Understand Corruption in Fraud Tree for fraud detection (Part 1/2)

And that is that asset misappropriation schemes are the most common. If we’re going to choose our top 10 data analytics, we’re going to choose things that happen like all the time, like really common ones is asset misappropriation. They are the most common, they’re 86% of cases.

However, financial statement fraud schemes, which are harder to find, are 10% of cases, but they have a much higher loss associated with them. So if you are not that used to what is the fraud tree, I’ve put a little fraud tree down here. And basically, there are three branches of fraud trees.

The first one is corruption, they got asset misappropriation, and then financial statement fraud. And this is such a good framework to have in your mind if you’re thinking about fraud, like where to start, what to do in terms of fraud to get that for tree in your mind. And it really does help.

I recently, well, a few years back, I was working for one of our major customers. And they said to me, no, no, no, we don’t want to do anything to do with corruption, because corruption is not fraud. And I was just like, yes, it is. It is. It’s the first branch of the fraud tree. People often also say to me that, you know, you cannot detect corruption with data analytics.

And it’s true that it’s hard, because corruption is often under the table, it’s like the little envelope that you give someone to have a bribe and things like that. But what we need to remember is that corruption, the money for it, so if you’re going to pay a bribe, you’re going to pay a big bribe to a customer, you’re probably not going to get that money from your pockets, you’re going to get that money somehow out of the company. So corruption, we can detect indirectly, it’s a little bit complicated.

And basically, what we’re looking for is bribes. If it’s to do with kickbacks, it’s even more indirect, because we have to look at, do we give something special to a supplier, and then it’s only then that that supplier actually gives us a kickback, you know, so we’re looking for like, you know, do we let suppliers charge 10 times the amount and one of our customers had this recently, where they were actually the supplier was charging 10 times the normal amount. And luckily, they had a tip off for that.

And so they’re able to go into emails. And they found like all of the text discussion about, you know, OK, just add times 10 to the invoice, and then you can give me some back and all this kind of thing. So we can detect that indirectly.