What Is Fraud?
In the broadest sense, fraud can encompass any crime for gain that uses deception as its principal modus operandus. More specifically, fraud is defined by Black’s Law Dictionary as:
A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.1
Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.
Types of Fraud
Fraud against a company can be committed either internally by employees, managers, officers, or owners of the company, or externally by customers, vendors, and other parties. Other schemes defraud individuals, rather than organizations.
Internal fraud, also called occupational fraud, can be defined as: “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.” Simply stated, this type of fraud occurs when an employee, manager, or executive commits fraud against his or her employer.
Although perpetrators are increasingly embracing technology and new approaches in the commitment and concealment of occupational fraud schemes, the methodologies used in such frauds generally fall into clear, time-tested categories. To identify and delineate the schemes, the ACFE developed the Occupational Fraud and Abuse Classification System, also known as the Fraud Tree. Learn more about the Fraud Tree.
External fraud against a company covers a broad range of schemes. Dishonest vendors might engage in bid-rigging schemes, bill the company for goods or services not provided, or demand bribes from employees. Likewise, dishonest customers might submit bad checks or falsified account information for payment, or might attempt to return stolen or knock-off products for a refund. In addition, organizations also face threats of security breaches and thefts of intellectual property perpetrated by unknown third parties. Other examples of frauds committed by external third-parties include hacking, theft of proprietary information, tax fraud, bankruptcy fraud, insurance fraud, healthcare fraud, and loan fraud.
Fraud Against Individuals
Numerous fraudsters have also devised schemes to defraud individuals. Identity theft, Ponzi schemes, phishing schemes, and advanced-fee frauds are just a few of the ways criminals have found to steal money from unsuspecting victims.
Why does Fraud Occur?
The best and most widely accepted model for explaining why people commit fraud is the fraud triangle. This is a model developed by Dr. Donald Cressey, a criminologist whose research focused on embezzlers—people he called “trust violators.” Learn more about the fraud triangle.
1Bryan Garner, ed., Black’s Law Dictionary. 8th Ed. (2004), s.v., “fraud.”