The Psychology Of Fraud - The Fraud Triangle

Why Do Fraudsters Commit Fraud Over Other Types of Crime?

This second part of the article (see PART 1 - Feb 2016) we talk about the Fraud Triangle, developed by Columbia University. The Fraud Triangle is a great visual depiction of how fraud occurs. This concept further supports the contention that reducing opportunity should be the key element of counter fraud efforts.

Pressure can come in the form of financial difficulties, debt, or greed; all of which create an incentive (or push factor) to commit fraud. Rationalization occurs when a fraudster justifies fraudulent behavior by minimizing or making themselves "feel better" about committing the act. Fraud scammers often view committing fraud as a means to recoup premium payments; they feel they are owed payback for the premiums they have paid. Opportunity is the one area that a company can manipulate to disrupt the elements in the triangle and help reduce fraudulent acts.
 
The tenets of rational choice and routine activities focus on the environmental factors that contribute to deviance and how reducing the opportunity to commit crime should be the focal point of counter fraud efforts. These theorists proposed that crime was not a matter of motivation, but a matter of opportunity and how environmental factors contribute to crime causation. They further proposed that crime can be prevented by controlling environmental factors, such as by increasing preventative efforts, using analytics, gatekeepers, analysts and other approaches.
 
The research in other criminal areas shows a strong correlation between sociological or environmental factors and its influence on behavior, in other words, there is evidence that supports that an alteration of environmental factors WILL result in an alteration of human behavior. It is therefore reasonable, according to these theories, that an alteration in environmental factors will have an effect on fraud incidents. And again, these theories have had extremely limited application in a fraud setting.  
 
So the logical question is……..
how do companies alter environmental factors?

And the answer is………………..
by making it more difficult for fraudsters to commit fraud.

Companies can make it more difficult to commit fraud by altering their internal environmental factors; focusing on ways to reduce the opportunity to commit these fraudulent acts. This is where a company would benefit from visiting their formal/informal counter fraud measures and adjusting them accordingly. The most common counter fraud measure in today's environment is the use and application of data analytical systems. It is important that companies are able to not only modify these systems, but also track their effectiveness in order to make the appropriate filtering adjustments. The Coalition Against Insurance Fraud reports that 95% of companies cite anti-fraud technology as the most effective counter measure in today's environment, and the most common technologies being used are automated red flags, business rules, link analysis, and anomaly detection. All of these tactics should be an integral part of a solid counter fraud approach.       
 
Criminological theories have shown their value in many other settings; in this analysis we have demonstrated their applicability and use in fraud fighting. Controlling environmental factors by focusing on reducing opportunity should be at the forefront of highly effective counter fraud programs.  

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