Internal fraud by employees is a phenomenon that all companies and organizations should be aware of, particularly when a lot of money is involved. But fraud in the insurance sector often brings to mind incidental or organized attempts by policyholders, their representatives or the companies and organizations that are paid from insurance claims to scam their insurer. Hundreds of millions of euros worth of attempted insurance fraud is detected every year. According to the Centrum Bestrijding Verzekeringscriminaliteit (centre for the prevention of insurance fraud), anti-fraud officers detect an average of 270,000 euros worth of false claims every day thanks to their high-tech systems and vigilance.
Fraud by internal employees
There are no estimates on the scope of internal fraud. This comes as no surprise, given that affected companies tend to resolve these matters privately. Nevertheless, some big cases do make the news, especially if policyholders are the ones being defrauded. The first time this happened in the Netherlands was in 1995, when life insurance company Vie D’or filed for bankruptcy due to internal fraud. While the scope of this case was quite large, smaller-scale internal fraud is far more common. This could range from stealing company property and granting privileges to friends and acquaintances to transferring funds to private accounts.
‘It was purely coincidence, but a few weeks before Vie D’or made the news, KPMG became the first company in the Netherlands to open a forensic accountancy department, albeit relatively small at the time,’ says Jack de Raad, a partner at KPMG Nederland and head of the Netherlands Forensic & Integrity department. ‘This was briefly mentioned in one of the insurance journals and Vie D’or became our first big case and an example of the insurance fraud problem. Awareness has grown considerably since then and we now employ some 3,000 forensic experts worldwide.’
Men of respect
More than twenty years of forensic accountancy has generated a lot of interesting information. For instance, roughly 80% of fraud is committed by men aged 36 to 55. Most of these men have been employed for more than six years in a management or executive position. In more than half of all investigated cases, the perpetrator did not work alone, but received help from inside the company. Nearly all fraudsters were highly respected and trusted members of the organization. So what went wrong?
‘A lot can change over the course of a lifetime,’ says De Raad. ‘Most fraudsters don’t join a company with the intent to commit fraud; personal circumstances and opportunity often play an important role. Someone could find themselves in serious financial trouble with no apparent way out, as a result of divorce or a similar situation. People who work with huge amounts of money every day and know how to bypass the internal checks may be more likely to take advantage of this.’
Most companies have control mechanisms in place, such as the four-eyes principle for payments. But these mechanisms only work under the right corporate circumstances. Employees should take their work seriously at all times and the four-eyes principle should never be neglected or cast aside due to work pressure or peer pressure. Friendly vigilance is also important. If you notice changes in a colleague, you should address these by approaching the colleague in question. Only then can you ensure an open and safe work culture. Cultivating a culture of fear with little interest in the well-being of the company, the clients or colleagues (an every-man-for-himself attitude) is a recipe for disaster.
No Big Brother
‘Corporate culture’ is often discussed in the context of annual accounts. While ‘hard’ inspections are essential, they only work if ‘soft’ inspections are possible, which in turn require a supportive corporate culture. ‘Various systems are in place to assess policyholders in the acceptance, extension and damage claim phase,’ explains De Raad, ‘but most employees – including those in senior positions – are only screened during the application phase. This should definitely be improved, although it shouldn’t become a Big Brother situation, which would be counter-productive.’
Positive corporate culture prevents internal fraud
It is no coincidence that supervisory boards are starting to focus more attention on corporate culture. This isn’t a trendy hype but an economic and social necessity. The damage caused by internal fraud can be devastating, not only in terms of the immediate damage of the stolen money, but also the indirect damage to the company’s reputation and the turmoil and mistrust that can arise among employees. While internal and external control mechanisms and addressing the actions of fraudsters help a little, a positive and safe corporate culture is crucial.