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The fraud triangle: What it is and how to apply it to your customers

Kate Randazzo
October 10, 2023
Read Time: 0 min

Use the fraud triangle to prevent fraud at your institution

The concept of the fraud triangle is frequently used in business, accounting, and criminology. How can you put it to use at your financial institution?

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Takeaway 1

The fraud triangle concept describes three factors that, when combined, incentivize a person to commit fraud.

Takeaway 2

Recognizing when these factors may be affecting your customers can help your financial institution prevent fraud.

Takeaway 3

When you help customers think critically and relieve financial pressure, you decrease the likelihood that they will fall for a scam.

Introduction

Fraud increases as economic stability decreases

According to data from the Federal Trade Commission, consumers lost more than $8.8 billion to fraud in 2022, $3 billion more than in 2021 and a 166% increase from 2020. The FTC received fraud reports from 2.4 million consumers last year, and the most commonly reported types of fraud were imposter scams, online shopping scams, sweepstake/lottery scams, investment fraud such as pig-butchering scams, and business and job opportunity scams.  

History indicates that any time there is a global economic downturn like the one we’ve experienced in the past year, business and consumer fraud will likely increase. "When the economy takes a turn, it boils down to fundamentals. We know that individuals are more likely to commit fraud when normal conditions worsen," said Andi McNeal, Vice President of Education at the Association of Certified Fraud Examiners. But why exactly is that the case?

A worsening economy can exacerbate conditions that experts refer to as the fraud triangle fundamentals—pressure, opportunity, and rationalization. These conditions can increase the likelihood of fraud—even internally among trusted employees. Banks and credit unions should consider teaching their staff how to use the fraud triangle to enhance their ability to shield customers from fraud.

Factors for fraud

What is the fraud triangle?

The fraud triangle is a concept frequently discussed in higher-level management and accounting courses. Coined by U.S. criminologist Donald R. Cressey, the phrase describes three factors that, combined, create the perfect conditions to induce someone to commit fraud.

Pressure, the first factor, usually stems from external forces putting negative pressure on an individual. This often comes in the form of financial difficulties or strict deadlines for larger payments such as rent and loan payments. The greater the pressure, the easier it is for the next two factors to take hold and induce someone to commit fraud.

Opportunity, the second factor, is the actual chance or ability to commit fraud. Sometimes individuals actively seek out opportunities, while other times, circumstances provide them. Perhaps they have a neighbor who only checks the mailbox once a month, leaving envelopes containing checks and other personal information unguarded. Perhaps an elderly friend or family member has shared bank account information with them, or a co-worker has shown them how they’ve successfully fudged the numbers to hit a corporate bonus in the past. When opportunities come easily, individuals may be more tempted to commit fraud.

Rationalization, the third factor, is the thought process individuals go through to justify fraudulent actions. Sometimes, the person committing fraud may believe they're entitled to the gains, or they may think they have no other choice. They might also rationalize their decision to continue committing fraud after initially considering it a one-time, desperate act. Phrases a person rationalizing fraud might say include:

  • “They mistreated me first!"  Individuals who are spiteful toward a particular family member, friend, or employer may rationalize fraud as a way of getting payback.
  • “They won’t even notice it's gone.” Fraudsters may deny any injury from their actions or morally justify fraud due to prejudice against entire demographics of strangers.
  • “This is the only solution.” Individuals may believe that unless they commit fraud, they will lose everything—a job, a relationship, a place to live—and are willing to do anything to avoid that outcome.

Looking out

Applying the fraud triangle to your customers

While these three points of the fraud triangle may not always be perfectly balanced, they're consistently present in cases of fraud. Auditors and management teams frequently use the triangle to identify weaknesses in businesses that empower these forces, such as poor control systems or unfair compensation. In a similar way, bankers can apply an understanding of the fraud triangle to better protect their customers.

When customers come in with a suspicious check or need to withdraw money to buy gift cards to pay the IRS, they are rarely trying to commit fraud knowingly. Often, the actual fraudster has influenced the customer without them realizing it. It is the job of your financial institution’s front-line staff to recognize red flags of the fraud triangle as they relate to customers. This will help you understand who may be most at risk of falling prey to a fraudulent scheme.

For example, some fraudsters apply pressure to victims by threatening blackmail or legal action unless they send gift cards or provide bank account information. The increased pressure can make it harder for the customer to think clearly and take the right next steps. Fraudsters may also take advantage of the pressures customers are already facing. For instance, older customers on fixed incomes might suddenly get a check in the mail that could really help them out this month. The fraudster is providing an opportunity to relieve pressure from the customer, increasing the odds that they will try to cash the check.

Rationalization can also play a part in fraud tactics. Customers who receive checks in the mail may know they seem too good to be true, but fraudsters use well-known names like Wal-Mart to trick them into trusting the checks’ validity. The established, familiar brand leads victims to rationalize that the sudden suspicious windfall is legitimate.

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Customer protection

Recognizing the signs of the fraud triangle effect

Bankers should learn to identify signs that the three points of the fraud triangle have influenced their customers. The following actions can help your institution prevent fraud.

Educate: Proactively teach customers to think critically about suspicious activity to avoid future mishaps. When a customer brings in a suspicious check, front-line staff should avoid simply telling them it is too good to be true and should not be trusted. Help the customer think seriously about the check’s origins by asking questions like:

  • Did you ever sign up for a mystery shopper program or contest?
  • Why would the IRS want Apple gift cards?
  • How did this person get your contact information?
  • Why didn't they charge a fee or put a stop on the check if it was written for too much?

Examine: Look at the customer's account. Are they in a situation that could cause financial pressure? Have they been taking out more money than they deposit? Suggest products that could help take the financial pressure off. You could offer a savings account to help the customer save for emergencies, or a line of credit with interest payments that are usually cheaper than the constant fees they've been struggling with. Helping put customers in a better position to manage financial stress can keep them from thinking a fraudulent check is their lucky break or the opportunity they saw is their only chance at financial freedom.

Delay: When you can, take away the chance for the customer to unknowingly commit fraud. If the customer insists on depositing a suspicious check, put a hold on it for as long as you're allowed. The customer might be upset at first, but they'll be glad when the check turns out to be fake. If they decide not to deposit it because of the hold, make notes in your system so other bankers at different branches know the situation. The customer probably won't give away much information if they try to do the transaction somewhere else. Know your bank's rules on what you can do to stop your customer from falling for a scam.

Conclusion

Fraud triangle and front-line interactions

Unfortunately, you might not always be able to stop the effects of the fraud triangle before they take hold of customers. Some customers will go straight to the store when they get a fake call from the IRS or ignore your warning and go to a different bank to deposit a check. But understanding what makes people want to commit fraud, and how they can become victims, helps bankers have better talks with their customers and decreases the likelihood that they will fall for scams.

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About the Author

Kate Randazzo

Content Marketing Manager
Kate Randazzo is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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