16 Best Practices for Financial Fraud Prevention

No one wants to believe fraud could happen to them. However, the reality is that fraud is pervasive, and it carries significant consequences for businesses. Research indicates that organizations lose an estimated 5% of their revenue to fraud each year, and many believe this figure is conservative. 

Whether it’s through internal manipulation or external attacks, fraudulent activity can erode trust, drain finances, and destabilize operations, often for years before it’s discovered. As AI and digital tools evolve, fraud is getting more sophisticated and more complex to detect. 

Fortunately, with the right combination of people, processes, and technology, you can build a layered defense that significantly reduces your risk. In this post, we’ll share actionable best practices to help you protect your organization and stay one step ahead of fraud.

6 Best practices to protect against internal fraud 

In some cases, fraud is internal, originating from within the organization. These attacks originate from individuals who already have access and trust, making it harder to detect and rationalize.

For example, a compromised controller might create fake vendors and purchases and misdirect funds. This issue might persist for years without being detected. 

Some other examples of internal fraud include:

• Cash theft
• Check fraud
• Payroll fraud
• Expense reimbursement fraud

The good news is that most internal fraud is preventable with the proper checks and balances. Let’s examine some best practices for combating internal fraud.

#1 Segregate duties

This involves splitting up the key steps in a financial transaction so that no single person is in control from start to finish. Segregation introduces essential checks and balances, which reduce the risk that fraud will go undetected. 

For example, the person who authorizes a transaction shouldn’t be the same person who processes the payment. Otherwise, someone could simply authorize and pay themselves, and get away with it. 

#2 Conduct thorough employee screenings 

One of the most effective ways to prevent internal fraud is to be sure you’re bringing the right people into your organization. Run background checks on potential employees to verify their relevant criminal history. For positions involving financial responsibilities or access to sensitive data, consider conducting credit checks, if permitted by state law.

Finally, verify educational qualifications and prior employment experience rather than relying solely on information provided on resumes. This step may seem tedious and expensive, but preventing even a single incident of internal fraud can more than justify the investment of time and money.

#3 Rotate company card numbers 

Credit cards can be easily misused. To reduce the risk, implement virtual payment cards with built-in controls.

Use single-use or rotating card numbers. This prevents card numbers from being stored or written down and then used for unauthorized transactions.  

Also, assign merchant or transaction category (MCC) codes to each card. This ensures the card can only be used for designated expense types, such as utilities. 

#4 Report fraud right away

When it comes to preventing fraud, timing is critical. The sooner you act, the better your chances of minimizing financial losses and reducing risk.

For example, NACHA rules governing ACH transactions allow only two days to cancel a fraudulent transfer and up to five days to initiate a reversal. Delays can make it difficult (or even impossible) to recover funds once they’ve been withdrawn.

Create a culture where employees feel empowered to raise their hands right away if they suspect anything is amiss. Quick action is the best defense against financial fraud. 

#5 Watch for employee red flags

Certain employee behaviors can signal potential risks of fraud. Perhaps there’s an employee that is reluctant to take a vacation. Or maybe another employee doesn’t want to share duties, and is insistent on owning all communications with a particular vendor. These signs warrant further attention. 

It’s best practice to divide key responsibilities among multiple people. Assign both a primary and a secondary owner to ensure oversight and accountability. 

#6 Get the right insurance coverage

Protect your organization by investing in insurance policies that cover crime and cyber liability. Some plans also offer add-ons for services such as social engineering and fraud protection.

Always review the fine print of your policies. By reading the specific terms, conditions, and exclusions, you’ll better understand exactly when you’re covered and when you’re not. That way, you can avoid surprises if an incident were to occur. 

4 Best practices to protect against external fraud

Financial fraud can also originate from outside of the organization. For example, a vendor’s email may be hacked, leading to a fraudulent request to change their bank account details. As a result, payments may be sent to the attacker.

Fortunately, certain best practices can help your organization avoid the risk of these external attacks.

#1 Call to verify banking changes

If you receive a request to update a vendor’s banking information, please call to verify the change. Don’t use the phone number provided in an email request. If the vendor’s email has been compromised, that number is likely part of the scam.

Instead, call a known, trusted number, such as the company’s main switchboard. Ask to speak with someone in accounts receivable or the finance department. Confirm banking details over the phone before updating payment information. 

#2 Verify that company domains are legitimate 

External fraudsters may create fake email domains that closely resemble those of legitimate companies. For example, they might use “therealcicso.com” instead of “cisco.com.” Or, they might swap a zero for the letter “o.” These subtle changes can trick employees into making fraudulent payments. 

Always double-check domain names and contact information before responding to requests involving financial transactions. If you’re making a payment to a known company, confirm that the email address and domain match the organization’s official website. This quick step can prevent costly mistakes. 

#3 Monitor the vendor setup process

Establish clear oversight over who is authorized to set up new vendors in your system. Track whether vendor setups are handled by a single individual or multiple people, and monitor when these setups occur. Pay close attention to instances when payments are made immediately or quickly after vendor creation. 

By closely monitoring the vendor setup process, you can identify suspicious activity and reduce the risk of fraudulent vendors being added to the system for unauthorized payments. 

#4 Check the invoice trust score

Before processing a payment, it’s important to validate the authenticity and reliability of the invoice. Ottimate is currently developing an Invoice Trust Score capability to simplify and enhance the efficiency of this process. 

This AI-powered capability assesses invoices based on the historic trust you have in specific vendors and past invoices. It identifies potential red flags such as handwritten notes, crumpled paper, or poor legibility. Even invoices from trusted vendors can be flagged if they contain anomalies, such as a different sales tax rate than the typical one.

6 Internal security best practices to prevent fraud

It’s crucial to have strong internal security practices in place to reduce the likelihood of fraud, especially in today’s remote and digital work environments. Here are some simple yet effective best practices.

#1 Enable two-factor authentication (2FA)

Always use two-factor authentication on systems that contain sensitive financial or personal information. Ottimate has 2FA for its dashboard, and you can implement 2FA across your broader tech stack using tools like Okta or SMS-based authentication. That way, even if an email is compromised, there’s another layer of protection in place.

#2 Invest in phishing training for employees

Conduct annual (and ideally, ongoing) phishing training for employees. Teach them to identify red flags like:

• Suspicious links
• Urgent calls to action
• Unexpected sender addresses 

#3 Enforce strong password policies

Apply minimum password complexity requirements across all of your systems and enforce password updates every 90-120 days. This is especially important for systems that handle personally identifiable information (PII) or financial data.

#4 Discourage account information sharing 

Discourage employees from sharing account information and passwords. Instead, ensure each user has their own set of credentials.

#5 Secure remote access with VPN and device controls

Today, remote work is the norm. Employees can work from anywhere – from their home office to the airport to a neighborhood coffee shop. Ensure that, regardless of their location, they’re connecting through secure networks. 

Implement VPNs and endpoint controls to prevent data from being exposed over unsecured public Wi-Fi. This also reduces the risk of fraudsters setting up fake networks designed to capture login credentials.

#6 Be wary of sponsored search results

When searching for vendor websites or portals, avoid clicking on sponsored links at the top of search results. These can be spoofed or misleading. Instead, scroll down and click the verified company website, and always cross-reference it with internal records. 

Take action to prevent financial fraud 

Fraud is a lot more common than we’d like to think. As AI and digital tools continue to evolve, so do the tactics used by bad actors. Fraud is becoming increasingly sophisticated, making it harder to detect and stop.

Now’s the time to put strong safeguards in place to stay one step ahead of fraud.

By implementing the best practices we covered in this post, you’ll strengthen your organization’s defense and significantly reduce the risk of both internal and external fraud.