An 'In-House' Issue: reducing the risk of insider fraud at your charity

An 'In-House' Issue: reducing the risk of insider fraud at your charity

An 'In-House' Issue: reducing the risk of insider fraud at your charity

As the line between work and home life becomes increasingly blurred, the opportunities for insider fraud are also increasing, and the link between insider threat and overall employee well-being is growing more substantial.

In the latest Charity Fraud Report we found a marked shift away from thorewarnere external threat of fraud, with a greater focus on the insider threat, compared to last year’s survey results. We saw this through a twofold increase in reports of misappropriation of cash or assets by staff members or volunteers, followed closely by an increase in staff expenses fraud. This is supported by the finding that the majority of detected frauds were perpetrated by a staff member, or a volunteer, compared to an external party with no connection to the charity.

In light of this, understanding how working from home and cost of living pressures could lead to insider fraud and the steps you can take to tackle the insider threat is crucial in today’s environment. Therefore, we hope our insight can provide a window of understanding into how employees' home lives can impact the work-world threat of insider fraud and what you can do to reduce the risk of fraud.

The Insider Threat

Staff and volunteers are the eyes and ears of any organisation and will likely be the largest source of suspected fraud referrals. As such an important resource in the fight against fraud, it is important for them to be aware of what fraud looks like so they can spot it and know how to confidently report any concerns. With that said, it can be a double-edged sword, as staff and volunteers can also be the largest source of threat to your organisation, given their in-depth knowledge of your processes and controls - and the way to work around them. An organisation’s risk can also increase depending on various factors, including practical and embedded working practices that bypass key controls or insufficient resources and a lack of segregation of duties.  However, as the sayings go, ‘knowledge is power’ and ‘forearmed is forewarned’, and on the basis that the vast majority of your staff and volunteers will not seek to defraud you, it is key that they have the tools to recognise red flags and fraud indicators, at the same time as having all the important checks and balances in place to remove the tempting pull of opportunity.

As noted above, there appears to have been a shift away from the external threat with a greater focus on the threat from within, at least from the perspective of fraud detected by respondents of our 2022 Charity Fraud Report. Based on the data drawn from 100 respondents from UK-based charities, we found that:

  • 55% of reported frauds originated internally, with 46% of detected frauds perpetrated by a staff member and 9% by a volunteer. Overall, only 23% of frauds were by an external party without connection to the charity.
  • The most common types of fraud were the misappropriation of cash or assets (43% of detected fraud), most commonly perpetrated by those within an organisation, closely followed by staff members submitting false expenses claims (26% of reported fraud).

Charities must remain extremely vigilant to internal threats to combat fraud risk effectively, especially since, in our experience, it is often some of the most trusted and long-standing employees who can take advantage of organisational trust when the opportunity arises.

The impact of the rising cost of living

Everyone is under increasing financial pressure from the escalating costs of goods and services and rising inflation, leading to the current cost of living crisis.

Since our previous survey conducted in the height of the pandemic, the economic landscape of the UK has seen a significant shift. The threat of a recession is persistent, the cost of living has skyrocketed, and we have seen waves of political and economic instability with immediate knock-on effects for the majority of households and organisations in the UK, almost everyone is feeling the financial effects. 

This societal environment could also drive ordinarily law-abiding employees or volunteers to pursue fraudulent activity as a means to an end as a result of the pressure of their increasingly challenging financial situation.

Our respondent charities themselves also identified the economic downturn and cost of living crisis as potential catalysts for an increased risk of fraud as demand for their services spikes and more individuals and organisations come under financial pressure. 

So, as households around the country grapple with the current volatile societal and economic climate, it is even more important for charities to be aware not only of the existence of heightened fraud risk stemming from home-life pressures, but the steps required to manage it.

The Impact of Hybrid Working

Based on the data from our respondent charities, 40% think hybrid working has increased the risk of fraud.

Post-pandemic, hybrid working has become part of standard working practices for many organisations. This means that there are now new and different opportunities for individuals looking to exploit their organisation from the comfort of their own homes. Hybrid working does not of itself promote fraud, but it is important to assess the risk profile of any new or changed working practices and implement controls and procedures to manage that risk accordingly.

The Importance of Good Recruitment

Other personnel-centric fraud risks identified by the 2022 Charity Fraud Survey included a lack of qualified staff, under-resourced team structures or frequent personnel changes. 

These risks centre around the recruitment process and the appropriateness (or not) of it.

The hiring process is essential in fraud prevention because the best defence against fraud is to keep the fraudsters out and make sure the ones you recruit have the necessary skills to carry out the role.  

However, increasing costs for organisations may lead to recruitment freezes, leaving already under-resourced teams under even more pressure. There is no simple cure for an under-resourced team structure, but identifying the high-risk roles, like who has access to your cash and assets, can help prioritise your focus on key controls in high risk areas.  However, you must remember that your organisation's internal controls are only as good as its weakest link.

How to tackle the in-house threat

Below are five top tips to help you protect your charity against insider fraud:

  1. Recruitment, recruitment, recruitment - a thorough hiring process that includes due diligence, background checks and checking references (from junior members of staff up to senior executive level) can lower the risk of opening the door to a potential insider fraudster.
  2. Here today, gone tomorrow - many organisations rely on temp employees and the background checks performed by the agency, but do you understand the rigour of the agency checks? You might want to consider the types of roles that are suitable for temp employees and restrict of permissions that are granted to help protect your organisation.
  3. Why are people leaving – honest employees don’t want to work in a dishonest environment. You can empower your employees to do the right thing and report concerns of wrongdoing by having a clear whistleblowing policy so they can report their concerns confidentially. If that fails, exit interviews are key to understanding the real reason that someone might be leaving.
  4. Hybrid working is here to stay – it is vital to assess the risk profile of any new or changed working practices and implement controls and procedures to manage that risk accordingly. Charities should perform a thorough risk assessment to identify any new weaknesses which have arisen because of hybrid working and put a plan in place to mitigate those risks. For example, does the employee have a secure working environment where documents and hardware can be locked away and is their remote connection secure through the use of firewalls and VPNs.
  5. Mental well-being in difficult times - consider offering financial and mental health well-being sessions, whether through an independent party or simply a conversation with colleagues (i.e., with a manager or HR team). Offering advice to employees and volunteers on how to improve their finances, or the impact those pressures are having on their mental health, could avert a crisis before it happens.

As illustrated above, preventative measures need not stop at controls to limit the opportunity to commit insider fraud, such as hybrid checks and enhanced recruitment techniques. Charities should also seek to actively help employees and volunteers cope with the cost of living pressures they will most likely be facing, thus easing the motivation to commit insider fraud in the first instance. 

Contact Tracey Kenworthy, Fraud Director for more advice on how to prevent fraud at your charity.

Charity Fraud Report 20