilities, and to retain legal, accounting, and other professional advisers and to retain legal, accounting, and other professional advisers as needed to advise the committee and assist in its as needed to advise the committee and assist in its investigation.investigation.

5555


PROCESSPROCESSManagementManagement• Management is responsible for overseeing the Management is responsible for overseeing the

activities carried out by employees, and activities carried out by employees, and typically does so by implementing and typically does so by implementing and monitoring processes and controls, as monitoring processes and controls, as mentioned earlier. mentioned earlier.

• However, management also may initiate, However, management also may initiate, participate in, or direct the commission and participate in, or direct the commission and concealment of a fraudulent act. Accordingly, concealment of a fraudulent act. Accordingly, the audit committee has the responsibility to the audit committee has the responsibility to oversee the activities of senior management oversee the activities of senior management

5656


PROCESSPROCESSInternal AuditorsInternal Auditors

• An effective internal audit team can be extremely helpful in An effective internal audit team can be extremely helpful in performing aspects of the oversight function. Their knowledge performing aspects of the oversight function. Their knowledge about the entity may enable them to identify indicators that about the entity may enable them to identify indicators that suggest fraud has been committed.suggest fraud has been committed.

• Internal audits can be both a detection and a deterrence measure. Internal audits can be both a detection and a deterrence measure. Internal auditors can assist in the deterrence of fraud by Internal auditors can assist in the deterrence of fraud by examining and evaluating the adequacy and the effectiveness of examining and evaluating the adequacy and the effectiveness of the system of internal control, commensurate with the extent of the system of internal control, commensurate with the extent of the potential exposure or risk in the various segments of the the potential exposure or risk in the various segments of the organization's operations.organization's operations.

• Internal auditors may conduct proactive auditing to search for Internal auditors may conduct proactive auditing to search for corruption and misappropriation of assets.corruption and misappropriation of assets.

5757


PROCESSPROCESSIndependent AuditorsIndependent Auditors

• Independent auditors can assist management and the Independent auditors can assist management and the board of directors (or audit committee) by providing an board of directors (or audit committee) by providing an assessment of the entity’s process for identifying, assessment of the entity’s process for identifying, assessing, and responding to the risks of fraud. assessing, and responding to the risks of fraud.

• The board of directors (or audit committee) should have an The board of directors (or audit committee) should have an open and candid dialogue with the independent auditors open and candid dialogue with the independent auditors regarding management’s risk assessment process and the regarding management’s risk assessment process and the system of internal control. system of internal control.

• Such a dialogue should include a discussion of the entity’s Such a dialogue should include a discussion of the entity’s exposure to misappropriation of assets. exposure to misappropriation of assets.

5858


PROCESSPROCESSCertified Fraud ExaminersCertified Fraud Examiners

• Certified fraud examiners may assist the audit Certified fraud examiners may assist the audit committee and board of directors with aspects of committee and board of directors with aspects of the oversight process either directly or as part of the oversight process either directly or as part of a team of internal auditors or independent a team of internal auditors or independent auditors. auditors.

• Certified fraud examiners can provide extensive Certified fraud examiners can provide extensive knowledge and experience about fraud that may knowledge and experience about fraud that may not be available within an entity. not be available within an entity.

5959

DocumentationDocumentation

-- Written Fraud PolicyWritten Fraud Policy

-- Code of conductCode of conduct

-- Code of Ethics StatementCode of Ethics Statement

6060

Who is responsible for the Who is responsible for the Detection of Fraud?Detection of Fraud?

Management is responsible for designing andManagement is responsible for designing and

implementing systems and procedures for the implementing systems and procedures for the prevention prevention

and detection of fraud and, along with the board of and detection of fraud and, along with the board of

directors, for ensuring a culture and environment that directors, for ensuring a culture and environment that

promotes honesty and ethical behavior. promotes honesty and ethical behavior.


6161

Questions?Questions?

Contact Information: Contact Information: Email:Email: [email protected]@ghl.com.jmTelephone:Telephone: 1-876-355-28561-876-355-2856

1-876-770-55371-876-770-5537


1 “insurance fraud, from the perspective of asset protection” presenter: winston delahaye; cfe,...

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