Insider fraud definition and meaning | AML glossary
Insider fraud definition: What it means in AML compliance.
Insider fraud occurs when an employee or someone with internal access to an organisation’s systems, data, or operations exploits that position for personal gain, typically by deceiving or misleading the organisation. This kind of fraud is a significant risk because it involves individuals who already have trust and authority within the company, making detection more difficult.
Insider fraud can take many forms. It may involve employees manipulating financial records, diverting company funds, or stealing sensitive information to sell or use for personal benefit. This form of fraud is particularly harmful because it’s often carried out by people who know the internal controls and vulnerabilities of a business, allowing them to evade detection for longer periods.
One of the most insidious aspects of insider fraud is how it can erode the trust within an organisation. When it’s an employee exploiting the system, it can feel like a betrayal, as that individual was trusted to protect the company’s interests. Not only does this result in financial loss, but it also damages the internal culture and potentially exposes the company to reputational harm.
“Over a third of employees (38%) filed to the Cifas Insider Threat Database (ITD) for dishonest conduct against their employer have been in their position less than a year – up from 21% in 2022.”
Cifas
Fraudscape 2024
What impact can insider fraud have on compliance teams?
In a UK-regulated environment, firms are obligated to detect and prevent any form of financial crime, including fraud, and insider fraud can create significant blind spots in a company’s AML efforts.
Firstly, insider fraud often involves the manipulation of financial data or transactions that go unnoticed by external parties. A dishonest employee could, for example, adjust transaction records to hide illicit activities, making it harder to spot suspicious activity through normal monitoring processes. As a result, it may evade detection until much later, potentially after significant damage has been done.
Secondly, employees engaged in insider fraud might exploit weaknesses in the company’s controls. For example, they may bypass verification systems, approve their own transactions, or change access privileges to facilitate fraudulent activities. This makes it even more critical for AML teams to ensure internal controls are tight and comprehensive. Regular reviews and updates to access permissions, approvals, and monitoring systems are vital to reduce these risks.
Insider fraud also impacts the company’s reputation and credibility with regulators. In a highly regulated environment like the UK, the discovery of insider fraud can raise serious concerns with the Financial Conduct Authority (FCA) or other relevant authorities. If an organisation fails to identify fraud that has occurred internally, it could lead to regulatory scrutiny, financial penalties, and even potential criminal charges. Preventing insider fraud should be seen as part of the broader effort to mitigate financial crime risks.
Regularly conducting background checks on employees, particularly those with access to sensitive financial systems, is one way to reduce the risk.
Further, creating a strong internal culture of accountability and transparency helps to deter fraudulent behaviour. Encouraging employees to report any suspicious activities through whistleblowing channels and having strict anti-fraud policies in place can also play an important role. Additionally, AML procedures should be adapted to account for the risks posed by internal threats.
Training employees on the signs of insider fraud and the consequences of such activities is essential for reinforcing a culture of compliance too.Â
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