Navigating the cost-of-living crisis: Implications for fraud and cyber risk

In this article, we explore how these pressures play out in the workforce and the impact it has on financial crime risk, ways to protect your business, and recognise red flags of potential suspicious activity. 

Current pressures driving financial crime

Occupational fraud occurs when individuals face a combination of the following circumstances: 

• Opportunity: Poor internal controls, trusted positions, and management override or collusion.
• Motivation: Financial, emotional, medical or other personal need or greed that drive individuals to commit fraud.
• Rationalisation: An individual’s ability to justify their actions, believing the reward outweighs the risk.

Key environmental factors

Several factors contribute to the pressure to commit fraud:

1. Cost of living: Rising living costs increase financial strain on individuals. The driving force is no longer to fund a lavish lifestyle, but rather essential needs. This means that traditional red flags such as an individual living beyond their means may not be as prominent and should be considered in a more nuanced manner. Organisations will need to adapt their fraud detection strategies to ensure that the appropriate red flags are being identified. People and Culture can play an important role in adapting and implementing this strategy.
2. Job security: Economic instability and job insecurity can manifest in occupational fraud such as procurement or payroll fraud as well as misstatement or falsification of financial statements to ensure that an employee keeps their job or are entitled to a performance bonus. More than 1,000 business went bust in March 2024, representing a 25 year high since ASIC started such capturing data. In an environment where businesses are going bankrupt or entering voluntary administration and certain sectors are experiencing pay cuts, job and financial security will be top of mind for some employees. Whilst misstatement of financial statements is rare per the Association of Certified Fraud Examiners Report to the Nations, it should be considered as an emerging risk in this economic environment. Organisations needs to consider whether their approach to financial data integrity is sufficient.
3. Volume and sophistication of scams: The increasing volume and complexity of scams, especially with the advent of generative AI, poses significant challenges in detection and prevention especially for financial institutions. Investment scams accounted for the greatest loss to the Australian community ($60m YTD). A recent case study in Hong Kong where deepfake technology was used to impersonate a company official resulting in a loss of USD25 million highlights how easy it is to use these technologies to fool businesses.
4. Mental health and substance abuse: The impact of post-pandemic stress on mental health combined with other pressures increases the risk of substance abuse, which can include alcohol but also behaviours such as gambling. This can further exacerbate financial pressures and motivation to commit fraud.

One of the key trends we have seen in recent investigations has been the misappropriation of funds by a trusted employee or advisor in businesses across various sectors including retail and real estate. The losses suffered by the related business varied from $500k to just under $1m. The modus operandi used by the perpetrators consisted of changing the bank details of suppliers and customers to direct funds to their personal bank accounts and manipulating the accounts and processes to conceal the fraudulent activity.

Other trends that have recently emerged include abuse of corporate credit cards, stock losses and procurement fraud.

The common contributing factors across these cases are:

• Lack of oversight and regular monitoring activities
• Inadequate documented policies and procedures and enforcement thereof
• Improperly assigned access rights
• Lack of segregation of duties
• Insufficient due diligence in respect of employees and suppliers

Strategies and best practices for managing and mitigating data breaches

Cyber fraud

Cyber fraud encompasses various crimes via the internet to acquire sensitive information for monetary gain. Key types include:

• Phishing
• Malware
• Ransomware
• Social Engineering
• Business Email Compromise (BEC)

Insider threats

Insider threats originate from authorised users such as employees, contractors and business partners, who misuse their access. Types include:

• Malicious: Deliberate theft or leakage of information
• Negligent: Unintentional misuse of access
• Compromised: Accounts hijacked by cybercriminals

Real-life examples

Some insider attacks occur because a current employee deliberately steals and removes sensitive information or leaks information to third parties. Prominent examples of this include Cash App’s customer data leak by a disgruntled employee and the massive data breach by two former employees at Tesla.

Strategies to limit insider threat risk

To better detect, contain and prevent insider threats, security teams rely on a combination of practices and technologies, which include:

• Employee and user training
• Identity and Access Management
• User behaviour analytics
• Offensive security
• Data breach monitoring software/services
• Data loss prevention tools
• Tested incident response plans

Practical ideas to protect your organisation

The risk of fraud and data breaches is continuously evolving and your organisation’s strategies to detect and prevent these risks should do the same. Some of the key mechanisms to include in your strategy are:

1. Frameworks, policies & controls: Implement or review fraud and corruption frameworks and policies, as well as policies and processes for high-risk areas.
2. Due diligence: Implement thorough due diligence procedures for suppliers and employees to ensure you know who your business is dealing with.
3. Review & monitor: Implement appropriate oversight and approvals for high-risk activities.
4. Staff training: Conduct regular training sessions on company policies and anti-fraud measures.

The cost of living crisis and associated psychological pressures significantly impact fraud and cyber risk profiles. By understanding these pressures and implementing robust strategies and best practices, organizations can better protect themselves against financial crime and data breaches.

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