Five best fraud risk management and assessment strategies

August 5, 2021

If a business has a digital channel, chances are they’ve been impacted by fraud or potential fraud at some point in their operations. And today, where online fraudsters are seemingly one step ahead of the best fraud detection models using tools like ‘synthetic identities’, businesses are looking to build out a holistic approach to their fraud and risk management strategies. 

Fraud risk management, simply put, is the process of assessing fraud risks within your organization and then developing an anti-fraud program that stops any fraudulent activity before it happens. It involves identifying potential and inherent fraud risks and developing a program that works to detect and prevent suspected fraud, both internal and external to the business.  

On average, it’s estimated that companies worldwide lose 5% of their gross revenue to fraudulent activity. And in a recent study, we’ve found that the fraud industry is growing at an accelerated rate. 

With economic constraints tighter than ever, this fraud loss percentage number is no small figure. If left unchecked, fraud loss can become embedded into an organization’s culture. If there is no fraud risk management strategy in place, fraud has the potential to grow like a virus, destroying the health of businesses and causing greater and greater losses.  

Fraud can also put companies and their employees at legal risk. 2015’s “Yates Memo” instigated and established a national focus on corporate wrongdoing that all companies deal with today. Even those who are not directly involved, but know of wrongdoing within their organization, become subject to severe penalties. A strong fraud risk management program provides structures and protocols that prevent escalation to the point of legal implications and helps businesses communicate the seriousness of repercussions to all stakeholders.  

We outline five principles of an effective fraud risk management strategy.  

  • Assessment 
  • Governance 
  • Prevention 
  • Fraud risk detection 
  • Monitoring and reporting 

These principles provide the groundwork for organizations to assess risk and implement a detailed program for preventing possible fraud. 

Download the latest Gartner report to see how "ID Proofing" is becoming an important part of fraud and risk management strategies

1. Fraud risk assessment  

The first step to preventing fraud is understanding the areas where your organization is vulnerable. Conducting an in-depth risk assessment will help you analyze the risks that your company faces based on its unique complexity, scale, products, and market exposure. Risk assessment looks at all types of risk, how likely they are to happen, and the cost involved with each one.  

Assessment begins with employees. There needs to be a holistic understanding of how they interact with company resources on a day-to-day basis. The benefits and opportunities provided by the organization can often become the cause of internal fraud. Senior management should consider assessing their communication tactics and system implementation. Lastly, it’s important to note that risk also occurs externally, especially if an organization deals with big data or complex networks.  

From there, a risk-tolerance limit is used to create a cost-effective framework. A risk-tolerance limit is the maximum amount an organization is willing to lose. This limit is useful because it makes risk assessment quantifiable and offers a base to build your strategy. More focus can be put toward risks above the limit and, therefore, most damaging to the organization.  

2. Fraud risk governance  

Once risk is assessed by an internal auditor and any other relevant team members, fraud management must become an integral part of your company culture. Stakeholders must be open to adopting new procedures and understanding of the serious nature of fraud risk.  

A solid fraud management strategy solution will likely include:  

  • A clear strategy for upper management and a fraud risk manager to educate and enforce requirements 
  • Delegated responsibilities with specific role descriptions 
  • Well-written whistleblower and reporting procedures  
  • Quality assurance and internal audit measures  
  • A description of the investigation process and any corrective actions  
  • Fraud awareness techniques and tools 
  • Research and analysis of market fraud prevention and mitigation technologies 

Additionally, these should be documented, shared, and easily accessible to all team members.  

The best strategy for effective governance is to assign one designated leader for the entire fraud risk management program. All communications run through this person or team. This governing body will also be in charge of training, monitoring, and making adjustments as needed.  

3. Fraud risk prevention 

One of today’s most effective fraud risk prevention strategies is to implement fraud detection tools and stop it at the very beginning stage of onboarding. This fraud risk prevention strategy can also be utilized  for a customer interacting with your business and signing up for an account, or a new employee / vendor getting onboarding to work on behalf of it. Verifying a person is “who they say they are” by conducting thorough background checks with multi-factor authentication technology that offers increased assurance, and fraud can be stopped before it’s embedded in an organization and create losses. 

The main goal of fraud risk management is to prevent fraud before it happens. In order to do this, risk assessments must be done frequently, especially since risk environments are constantly changing. There needs to be clear internal controls. 

Over time, organizations might adjust their program for better prevention. A risk can be avoided entirely by choosing not to participate in the activity anymore - it can be transferred to another party, for example, by purchasing insurance.  

In between assessments, it is critical that an organization, from top to bottom, understands the entire scope of the strategy. If management is diligent about enforcing and modeling the new policies, employees are more likely to follow them. The visibility of detection mechanisms alone can inspire stakeholders to act in a way that will prevent fraud before it happens.  

4. Fraud risk detection 

The controls and reporting used to prevent fraud can also help detect it. 

Controls are tools that alert employees about potential fraud. They can be installed across several layers of the organization, from network settings to internal communication software. Employees must be aware of exactly how these controls work and when to assess them.  

Reports are one of the pillars of fraud detection. When used correctly, they can detect variances and indicate fraudulent behavior. Reports must include all relevant information, including date and time stamps, and should be stored efficiently.  

If fraud is detected, employees need to be able to have a streamlined way to flag it. A special consideration today is to include a fraud procedure that will appropriately flag fraud while protecting important consumer information that could be sensitive. 

5. Monitoring & reporting  

Fraud risk management is an evolving process. The first four principles must be constantly monitored and reported on. The only way a fraud management solution will work is if it’s assessed on successes, blind spots, and areas for improvements regularly.

Measure outcomes of the current strategy and communicate the results transparently to relevant stakeholders. Let teams know when assessments will occur and what exactly will be monitored. Additionally, legal rights should be reviewed frequently to ensure compliance with the applicable law.  

Clarity is the best policy for fraud risk management 

The common thread throughout all five principles for effective fraud risk management is clarity.  

Risk assessment is the first step to developing a clear strategy. It takes an in-depth look at internal and external vulnerabilities while providing an overview of the corporate fraud culture at large. Assigning one entity to lead the fraud risk program ensures clear communication across all levels of the organization.  

Fraud prevention is encouraged through a united effort and corporate culture, while fraud detection is only as effective as the clarity of its controls, reports, and whistleblower strategy.

And lastly, consistent monitoring and reporting ensure a productive, clear, and up-to-date fraud management system at all times.  

If all five principles are integrated well, a fraud risk management strategy will protect an organization from scammers, financial losses, and corporate wrongdoing.

Learn more about state-of-the-art identity verification technologies that can be used in fraud and risk management tools

- Press Release. ACFE Report Estimates Organizations Worldwide Lose 5 Percent of Revenues to Fraud. Accessed 14, October 2020.

- Memorandum. Individual Accountability for Corporate Wrongdoing. United States Department of Justice, Office of the Deputy Attorney General. Accessed 14, October 2020.