What Can Fraud Prevention Learn From Behavioural Science?

Stop! Think Fraud. The UK Government’s new campaign is hardly surprising, when fraud accounts for more than 40% of all crime reported in England and Wales. Worryingly, of the 3.5 million incidents of fraud in the year to March 2023, only 13% of cases were reported by victims to the police or Action Fraud.¹ Some estimate that 1 in 17 adults were victims of fraud in 2023 alone.² How can we take proactive measures to tackle these alarming statistics?

Behavioural science provides a unique approach to encouraging individuals to do the right thing. Drawing from elements of economics, psychology, sociology and neurology, it offers insights into human decision-making processes and underlying factors that influence conscious and unconscious behaviours. To manage the risk of fraud, organisations must shift their focus from simply dictating rules to also explaining the purpose of rules, understanding employee perspectives and anticipating their likely actions.

In this context, Guidehouse recommends the following techniques derived from behavioural science research that help encourage people to do the right thing:

1. Social Norms

Social norms are the unspoken behavioural rules shared by people in a given society or group; they define what is considered ‘normal’ and appropriate behaviour for that group. Social norms consist of what we do, what we believe others do, and what we believe others approve of and expect us to do.

Most people in the UK do not commit fraud, because they have a strong sense of moral obligation, justice and fairness which is shared by those around them. In other words, there is a strong social norm against committing fraud rather than the power of the law itself. 

Understanding social norms matters because it enables us to inform behavioural change interventions that go beyond the individual and spark collective change by addressing deeply rooted norms. This increases the likelihood of making lasting positive change. Social norms are effective because the majority of us don’t like being outliers - we want to be in the ‘in group.’ The in group (or reference group) are the people we look to when deciding what to think or do, and they are the people whose thoughts and opinions we care about. Interestingly, they could be complete strangers.

The key to moving the dial from good intentions to good actions using the social norm technique is to get the ‘in group’ to exhibit the right behaviours. And once we have the in-group exhibiting the right behaviours, new joiners will likely follow that behaviour - not dissimilar to social media influencers.

2. Connecting With Purpose 

It is important to help individuals connect with the purpose of any law, regulation or rule to encourage them to do the right thing. If our own moral compass doesn’t connect with the purpose of the law/rule, we are less likely to follow the rule, but worryingly we do not always see that as compromising our integrity.  

People are also more likely to undertake good actions if they perceive the impact is high on others -  so understanding the consequences of actions and who the victim is are essential. Understanding this harm helps to identify what we are protecting society from.

3. Implementing Ethical Nudges

Ethical nudges are regular reminders within our environment that help us to do the right thing.

An ethical nudge can serve as a reminder for people to act in a way that is ethically correct and aims to influence the decisions people make. An example can be seen in road safety measures, where displaying an image of a sad face when a vehicle exceeds the speed limit serves as an ethical nudge to encourage compliance with the law. However, it is essential to continuously innovate these nudges to prevent desensitisation. A workplace example of an ethical nudge includes implementing reminders that pop up when completing an expense form, to remind employees to record their expenses truthfully.

Nudges can be used to prompt honesty at key moments. When assessing a process for fraud risk, identify where people are likely to be dishonest and create a tailored intervention to prompt honesty.

4. Incorporating Simplicity or Friction

Friction is a barrier or impediment that slows down a process. Nowadays, society wants to remove friction from processes. We want things at the click of a button. We don’t want to wait for things anymore. Why the need to complete so many forms to get something simple done? It frustrates customers, leading to poor customer experience. It frustrates employees, leading to disengagement.  

Friction, when used correctly, is a great tool. You can add friction to a process or remove it from a process, depending on how you want people to behave. A key reason why people do not comply with rules is due to friction in processes - processes that are clunky or contain too many steps. In these scenarios, people will find shortcuts (leading to the risk that key controls may be bypassed) or avoid doing the process altogether. If you want people to follow the rules and take quick action, the answer is to take the friction out of processes - make things easy. Look at an end-to-end system from the user’s perspective. The best way to find the friction in the process is to ask the people who undertake the process.

When it comes to designing fraud controls, friction can be your friend. Additional security measures that slow down or complicate the user experience, such as multiple payment screens or multiple factor authorisations in the processing of payments in banking applications, can deter fraudsters and also provide more time for detection and intervention. It also increases the complexity fraudsters face in circumventing security measures. Slowing things down is a key driver of the campaign to Stop! Think Fraud.

The flip side of this is simplicity. We spend a lot of time creating framework documents, policies, procedures and risk assessments, and most people in the workforce do not retain the information in them for very long. For a positive and engaging experience, the Behavioural Insights Team, a British social purpose company focusing on applying behavioural insights to design effective systems, policies, products, and services, suggest aligning these with the "EAST" framework - Easy, Attractive, Social and Timely.³  Simplicity means that controls are less prone to errors or false positives and is a key driver of encouraging understanding and increasing the likelihood that people will engage with the rules - and do the right thing.

5. Communicate That There is a High Risk of Getting Caught

This communication is twofold: First, what controls are in place detect poor behaviour - but also what is the personal impact of being caught? This is a key disruptor to the pressure/motivation element of the fraud triangle.  

Employees should know what regular processes the firm has in place to reduce fraud and error. For example, make it clear that all claimed expenses are monitored by management and are audited on a random basis - this helps to drive good outcomes. One of the most effective ways of re-enforcing a company’s expectations that their employees do the right thing is a visible and timely response to issues reported to the company, be it internally, or anonymously through whistleblowing lines. 

Transparency in how these matters are handled is key to bolstering employee trust - moving from a speak-up culture (reporting concerns) to a listen-up culture (where individuals feel heard and respected, potentially leading to the earlier detection of wrong behaviours). There is no better way to positively reinforce this message than to continually improve day-to-day controls identified in  the course of investigating these issues. Highlighting the consequences of poor behaviour can help individuals to understand what is tolerated and what is not acceptable behaviour in the workplace. 

The Economic Crime and Corporate Transparency Act 2023 introduced a criminal offence for corporations that fail to prevent fraud. A key defence to this charge is where an organisation has ‘reasonable procedures’ in place to detect and prevent fraud. While this legislation is still new, with guidance expected later this year on the expectation of what would be considered reasonable, it is evident that proactive companies will be reassessing the robustness of controls in this area - meaning that the likelihood of being caught is only going to increase.

6. Reassess How Incentives are Measured

There are many mechanisms within organisations that inherently drive behaviours away from integrity and promote the individual  over the organisation, so there is real value in examining the power of what is measured and how people are incentivised. Most people want to live up to their own standards of personal and corporate integrity, unless that puts them at a personal disadvantage.

Many firms have performance management processes which assess how well individuals have done in a specific period. Some people have sales targets as part of that process, particularly at more senior levels of an organisation. Such targets in pressurised sales environments take on a life of their own. Those sales objectives are seen as more important than compliance behaviours. No one seems to look at how some people manage to succeed year after year - despite economic cycles.  Good performance can hide bad behaviours. Often, poor behaviours are only identified when the star, hardworking performers go on holidays. 

Think about bonuses based on hitting quarterly targets - where being a few thousand pounds off the target earns nothing. Consider what kind of behaviours this type of performance measure might lead to - could it drive bogus signings, inflated contracts? Think also about benchmarking KPIs against peers: When does a culture of ‘healthy competition’ spill over into an environment where sabotage and deception could be used for competitive advantage?

Behavioural science offers a nuanced approach to encouraging people to do the right thing. There are many such strategies, and this article just scratches the surface of what can be achieved. By understanding the drivers of human behaviour and rationale behind decision-making, we can also understand how we can use behavioural science strategies to influence people to do the right thing and move the dial from good intentions to good actions.