Fraud Risk

Definition

Fraud Risk is the risk of unexpected financial, material or reputational loss as the result of fraudulent action of persons internal or external to the organization.

Classification

Fraud Risk is customarily split into internal and external fraud:

• Internal Fraud is a recognized risk category in regulatory frameworks worldwide (Basel II/Basel III standards). The Basel II definition states more specifically: Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involves at least one internal party.
• External Fraud is the risk of unexpected financial, material or reputational loss as the result of fraudulent action of persons external to the firm. External Fraud is a recognized risk category in regulatory frameworks worldwide (Basel II/III standards). The precise Basel definition of external fraud reads: Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party.

Issues and Challenges

• The separation between internal/external can occasionaly be ambiguous