The 5 'C's of Fraud Prevention
Business fraud is nothing new. With high-profile cases, such as those at JPMorgan Chase and Bank of America making headlines, companies are becoming more aware of fraud. Still, corporate fraud can be difficult to prevent and prosecute as criminals employ more sophisticated tactics, such as phony business identity credentials, to obtain credit.
According to the Kroll Global Fraud Report, 70% of companies surveyed said that they were affected by fraud in 2013, up from 61% in 2012. Growing at a rate of 13% annually, according to Javelin Strategy in a recent whitepaper on mitigating business fraud, business identify theft has surpassed $4 billion annually and is now one of the most popular forms of commercial fraud.
When corporations fall victim to fraud it can have devastating financial consequences and inflict irreparable damage to a company’s reputation and brand. Take Bank of America, for example. In October 2013, the company was found liable for fraud over defective mortgages sold by its Countrywide unit and was asked to fork over the gross loss of $848.2 million the US Justice Department said Fannie Mac and Freddie Mac suffered on the loans.
Combating fraud requires a proactive approach. The 5 'C's of fraud prevention, used by many organizations and offering insight and guidance on how to address and combat fraud, can provide companies with a strategic framework to guide their risk management efforts.
The Five 'C's of Fraud Prevention
1. Confirmation: Does an entity or person truly exist? When doing business with a new company, it’s important to do your due diligence and identify any red flags. A quick check of databases will reveal if a particular business is registered to operate in the state or has a valid address.
2. Condition: Is the business and/or its executives active? After you’ve confirmed that the business exists, the next step is to find out its status. Does it have a functional telephone number, website, or e-mail address? Is the company’s business license expired? If it feels and looks suspicious, it probably is.
3. Consistency: Are stated facts consistent with other sources of information? Now that you’ve confirmed the business exists and is operating, the next step is to look for consistency—or lack thereof. For example, does the company president also run 15 other businesses registered at the same office? This is a definite warning sign that something is awry.
4. Character: Are there any past issues that could make current or future transactions risky? Conduct criminal and background checks to reveal any past skeletons, such as complaints with the Better Business Bureau, or arrests for criminal fraud. You want to make sure you are dealing with a business that’s in good financial standing.
5. Continuity: Has the operation’s status changed and is it posing new risks? Just because you’ve signed the contracts, it doesn’t mean your job is done. Implement a system that continually monitors contacts for events that may indicate potential trouble.
While the five 'C's of fraud prevention is a great foundation for risk management, companies also must adopt clear policies for applying their fraud prevention rules and processes. Remember: all levels of staff must be educated and trained to follow gold standard practices.