Financial Services Anti-Fraud Risk and Control Workbook

Preface ix

Acknowledgments xiii

Introduction: Brief History of Fraud in the Financial Services Industry xv

Chapter 1 Why No Financial Services Institution Is Immune to Fraud 1

Statistical Perspective 1

What Is Fraud? 4

Myths and Realities about Financial Services Fraud 5

Review Points 9

Chapter Quiz 9

Chapter 2 The Human Element of Fraud 11

Who Are the Bad Guys? 11

Insider Threat 12

The Fraud Triangle 13

The Fraud Triangle in Financial Services 15

Pressure at Lehman: An Extreme Example 15

Opportunity and Rationalization 16

Rationalizing High-Level Fraud 19

A Fraud Diamond? 21

Review Points 21

Chapter Quiz 22

Chapter 3 Internal Fraud: Loan and Mortgage Fraud 25

Loan Fraud (Nonresidential Mortgage) 25

Mortgage Fraud 31

Types of Internal Mortgage Fraud to Beware Of 32

Red Flags of Employee-Level Loan and Mortgage Fraud 33

Preventing Employee-Level Loan and Mortgage Fraud 36

Review Points 47

Chapter Quiz 48

Chapter 4 Employee-Level Embezzlement 51

Looting Customer Accounts 51

Looting Noncustomer Funds 55

Theft of Confi dential Information 73

Insider Abuse of Computer Systems 75

Red Flags of Employee-Level Embezzlement 76

Preventing Employee-Level Embezzlement and Information Theft 81

Review Points 90

Chapter Quiz 90

Chapter 5 Internal Fraud: Management Level 93

Looting and Embezzlement 94

Illegal Financial Transactions/Corruption 97

Fraudulent Financial Reporting 102

Deceiving Borrowers, Investors, and Regulators 106

Red Flags of Management-Level Internal Fraud 109

Management-Level Fraud Prevention Checklists 113

Review Points 119

Chapter Quiz 120

Chapter 6 External Fraud against Financial Services Companies 123

Externally Perpetrated Loan Fraud (Nonmortgage) 123

Externally Perpetrated Mortgage Fraud Schemes 127

New Forms of Identity Theft and Fraud 139

Red Flags of External Fraud 152

External Fraud Prevention Checklists 160

Review Points 170

Chapter Quiz 171

Chapter 7 Conducting a Successful Fraud Risk Assessment 175

Getting It Done 175

Procedures for Conducting a Fraud Risk Assessment 177

Roles of the Board and Management in Fraud Risk Assessments 181

Review Points 183

Chapter Quiz 183

Chapter 8 Legal and Regulatory Compliance for Controlling Fraud Risk 185

Fraud Rules to Take Seriously 187

Hypothetical Case: Compliance and InfoSecurity 192

Develop and Implement a Response Program 193

Future Regulation: A Prediction 197

Review Points 197

Chapter Quiz 198

Chapter 9 Fraud Detection in Financial Services Companies 201

Basic Detection Methods 203

Advanced Fraud Detection Tools and Techniques 208

Essentials of Fraud Auditing in Financial Institutions 212

Essentials of Automated Auditing 215

Conclusion 215

Review Points 216

Chapter Quiz 218

Appendix A: Answers to Chapter Quizzes 221

Appendix B: Answer Key for Case Studies 225

Notes 237

Glossary 249

About the Author 255

Index 257