Types of internal business fraud

Internal fraud is committed by an employee of a business itself and can be extremely difficult to prevent. Common examples include invoice fraud, payroll fraud, and skimming.

Our dive into fraud in the UK continues as we explore the various frauds that come from within businesses themselves; also referred to as internal fraud.

Whilst not quite as common, but not uncommon by any means, as external business fraud; internal fraud can be much harder to spot and predict. Especially as it comes from employees that you want to trust and may even have a close personal relationship with.

What is internal fraud?

Internal fraud is committed against a company by one of its own employees. These types of crimes can be especially damaging as it is much easier for them to go unnoticed for long periods of time as generally fraud defences are created to protect from external threats and because employees often no exactly what they need to do remain undetected.

These crimes can be carried out by an individual with rank, responsibility and control over what they are stealing (usually money, stock, or other assets) as well as being able to submit false reports that would not be questioned.

Or, they can be committed by a low to mid-level employee who has detected a gap in processes that would allow them to syphon off funds or assets without being questioned or detected.

The common view is that this is the sort of thing to go on at large companies whose size and complex processes allow for this but it is just as common, and in some cases more common, at small businesses who do not have the resources, safeguards, and expertise to detect financial crime. Also employees in smaller companies often have much more trust placed in them by senior management and are much likely to have a good personal relationship with the ones they are duping.

Types of internal fraud: 

• Embezzlement 
• Payroll fraud 
• Skimming 
• Invoice fraud 
• Expense Fraud

Embezzlement

Embezzlement is the blanket term for an employee stealing money or other assets from their employer. Almost all cases of internal fraud are embezzlement and it is a key term to know.

Payroll fraud (AKA timesheet/timecard fraud)

This is where an individual submits falsified timesheets where they have lied about the amount of hours they have worked. This is extremely common and is actually more so at small companies.

This scam is most effective where only a small and believable numbers are added to each timecard and where the employee is offsite or unsupervised, so how long they worked can’t be easily verified.

This type of fraud is actually much more common at smaller businesses where more staff are hourly, there is generally less oversight, and processes in place to make it difficult.

Skimming

Skimming is where a fraudster intercepts your customers payment card information to then be used fraudulently by the thief or to be sold on to other criminals. Whilst this does not directly impact your business in terms of loss your data is still an asset, you can be liable for a breach of data protection, and severe reputational damage can be caused.

Invoice fraud

This is where an employee creates poses as a supplier and creates fake invoices to convince their employer to pay money into an account controlled by themselves. They can pose as a real supplier of the company or as a fictitious one. However, due to the ease with which companies can be created in the UK, these fake suppliers will often be shell companies and appear legitimate with a cursory check.

The main aim with invoice fraud is to appear as an unremarkable charge hidden amongst the usual invoices received by the business. As these frauds often fall down under close scrutiny, the fraudsters enacting these schemes are often in a position of responsibility for paying or reporting invoices.

Expense fraud

This is where an employee submits false or inflated expense claims. This can be done by the employee submitting the expenses or by the employee in charge of processing the expenses. In the second instance they will receive the legitimate expense claims, inflate them, pay the employee for how much they claimed and pocket the difference. As this individual will be the one in charge of ensuring the expense claim is correct they will report they will have the power to report the inflated figures as non-suspicious. 

Given the amount of different types of fraud threatening businesses, it can feel like there is nothing that you can do to truly protect yourself and your business. Fortunately, there are many anti-fraud solutions available and process that you can implement that will make your business fraud-safe.