Hero Image

May 27, 2022

Fraud Risk Management: What It is and How the Process Works

Fraud risk management process is extremely crucial for firms to detect and prevent fraudulent activities. Learn what fraud risk management is and how to protect your company more efficiently from fraud.

We often hear risk management term in the business world but what does it exactly mean? Risk management is the exercise of spotting possible risks in advance, analysing them and taking preventive steps to decrease both possibility of the risk and the effects of risk. Effective risk management process requires organizations to act proactively, not reactively.  In the end, disregarded risks may cause both financial and reputational damage. Therefore, corporations should be prepared for risks and potential outcomes of risks in advance.  

What is Fraud Risk Management?

Fraud risk management is a structured method to lessen fraud in an institution. There should be a fraud risk management process in an organization for frauds to be detected at early stages. A properly conducted fraud risk management process can help reduce fraud rates considerably. After a fraudulent activity is detected, necessary and right actions need to be taken to deal with it. That’s called fraud risk management. So, in other words, fraud risk management is the procedure of evaluating internal and external fraud risks in a corporation and then developing an anti-fraud program in order to prevent fraudulent actions before they take place.  

Why Organizations Need Fraud Risk Management?

In today’s world, enhancements in technology give criminals various opportunities to commit fraud. Even though technological developments can make fraud risk management easier for companies, it is a fact that those developments open the doors for scammers as well. According to PWC’s 2022 Global Economic Crime and Fraud Survey, 46% of surveyed firms reported that they faced with fraud cases in the last 2 years. The survey was conducted with over 1200 executives across 53 countries and regions.  

Global Economic Crime and Fraud Survey

Fraud might cause financial losses for companies. A study conducted by Association of Certified Fraud Examiners’ (ACFE) demonstrates that institutions lose 5% of their revenue each year due to fraud. 5% may sound small in the beginning but that 5% equals to millions of dollars for some companies. Companies could have benefited from those million dollars to invest more and grow their business if fraud cases haven’t occurred. To not lose horrible amounts of money to internal or external fraud, firms should have fraud risk management processes in place.  

Moreover, fraud cases within organizations may hurt reputation of those organizations. It may also hurt their brand image in the eye of the public. All these lead to a decrease in customer trust and loyalty. Customers who lose their trust might stop doing business with the company in question after all. Along with losing their existing clients, companies and organizations also face the risk of losing potential new customers. Reputational damage caused by fraud cases may prevent firms from acquiring new clients.  

How Does the Fraud Risk Management Process Work?

Fraud risk management processes are like risk management processes. Risk management processes also apply for fraud risk management processes. These are:

  • Identifying risks,
  • Assessing risks,
  • Responding to risks,
  • Monitoring and reviewing risks,
  • Reporting risks.  
  1. Identifying risks:

Identifying risks is extremely crucial for fraud risk management process in a business. Factors which impact fraud risks are:

  • What kind of nature and environment the business has,
  • How effective the internal controls are,
  • Values and ethics of the organization and organization personnel.

Assessing which employees and units tend to commit fraud and the possible methods they will use are significant. Identifying risks require brainstorming between employees. Once identifying risks is done, here comes prioritizing the risks. When there is no time or enough resource to decrease effects of existing risks, prioritization of risks is of high importance. Thus, corporations handle risks which have high priority immediately and prevent losses.  

  1. Assessing risks:

Based on many examples, to solve a problem, businesses should identify the problem and come up with a proper solution. Even though this is a nice and valid way to deal with issues, organizations need to do more than that. They should first try to figure out reasons behind the risks. They should address causes of the risks. In addition, they should think about how those risks might affect the business.  

  1. Responding to risks:

After identifying and assessing the risks, organizations should respond to risks in the best way possible. They should work on the strategies to mitigate risks and decide on who will be in charge of executing those strategies. Moreover, they should take the necessary actions to prevent the risks to occur again. Businesses should also think about what to do if those risks occur again in the future.

  1. Monitoring and reviewing risks:

Fraud risk management process is an ongoing process. Therefore, risk assessment is never done. Firms need to have constant monitoring and reviewing for their fraud risk management so that they can easily and quickly adapt to changing conditions and environment. Furthermore, new risks may happen in time and companies should be prepared for these new risks without getting late.  

  1. Reporting risks:  

With an appropriate fraud risk management approach, companies avoid the risk of missing crucial information and getting doubtful results. When reporting the risks, one should behave objectively, take measurable and clear actions, advice control activities to diminish the fraud risk.  

How Can You Make Fraud Risk Management Process Easier for Your Business?

Businesses should benefit from fraud risk management solutions to detect and prevent fraudulent activities on time. They should use a fraud detection software/tool. Fraud detection software is a program used to detect illegal, suspicious and risky online actions. A fraud detection tool analyses user actions on an ongoing basis and needs to have these benefits for organizations:  

  • It should have high detection rate so that zero or less fraud cases will happen in the organization. Therefore, there won’t be many financial and reputational losses,
  • should not only protect the company but also customers,  
  • should help the business to reserve its market share,  
  • needs to monitor the user behaviour,
  • needs to improve the operational efficiency and increase productivity,
  • ought to work with Big Data excellently.  

Moreover, these are the necessary and nice to have features of a fraud detection tool:

  • Machine learning – artificial intelligence,
  • Easy integration,
  • Real-time data analysis,
  • Alarm management,
  • Mobile reporting.

Machine learning – artificial intelligence:

Machine learning infrastructure lets firms deal with fewer and fewer fraud incidents every day by self-learning from the actions and customer behaviours over periods and usage. Fraud teams will spend less time investigating false alarms with fewer and more accurate cases. This way they can handle true fraudulent attempts instead of false positives. False positive means customer actions which are real and proper but is perceived like a fraudulent activity by the company. False positive cases might offend real customers whose actions are real and right and they might stop doing business with the company.  

Using a self-learning fraud detection product, organizations can reduce manual investigation and automate their decisions based on data and artificial intelligence. By reducing the numbers of false-positive issues, firms can increase its fraud team's operational performance besides saving more money.

Easy integration:

Fraud detection software needs to be flexible because of constantly changing situations and business needs. Therefore, firms should use a fraud detection tool which can be integrated with an API gateway to any service or application the firm uses. When organizations use fraud detection and prevention products which can be integrated with APIs, they can make data-driven decisions for fraud prevention in a couple of hours.   

Real-Time Data Analysis:

When it comes to fraud risk management, there's not even a second to spare. Thus, real-time data analysis and reporting is among the must features of an anti-fraud solution. You need to be able to intervene in fraudulent activities as soon as possible so that your business can avoid the damage or minimize the risk of it. Real-time solutions give you the chance to be ahead of fraudsters at all moments.

Alarm management:

Organizations should use a comprehensive alarm management screen to analyse and investigate risky transactions and potential fraud incidents while using a fraud detection tool. They should group each alarm page depending on the customer journey or stage like onboarding.  

For further steps on alarm management, they can make a deep investigation, search and create reports based on customer segmentation or users. They can also edit the configuration to set the alarms they need the most. Alarm management lets companies easily take actions like blocking or change permissions where necessary.

Mobile reporting:

Mobile reporting feature is a nice-to have feature of a fraud detection and prevention software. Thanks to the mobile reporting feature, responsible people can stay connected when they are on the go. Mobile Reporting App gives the people secure access to their business data and information right from their pocket. They can see business reports, key performance indicators (KPIs), and dashboards from their mobile phone while they are travelling or at a meeting. Those employees can get notifications and scheduled reports based on user groups and duties. 

If a firm wants to protect itself from fraudulent activities and have a smooth functioning fraud risk management process, it needs to benefit from a proper fraud detection and prevention technology. A fraud prevention tool makes fraud specialists’ job easier and save time for them. Thus, they can spend more time on critical cases. Companies need to be careful and picky while deciding on which fraud detection tool to use. They should look for specific features such as alarm management, real-time data analysis, machine learning, etc.  

Sign up to our newsletter and stay up-to-date!