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December 17, 2012
The Fraud Triangle
The "Rule of 3" is a principle that suggests when things come in threes, they are inherently funnier, more satisfying, or more effective. (I talked about the Rule of 3 in a recent post in which I described my search for the right payment product.) There's even a Latin phrase that generally describes this concept: omne trium perfectum, which means "everything that comes in threes is perfect," or "every set of three is complete."
This rule may apply even to occupational fraud. Long recognized as a predictor of fraudulent actions in the workplace, the Fraud Triangle suggests that three factors must be present for fraud to occur: opportunity, perceived pressure or motivation, and rationalization. But what happens when one of the three members of the trifecta is removed? Will it topple over like a three-legged stool that loses a leg? Will the chance of fraud be decreased?
The Fraud Triangle theory, first described by Donald Cressey in the 1950s, is based on interviews with 200 incarcerated embezzlers, including executives. Not surprisingly, the researchers found that the majority of these embezzlers had committed fraud for financial gain. But what they didn't expect was that most often the perpetrators had no intent to commit the crime.
In workplace fraud, there is the opportunity—say an employer doesn't follow necessary workplace controls and makes one trusted employee singly responsible for all the cash in the business. Then there is the financial trigger, or motivation—the employee experiences a sudden illness, is living beyond his or her means, experiences a loss of spousal income, or has an addiction.
Next, there is the rationalization. Say the employee feels job pressure because of too-high performance standards or unattainable goals, or maybe the employee simply wants to exact revenge on the employer for a missed promotion or reassignment. And voila! You have the Fraud Triangle. The employee has access to cash, needs cash in his or her personal life, and is angry at the employer anyway, so might feel somewhat justified in taking the money.
These situations can occur any time there are weak or missing controls, fast growth in a business, or just lax management, and they usually increase in times of downsizing and layoffs. The crime tends to start small. It may even at first be a true accident. But when it goes undetected, the amounts grow, as does the confidence of the fraudster.
According to the Fraud Triangle theory, then, opportunity, motivation, and rationalization combine to lead to fraud. As an employer, by taking away the opportunity, you can prevent fraud. Make sure you have the proper controls in place in your workplace, even if your workplace is your home, because you hire outside help.
You can protect yourself from fraud as a consumer, too. Make sure you have balance alerts on your accounts, use strong passwords, and undertake other prudent financial account management practices. Let's all keep our holidays safe and secure.
By Michelle Castell, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud