Due to the absence of reliable statistics, it is difficult to determine the percentages of fraud committed specifically against financial institutions by outsiders as compared with insiders. However, by virtue of the fact that they are in the money business, the banking and finance industries provide more opportunities for outsiders to perpetrate (or at least attempt to perpetrate) fraud than do most other industries. This is especially true in light of the rapid growth of Internet – based fraud attacks against banks. As such, many financial institutions report that external frauds are considerably more costly in aggregate than internally perpetrated crimes.

What we do know is that financial institutions of all kinds are constant targets of fraud perpetrators from inside and outside and that management must devote substantial financial, human, and technological resources to detection, prevention, and deterrence of frauds of all types and origins.

Who Are the Bad Guys?

When it comes to external fraudsters, financial services institutions have a dizzying variety of perpetrators to worry about. Most serious, in terms of the dollars involved (although not necessarily dollars lost) are money launderers. This group includes the far – flung global population of drug traffickers as well as members of organized crime, illegal gambling operators, terrorists, and others. Note. Although financial institutions are directly responsible for monitoring and reporting money – laundering activity to federal regulators, because they typically are not victims of such activity, this book does not address the money – laundering problem in great detail.

However, plenty of external fraudsters besides money launderers cause massive losses to fi nancial services companies. Their illegal exploits and how to detect and prevent them are discussed in coming chapters. This band of ethically challenged outsiders includes:

Dishonest customers (retail and commercial)

  • Identity thieves/fraudsters
  • Check forgers and counterfeiters
  • Dishonest vendors
  • Ex – employees
  • Internet fraudsters (including phishing attackers, hackers, malicious code programmers)
  • Credit card fraudsters
  • Crooked mortgage brokers, appraisers, and attorneys

Because external fraudsters are so varied in terms of both the business and social environments in which they operate, as well as their geographical location, it is difficult to identify common personal, behavioral, or demographic characteristics. Some are hardened career criminals; others are occasional opportunists; others target financial institutions for the “ thrill of it ” ; still others do what they do out of desperation (which is increasingly the case during economic downturns, when banks regularly experience spikes in credit card fraud, identity – related frauds, and Internet crime). The bottom line is that there are few if any behavioral or demographic characteristics common to external fraudsters. For that reason, we will need to focus on the varieties of crimes they perpetrate and learn to spot the red flags, regardless of who the perpetrators are.

Insider Threat

Fortunately for fraud fighters, the same is not true with regard to internal fraudsters. Employees who commit fraud do have common personality and behavioral traits. They are also prone to scientifically proven psychological influences that help fraud prevention experts to identify them.

In general, research on internal fraud shows that about 80 percent of employees in any financial services institution are fundamentally honest. If that is the case, you may wonder, how can internal fraud be such a costly threat to financial institutions? Many fraud prevention experts use the so – called 20 – 60 – 20 rule to illustrate the human component of fraud:

  • Twenty percent of the people in any organization will never steal — no matter what. They are individuals whose character and integrity are so incorruptible that nothing could pressure or tempt them to do anything dishonest.
  • Sixty percent of the people in the organization are “ fence sitters. ” They are basically honest people. But if given the opportunity to commit fraud and they perceive the risk to be minimal, they might cross the line.
  • The remaining 20 percent are inherently dishonest. They will always commit fraud when the opportunity arises. In fact, they often will seek out or even create opportunities to steal or deceive if they think it will result in personal financial gain.

To understand the insider fraud threat, it is helpful to divide it into two key categories:

  1. Employee – level fraud. This type of fraud is committed by people who are neither supervisors nor managers or executives. They may be salaried professionals or hourly employees.
  2. Management – level fraud. These crimes are committed by managers at all levels, including the most senior levels. Many of the frauds committed by these individuals are the same as those committed by employees lower down the organization chart.

Although committed with less frequency than employee – level fraud, virtually all management – level frauds result in much greater losses than those perpetrated at lower levels. The reason is clear: Managers have more authority and therefore more opportunity to cheat than those who work under them. These statistics do not include fraud by business owners and top executives. Although such frauds are committed with less frequency than those committed by managers and employees, frauds by the “ top dogs ” result in losses 5 times greater than those committed by managers and 11 times greater than those by employees.


There is an inverse ratio between the level of the organization at which fraud is committed and the amount of financial loss resulting from frauds at each level. Thus, while management – level frauds are committed less frequently than employee – level frauds, the financial loss resulting from these crimes is almost always significantly greater than the amount lost to frauds committed by “ regular ” employees.


  • Goldmann, Peter D. 2010. Financial Services Anti-Fraud Risk and Control Workbook. John Wiley & Sons, Inc.
  • 2021. Google Image – Fraud Image.
  • Vona, Leonard. 2011. The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems. John Wiley & Sons, Inc.