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Fraud survey highlights unique control issues for specialty lenders

4 ways specialty lenders can control fraud


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RSM recently conducted a survey about fraud experienced by specialty lenders. The survey found that half of the respondents had experienced fraud in the past 12 months.

Following are some of the other key survey findings detailed in the 2014 specialty finance fraud survey report:

  • Among the respondents who identified the positions involved in the fraud, the most common positions were branch managers and customer service personnel.
  • Personnel committing fraud were usually not long-term employees, most having between one and five year’s experience with the employer.
  • Perpetrators were more than three times as likely to have a high school education or equivalent than a bachelor's degree.
  • Of the types of fraud reported, thefts of cash and fraudulent loans were the most common.
  • The majority of frauds were discovered within six months of being committed.
  • Frauds were most likely to be detected by internal controls or management.
  • The majority of frauds involved losses of less than $10,000.
  • In most cases, little or none of the losses were recovered.

These findings reveal some interesting patterns that specialty lenders can use to strengthen their internal controls. Most fraud studies find that frauds are committed by long-time employees, more often male, with college educations. Yet, among the specialty lenders surveyed, the perpetrators are most likely to be females with the company for less than five years and with only a high school education. In addition, the frauds reported in the survey were almost exclusively committed at branch locations, not at the home office. These frauds were almost always detected through internal controls or by management at home office locations.

These findings point to some clear opportunities to minimize fraud losses.

Four ways to control fraud

First, they demonstrate a lack of controls and insufficient segregation of duties at branch locations. The types of fraud most commonly committed help underscore this point. For example, fraudulent loan schemes often involve someone at the branch office recording a loan on the books and then writing it off. By ensuring those duties are performed by separate parties, this type of fraud could be largely avoided.

Second, specialty lenders should ensure that branch locations have strong internal controls on-site and not rely exclusively on controls at the home office. While fraud losses among the surveyed lenders were relatively small and generally caught quickly, stronger controls at the branch locations, where fraud is most likely to occur, could prevent many of these instances from occurring in the first place. Improved systems that would allow real-time reporting between branches and the home office could play a key role in improving controls and providing real-time oversight of operations – even if not real time, at least more comprehensive and more timely.

Third, weak or poorly documented operating policies and procedures, including formal fraud policies, also play a role in increasing the likelihood of fraud. By making it clear to all employees exactly what your operating procedures are, deviations from those procedures are more immediately obvious to everyone.

Fourth, specialty lenders should also consider educating new employees on common types of fraud. This would help honest employees spot malfeasance by co-workers. In addition, it would also underscore to employees who might be considering fraudulent behavior how small the gains from those frauds generally are, how quickly they are usually discovered and the consequences they could face.

Because many specialty lenders are relatively small compared to more traditional lenders, they often have less formal policies and closer personal ties to their employees. But it is a mistake to rely on this more familial atmosphere as an effective control. Improved segregation of duties; real-time oversight; stronger, more formal operating and fraud policies; and effective employee education can go a long way to preventing fraud at your organization.


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