Originally Published November 17, 2023
Last week was International Fraud Awareness Week, which is dedicated to highlighting the prevalence and impact of fraud in all its terrible forms. Unfortunately, we do not have to look far to see flagrant examples of corruption, misappropriation, identity theft, insider trading, money laundering, counterfeiting and market manipulation.
Protecting against fraud is a foundational part of UCF’s new MBA program with an emphasis on risk management and insurance. Offered in Daytona Beach, the epicenter of Florida’s insurance industry, this graduate program will combine 10 advanced business courses with three electives focused on data analytics, risk management and insurance. Beginning Fall 2024, students will learn to identify various types of risk; analyze, interpret and evaluate insurance policies; and conduct in-depth business analysis of various industries and competitors.
In 2023, there have been egregious cases of fraud in healthcare, finance, real estate and insurance — highlighting the critical need for UCF’s new program. The Department of Justice, for example, recently announced results of a two-week blitz to crack down on illegal prescriptions, inflated Medicare reimbursements and fraudulent health insurance claims. The disruption of a nationally coordinated deceptive scheme resulted in 78 defendants facing federal and state charges in 16 states; 90 Medicare and Medicaid revocations; seizures of millions of dollars in cash, vehicles and real estate; and nearly $2.5 billion in total fraud.
Remember the rush by federal, state and local governments to provide financial subsidies to small companies during the height of the COVID-19 pandemic? Well as it turns out, hundreds of billions of dollars were misplaced or stolen in what has been described as “the largest fraud in U.S. history.” It should be no surprise that millions of borrowers misrepresented their financial needs, inflated the numbers of employees in their businesses, or created new companies out of thin air.
Some form of fraud seems to be ever present — in every industry, every organization, every “news” report and in nearly every complex transaction. The costs of fraudulent activity are immense. Whether it’s theft of property or other physical assets, manipulation of financial records, embezzlement by employees or lying to customers, the effects of fraud on the bottom line are both immediate and long-lasting.
The Association of Certified Fraud Examiners report that U.S. businesses lose an average of 5% of their gross revenues each year to some form of fraud. Forty-three percent of businesses with more than 100 employees are affected by corruption or fraudulent activity. The Federal Trade Commission reported that consumers lost nearly $9 billion to fraud in 2022, an increase of 30% over 2021. And investment scams such as pyramid and ponzi schemes, cost consumers nearly $4.0 billion in 2022.
The New York Times recently reported on a study conducted by Professor Alexander Dyck at the University of Toronto that suggests “only about a third of frauds in public companies actually come to light, and that fraud is disturbingly common.” He estimates that “about 40% of companies are committing accounting violations — destroying 1.6% of equity value each year — about $830 billion in 2021.”
Every industry is a target for some form of fraudulent or deviant activity, but the insurance industry is especially affected by deceptive schemes, staged accidents, misrepresentations, rate evasion, intentional property damage and inflated claims. The Colorado State University Global’s White Collar Crime Research Task Force estimates $45 billion of property and casualty insurance fraud per year including home, auto and business insurance policies. Between 10% and 20% of insurance claims are fraudulent costing families between $400 to $700 per year in insurance premiums to help cover the cost of insurance fraud.
So if fraudulent activity is prevalent and so costly, what can individuals and organizations do to protect themselves?
Governments, public entities, and private companies increasingly implement risk management strategies that identify, assess, prioritize, monitor, and mitigate risk in every action, interaction, and transaction. Through a combination of internal controls, employee training, audits and technological safeguards, the most intentional organizations actively identify vulnerabilities and minimize the impact of deviant behavior. But as we know, a sophisticated, well-intentioned company can be impervious to fraud 99% of the time — but still be blindsided by a single, fantastic act that creates financial, social and emotional havoc.
In addition to risk management strategies, business crime insurance is a way for companies to protect against losses due to fraud, embezzlement, theft, forgery, and other business-related crimes. Business crime insurance protects the assets, operations and reputations of businesses, especially those that rely on online payment systems and other vulnerable operational processes. Risk management and insurance are the most common ways companies try to protect themselves.