The Real Risks and Damages of Business Fraud

Copyright 2005, 2009 STILAS - All International Rights Reserved.

According to studies by the Association of Certified Fraud Examiners (ACFE), the

Congressionally authorized regulatory body National Futures Association (NFA), and
statistics from the Federal Criminal Investigators Association (FCIA), business fraud
which targets and directly affects corporations is valued at over $413 Billion per year, in
the US alone. ACFE statistics and FCIA analyses reveal that the average losses due to
business fraud are as high as 15% of every company’s total annual revenues. An
exhaustive nationwide study by the ACFE found that the average annual loss of
businesses in private sector industries reached as high as $274,000 per company.

ACFE statistics established that the most costly business fraud violations generally
target or occur within organizations with less than 100 employees. This is in part
because smaller companies do not reserve adequate budgets for security services,
background checks or legal services.

The vast majority of fraud is committed by individuals rather than by businesses. The
FBI in cooperation with the National White Collar Crime Center established that 60.1%
of fraud cases are perpetrated by individuals only, 22.1% by individuals utilizing
business structures or assets, and only 17.8% are perpetrated by a business as a
whole. Thus, in most cases specific individuals are committing the fraud, predominantly
in cooperation with other individual perpetrators.

FBI statistics also show that 92.2% of all business fraud world-wide was originated by
perpetrators in or from the United States.

Fraud compromising or preventing the effective acquisition of professional services by

the organization constitutes 18% of all internal business fraud, resulting in the greatest
average losses of approximately $300,000 per year for every company. Most
alarmingly, the statistics evidencing that this type of fraud is the most damaging to
company operations do not consider the consequential damages and losses due to
failure to procure needed legal and security services to defend the company’s essential
assets and infrastructure at critical times.

Corrupt insiders involved in this type of fraud generally abuse the authority and weight
from their corporate position to avoid or prevent the hiring of professional legal or
security services, interfere with the work of a security firm or law firm, or undermine the
services firm’s relations with the client company. Such operational sabotage is usually
intended either to avoid detection, or to reserve the company’s budgetary funds for
continued diversion or embezzlement to maintain a level of fraudulent profits.

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Most business fraud perpetrators act as independent “business consultants,”
“investment consultants”, middle-men, or “deal brokers”, and are most often presented
as “friends” with “connections” related to urgent needs of the company to be defrauded.
Based upon statistics developed by the FBI in cooperation with the National White
Collar Crime Center, federal investigative experts conclude that one of the highest risk
areas for external business fraud is relations involving an individual “representative” on
a foreign territory, entrusted with selection, management or performance of professional
services.

This article is a brief extract from one of a series of expert reports developed by
STILAS, in cooperation with certain federal law enforcement and national security
agencies of multiple countries, for protection of national critical infrastructure in the
private sector.