The typical perpetrators of internal business fraud

21 July 2023

Insider criminals who defraud their own companies can be anyone – any gender, age, or job role. Male offenders are still more common, but Allianz Trade’s loss statistics reveal a wide range of differences in how often fraudsters strike and how high losses are.

Which employees are most likely to commit internal business fraud?

There are various profiles when it comes to employees committing internal business fraud. The most frequent insider criminal is usually someone inexperienced who’s only been with the company a short time. They’re usually poorly educated and are lower in the organisation’s hierarchy without any managerial responsibility. They commit far more crimes, but they’ll usually involve much smaller sums, and be discovered far more quickly.

These frequent offenders tend to be men between the ages of 35-45, attempting theft, embezzlement or misappropriation if the opportunity presents itself. Unlike the long-term planners, they’ll act on impulse instead of following a long-term plan.

The biggest losses internal business fraud are inflicted by male perpetrators in their 40s to mid-50s. These criminals are well-educated, holding high or senior management positions typically in finance departments, and have been with their companies for at least 10 years.

While it’s true that these types of employees don’t turn criminal often, when they do, they take no prisoners and cause huge losses. They know your systems—and any loopholes—inside out, and their long years of service mean that colleagues and superiors trust them implicitly. It’s the perfect way for them to keep defrauding their employer over a long period without ever arousing suspicion.

And usually, they’re helped out by being friendly and polite to everyone – blending in so well that they are the last person anyone would dream of suspecting. Sometimes being the person you’d least expect all but cries out for your attention.

Internal business fraud real-world example

Let’s be honest. When a worker steals from their employer, it’s not only a matter of broken trust. The company’s whole future may be at stake. The only real protection comes from implementing effective controls.

The whole world collapsed for the owners of a large lock manufacturer when their long-term general manager admitted that he’d been embezzling the firm’s money. A staggering €26 million in total. Management had implicitly trusted the experienced and reliable man with oversight of all the company’s accounts. On top of that, he came highly recommended by the local church congregation for his moral standing within the local community. No one ever expected his actions to bring the firm to the verge of folding.

This (totally true) experience of a traditionally minded family company graphically demonstrates how fragile even years of trust can be in the world of business. It also raises an important question: “Why didn’t a leading manufacturer of security systems employing more than 3,000 people have any internal controls which could have prevented the fraud?

It was child’s play for the general manager: he used a previously inactive bank account to repeatedly take out loans, telling the bank it was all to cover the firm’s short-term capital requirements. In reality, the millions he claimed went into his pocket. This went on for years and could’ve continued unchecked if the bank hadn’t cut off funding and demanded repayment. When they did, his system of fraud imploded.

Business fraud caused by normal, everyday carelessness

What happened to the lock manufacturer is extreme, but it’s by no means an exception. The numbers show that for any business, unquestioned trust is reckless. The EY Global Integrity Report 2020, for instance, revealed that the pandemic led to an elevated risk of unethical behaviour in every single industry sector.

Some 13% of all respondents to our survey said that they would be prepared to ignore unethical behaviour by others to further their career or to influence their pay. Among board members, 25% of managers admitted they’d be happy to turn a blind eye to this behaviour.

On top of that, younger employees fear negative consequences for their careers if they report misconduct. Only 58% said that they wouldn’t expect any adverse results. This is consistent with the assumption that unethical behaviour is often tolerated if senior executives or high achievers are involved. More than a third of all respondents think this is the case, rising to 41% among managers polled.

This attitude seems to be reflected in the business world generally: consulting firm PWC determined that around half of all companies polled had been faced with a substantial case of white-collar crime at least once in the past two years – a large number of which go unreported.

White-collar crimes usually only come to light when the appropriate control systems are in place and when checks are regularly carried out. One reason why many cases remain hidden is also that companies are shy about making them public. According to a PwC study, only a little over half of defrauded companies even initiated investigations into their most serious incidents. Yet these incidents can have a severe impact: in over 50% of internal fraud cases, upwards of £70,000 is stolen. A large enough sum to give any business pause for thought.

What motivates typical perpetrators of business fraud?

Moral compass gone haywire

Companies looking to protect themselves from criminal employees are faced with a challenging situation because those involved are mostly not ordinary criminals, says Bernd Noll, an economics professor from Pforzheim and researcher into the profiles of white-collar criminals.

Noll believes that many fraudsters act for a long time without arousing suspicion. And nothing in their background gives them away. “They neither had a difficult childhood nor did they stray from the straight and narrow or have a criminal record.

So what is it then that motivates them to commit a crime? Why do they harm their company and jeopardise their careers? This is often triggered by a flaw in their moral compass, says Noll, caused by a breakdown in their system of values such as a divorce, a severe illness or some other life-altering experience, which may also be concealed from colleagues or superiors.

A possible result of these life changes can be the development of extravagant tastes which require much more money.

Lifestyles of the rich and famous

The general manager at the lock manufacturer mentioned above bought a yacht for €3 million and furnished a villa with heated outside paving for €7 million. He indulged a taste for exclusive wines and fitted out his home with hand-crafted furniture made of tropical hardwoods.

Despite this change in behaviour and extravagant expense, nobody put two and two together that this man couldn’t afford to buy such luxuries on his salary. In his investigations into offender types Noll found that, besides chronic lack of funds, greed was also a frequent motive. Employees may also have their hand in the company till because they fear social decline. They may be trying to earn the respect they don’t receive from family or friends by simulating a higher standard of living.

Another motive can be revenge – for example when an employee feels ignored, or passed over for promotion.

In the case of the general manager who defrauded the lock company, his motives remain unclear. He gave the impression in court that he’d forgotten or repressed his initial motives, and that he didn’t know when the fraud had begun.

Like many fraudsters, when caught he claimed he’d always planned to pay back the money, and that he’d lost track of just how much he’d taken. The court didn’t accept this excuse and sentenced him to six years in prison.

In another case, a 39-year-old employee of an outdoor clothing specialist also ended up behind bars. He had stolen goods to the tune of €100,000 from the warehouse where he worked, which he then sold via eBay. He used the proceeds to finance his high-class lifestyle, eating out in expensive restaurants, taking expensive trips and indulging in luxury holidays.

Just like with the general manager, nobody suspected him at first because he was always so friendly to everyone and was considered a good team player.

Want to avoid internal fraud? Trust must have its limits

Think about the senior executive who takes kickbacks from suppliers to sign off payment of overstated invoices. Or the worker at a recycling yard who pilfers valuable metal. Even the waiter who orders a few extra barrels of beer or expensive wine and then sells them on the side – all these cases have one thing in common.

Nobody checked up on what they were doing!

Trust is a fine thing and important for a company’s culture. But there must be limits to it”, says Rüdiger Kirsch, fraud expert at Allianz Trade. “Lack of controls gives fraudsters a free ticket.” For Kirsch, a lack of oversight and checks is often the trigger which causes employees to slip into illegal behaviour.

Workers who are free to do whatever they like develop their own understanding of what is fair or not over time.” Kirsch describes the case of a multinational which did not send out an auditor from their Internal Audit Department to their Mexican subsidiary for eight years. The lax controls poisoned the company culture, giving the national manager the opportunity to skim off millions of dollars for himself. For a long time, nobody noticed the scam, and the poison spread throughout the whole company.

Identifying potential perpetrators of business fraud

It’s not easy! People adapt themselves to the framework they work in

It’s impossible for companies, even those with extensive selection procedures, to detect whether a senior executive harbours criminal potential, according to Noll. That also has something to do with job profiles: “Some companies specifically look for managers who are not only quick to make decisions and persist in getting what they want, but who are also prepared to go to the limits of what is legal.”

These are qualities which make for good, high-achieving executives, but also make for superb white-collar criminals. On top of that, the framework of the companies people work in has a formative influence on them. If the circumstances reward criminal activity, even the best recruitment processes won’t help.

Although the number of unreported cases remains high, fewer and fewer companies are ready to simply write off wrongdoing by their employees as collateral damage and the price of doing business. The lock manufacturer affected by internal fraud started to set up a compliance system immediately after discovering the scale of wrongdoing – just like many other global companies in recent years.

These compliance and control mechanisms are aimed principally at preventing infringements of data protection rules and reducing corruption but are being expanded bit by bit to take in other areas of criminal activity such as property offences, money laundering and insider trading.

Used mainly in larger corporations, these programmes have led to a decrease in the number of individual cases of internal business fraud or criminal activity. But smaller businesses are reluctant to follow suit as many bosses still believe they can trust their employees without question or reservation.

Controls in a company need to be effective, but not so strict that they generate a culture of mistrust, warns Noll. “If [employees don’t feel trusted], the company suffers in another way – and that is just as undesirable.”

Finding the right balance is key.

Protect your business against the risk of internal fraud

Even the most stringent security controls and the most supportive corporate culture won’t completely eliminate the risk of internal business fraud. Make sure you’re always protected against financial losses through dishonest, fraudulent, malicious or deliberate criminal acts with our comprehensive fraud protection cover.

We’re here to answer all of your questions, whether you’re an Allianz Trade customer or not.

If you’re in the UK, you can visit our dedicated Business Fraud Insurance page or call us on  020 7860 2063 to learn more.

For a free Business Fraud Insurance consultation call our UK team, 09:00-17:00 Mon-Fri.