The top five areas to monitor for employee fraud money laundering identification requirements

The top five areas to monitor for employee fraud money laundering identification requirements

Even in a generally well-run company, fraud still takes place. According to the 2012 ACFE report, an average organization loses 5% of its revenues to fraud — a staggering sum.

So what can senior management do about this problem, which is toxic, even if actual losses are far less than the ACFE statistics? Most organizations start by ensuring that there is an appropriate tone at the top, clearly defined ethical policies and well-designed controls. There seems to be a trend in many organizations, particularly those within the high-performance category, to assume that fraud only happens elsewhere. The reality is that people are fallible and there is always going to be at least one bad apple. Policies will be ignored, and controls are never perfectly effective.

According to the ACFE report, the majority of asset misappropriation occurs in the procurement, payment and expense areas.Money laundering identification requirements this is where most organizations start monitoring activities. In fact, by analyzing transactions in these areas (such as with continuous monitoring systems that are driven by data analysis), it is usually possible to test for a wide range of employee fraud schemes, as well as bribery and conflicts of interest.

Here are five areas in which employee fraud commonly occurs:


Potential fraud risks include (a) an employee initiating purchase orders (P.O.) for goods and services that are diverted for personal use and (b) an employee setting up a “phantom” vendor account, through which fraudulent invoices are processed and payments are made to the employee.

In these situations, fraud tests can detect if the same individual both enters and approves a P.O. Or if an individual enters or approves multiple “split” P.O.’s, just under an authorized limit.Money laundering identification requirements other evidence that can be discovered includes whether the delivery address for goods or services is the same as an employee’s, whether the goods being purchased are typically consumer items, or whether the vendor master file information (address, bank account, etc.) is the same as that of an employee.

Corporate credit cards

A common fraud risk is an employee using a corporate credit card for personal gain instead of legitimate corporate purchases or travel and entertainment expenses.

Fraud tests can detect purchasing cards (P-cards) being used to acquire goods and services from vendors with suspect merchant codes (e.G., home supplies, personal entertainment, etc.) and corporate cards being used by employees on weekends or while the employee is on vacation. Additionally, tests can determine whether fuel is purchased in unusually large quantities, mileage charges are made in the same period as rental-car charges, and corporate-card transactions are approved by the card holder.Money laundering identification requirements


Payroll fraud can consist of (a) “phantom” employees being set up on payroll systems; (b) excessive overtime payments; and (c) employees remaining on the payroll after death or termination.

Tests can detect if there is more than one employee with the same bank account details or the same address. In addition, they can find invalid address information for employees, invalid social security numbers, unusually high overtime amounts, and payroll payments made to employees who were terminated or deceased according to HR records.

Sales and receivables

Some potential frauds include (a) employee collusion with vendors and (b) sales representatives inflating sales to achieve higher commissions and bonuses.

Fraud tests can detect customer accounts with exceptional credit terms; customer accounts that have unusually large or frequent credit memos; customers receiving unusually large discounts; customers returning goods without corresponding adjustments to sales representatives’ commissions; and sales shipment addresses that are the same as an employee’s address.Money laundering identification requirements

Information systems and critical data

This kind of fraud includes (a) employee theft of critical data and (b) employees providing corporate data to external individuals.

The right tests can discover databases accessed by individuals without appropriate authorities and reports generated by individuals without appropriate authorization. Similarly, fraud tests can detect customer accounts with exceptional credit terms and network logs that indicate unauthorized copying and movement of data files. Tests can also help discover if email attachments include sensitive data.

John verver is vice president, product strategy and alliances, at ACL, an audit and risk management technology solutions firm.

@retireit said

11/22/13 09:40am

Employee theft of retired computers is the most overlooked aspects of data security. Insiders (usually IT staff) take retired assets that supposed to be handed to a disposal vendor for proper processing.Money laundering identification requirements

The value of the stolen hardware is not the issue. Consequential damage from a data breach is the issue. Even a small breach will cost more than $1 million dollars.

Here is a simple challenge for any fraud professional…a very straight-forward test: account for every asset retired this year.

In other words, compare an inventory of assets that your organization claims to have retired, to the corresponding inventory your organization’s disposal vendor claims to have received.

Of course procurement is an area ripe for fraud. Organizations would be wise to adopt a process of reverse procurement™.

If an organization purchased 100 servers and only received 99, procurement professionals would demand accountability. That same organization should demand at least the same level of accountability when it retires the 100 servers, particularly when protected data is involved.Money laundering identification requirements

/kyle marks


Patrick taylor said

12/20/13 12:26pm

On the topic addressed in this article on staying ahead of the game by monitoring specific areas for employee fraud, among the top 5 areas where employee fraud commonly occurs included purchase-to-pay, corporate credit cards, payroll, sales and receivables, and information systems and critical data. While it is essential to monitor in these areas to stay ahead of fraud, we find the action that follows monitoring is key to successfully fighting fraud and compliance efforts in general.

First we have to validate the findings to avoid false accusations. For bona fide fraud we have to open a case and typically invoke other departments such as HR and legal. For relatively minor policy infractions (think abuse as opposed to fraud) an email to the transgressor and their manager will correct the behavior and let it be known that you’re watching.Money laundering identification requirements these transgressions should be tracked through time so that repeat offenders can be identified and stringently addressed.

If you’re not acting you might as well not monitor either. Both activities must be done on an ongoing basis to be effective, as spot checks and samples will most likely miss fraud. To perform this at scale, leverage technology to make it efficient.

– patrick taylor, CEO, http://www.Oversightsystems.Com

John verver said

01/13/14 16:57pm

I completely agree with patrick taylor’s comment about the importance of the follow up process, once indicators of fraud and abuse are identified. One of the first steps is to determine whether the exception that has been identified is a “false positive” or likely to be fraudulent.

Technology can also play a vital role in supporting the entire subsequent process to help ensure that appropriate follow up procedures are performed.Money laundering identification requirements this usually involves some form of pre-determined workflow, depending on the nature of the fraud indicators that are identified by the fraud monitoring system. For example, certain types and sizes of “exceptions” can be prioritized for immediate review by an appropriately senior individual. Once an exception is determined to have a high probability of being fraudulent, the issue can be automatically routed to the fraud investigation department, HR and legal – as needed. Overall dashboards can keep track of the status of all issues that have been identified and are being processed through the system.

I also agree with earlier comments suggesting there could be more critical areas to monitor for potential fraud, including instances in which senior management is involved. The techniques of using data analysis to monitor transactions can be used in a wide range of different areas, all based on the premise that “the truth is in the transactions” – in other words, no matter what controls are meant to be in place it is by examining what has actually occurred that instances of fraud, error and abuse can very often be identified.Money laundering identification requirements

Ideally, any fraud monitoring system should also operate in the context of an overall risk management system. This provides for the identification of those areas that are most likely to be high risk for fraud and helps to focus efforts on those areas of greatest concern, which may vary greatly depending on the industry. That said, there is often “low-hanging fruit” instances of fraud that can be rapidly addressed by implementing analytics in the more standard areas of procurement, payroll, TE etc