Risk Visualization: Enterprise Prevention...

When "Corporate Executives" start talking about how to reduce fraud and other critical Operational Risks across the institution, there is going to be plenty of debate.

Where do you focus your resources and investments in order to get the best ROI and economic value?

If you thought the pornographers were the leading ledge of innovation on the AI Internet, there is a new breed of international criminals and corporate attackers that have emerged at the top of the pyramid.

Financial services organizations are taking an enterprise view of global risk prevention to try and keep ahead of these increasingly clever and technology oriented crooks.

Having an enterprise view of holistic risk is the "Holy Grail" and some would say that focusing on the account and not more on the customer is the wrong approach.

What is clear about the online evolution of fraud activity is that social engineering is working in the exploitation game. Hardening all of the systems with two-factor authentication or even IP Geolocation is just part of a layered risk strategy.

Working from within the walls of your institution trying to figure out how to protect your assets and your customers is merely a myopic strategy.

The attackers are moving too fast and have access to the same tools in their labs where they utilize their own methods and processes for exploiting the vulnerabilities in your latest applications.

Now that you have spent millions on implementing that new AML or fraud detection system, are you sleeping any better at night?

"True strategic analysis of risk and the convergence of relevant data makes scenario development, proactive planning and open source intelligence an area that requires consistent attention."

Simulations and evaluation of possible physical and digital exploits that haven't even been detected yet could provide the proactive and preventive advantage you have been seeking.

What is your latest hypothesis?  Have you tested it effectively to determine the likelihood and impact of success? Training and practicing for the unknown and unthinkable puts you and your team in a more resilient mode to survive the next attack. Whether it's through the front door, the suppliers back door or through the copper wire into your customers home or business office, detection is critical.  

Anticipation and deterrence is imperative...

Insider Threat: Corporate Integrity Culture...

Does your organization have a culture of "Corporate Integrity?" One can only wonder how these findings have changed since these results.

The depth and breadth of Operational Risks were apparent over eight years ago in the 2011 CyberSecurity Watch Survey by CSO Magazine, USSS, CERT and Deloitte.

The most common insider e-crime at 63% is unauthorized access to / use of corporate information. Here are the others:

• 57% - Unintentional exposure of private or sensitive data
• 37% - Virus, worms or other malicious code
• 32% - Theft of intellectual property

When asked which electronic crimes were most costly or damaging the results were:

• 38% - Outsiders
• 33% - Insiders
• 29% - Unknown

Regarding the "Insiders" reasons were given for not referring for legal action, the one that stands out in our mind is this one. 40% could not identify the individual(s) responsible for committing the eCrime. And maybe even more astonishing is that 39% did not have enough information or a lack of evidence, to proceed with either civil or criminal litigation.

So what is really going on with these survey results presented so far? Even though the respondents say that 33% "Insiders", they have done little to collect enough evidence to identify who the responsible parties are to the incident. This may be for several reasons including the lack of internal expertise to preserve evidence and conduct timely investigations.

We have addressed the "Insiders" that make up one third of the digital incidents, yet what about the "Unknowns" who add an additional 29%. The combination of the two make up 62% of all the incidents in the study.

This is where Operational Risk professionals can have a significant impact within the enterprise.

The unauthorized access to information and use of that information is at the center of this issue. When an organization realizes that this "information" has impacted them, the funds have been stolen, the trades have been placed or the press has published a trade or national security secret.

Regardless of the high tech tools utilized or the systems and controls within the organization, there are always methods and processes that if properly implemented, will reduce the number of "Unknowns" and "Insider" threats.

In your particular case, it just may come down to developing more effective situational awareness with your employees.

Suppose you create a mandatory program for all employees that is focused on corporate integrity and each year the CEO kicks off the first session with their own attendance and their own direct reports, including the Board of Directors.

Next, all senior staff attend the program and posted on the corporate Intranet are webcast shows with several 5 minute clips of parts of the one day session.

Finally, the roll out for the remainder of the employees is tied to the annual 360 degree review, that each manager does with their subordinates in the company.

Employees must understand the ethical behavior expected of them. New employee orientation should detail the organization's mission, values and code of conduct, types of fraud, compliance, their responsibility to report violations of ethical behavior and impropriety, and details of the hotline or other ways to report incidents and other integrity concerns.

Periodic training throughout an employee's career reinforces awareness and the cost of internal incidents.

If your organization does not currently have a program as we have described earlier, then maybe it's time to start one.

If you already have one in place, how effective is it in detecting the "Insider Threat" and the spectrum of Operational Risks within your organization...

Information Threat: Battle for Superiority...

What continues to be the greatest economic threat to your organization? Is it "Internal" or "External" to your institution? Could it be both?

Insiders rarely work alone and therefore the nexus with some outside influence, whether it be a person, life factors or some other entity are typically in play.

Is an engineer in R&D copying precious intellectual property information from within the enterprise company, that could be worth hundreds of thousands or even millions to the highest competitive global bidder? Could your small business have an accounting supervisor that has been diverting funds to a private bank account for the past two years?

Would it be possible that a supplier or 3rd party partner is capable of inflating the number of billable hours on a project?

Whether it's IP Theft, Fraud or other white collar corporate malfeasance, these Operational Risks are real and growing at a double-digit percentage rate annually. The greatest economic threat to your organization could be complacency or an apathetic staff, who works without adequate resources and little communication with the Executive "Powerbase".

The compliance and oversight mechanism's are in full swing from the federal governments around the world as highly regulated critical infrastructure organizations are implicated in a myriad of corruption, scandal, ethics and criminal matters.

Litigation is an Operational Risk that many organizations have realized the necessity for more robust internal teams to address the continuous requests for information from the government.

There is one common denominator across all of the insider threats, external forces and other vectors that seem to be attacking our institutions night and day. That common denominator is "Information".

And underlying this is the data and meta data that all to often ends up being the key or clue to finding the "Smoking Gun" and the source or person(s) associated with the scheme or attack on the organization.

Managing information in a mobile and interconnected planet is a major issue in any global company. Providing the tools and the right information faster and more accurately than the competition can be the difference in your own survival on the corporate battlefield.

So how does the CxO suite even begin to address the risks, opportunities and resilience in our demanding "Information-centric" environment?

They believe in having a strong culture of ethics, training and continuous monitoring of employees, systems and their supply chain. They understand the importance of providing the vital resources to the people on the front line of risk management and to make sure that their early warning systems and methods are not compromised.

This breed of CxO's are the new breed of organizational management, that are leveraging information to their most significant advantage:

Whether you are trading in a marketplace, analyzing assets on a map or manufacturing widgets and selling them to qualified buyers, operational risk management begins and ends with information. Managing that information effectively and more accurately than your competition is the name of the game. What have you done today to insure your survivability in the face of the next crisis?

Certainty: Solutions for an Unpredictable World...

As the moon rises on a distant horizon, vital leaders across our globe are gaining new strategic foresight to continuously adapt their enterprise.

The future horizons in the mid-2000's are now on their mind and for good reason.  All of us are operating at increasing speed, in an unpredictable world:

• Computer Virus
• 9/11 2001
• Hurricanes Harvey & Katrina
• Financial Crisis 2007-2008
• Deep Water Horizon
• San Bernardino Attack 2015
• Las Vegas Shooting 2017

What is the certainty that the Operational Risks in the next 20 years, will be a replay of the variety and spectrum of loss events we have witnessed in the past 18 years.  The difference is that they are accelerating.  What have we learned?  What are we doing about it?  How are we changing?  Why?

Solutions for resilience in motion in our "Unpredictable World" span the domains of people, processes, systems and external events.  Operational Risk Management (ORM) is a discipline that can be applied in most any size enterprise including government.

When you are seated around the meeting room with your leadership team, what do you see?  People who are in charge of teams, business units, departments, subsidiaries, portfolio investments and other assets of the enterprise.  You are counting on them to be prepared, to be predictive and to be proactive.  Are they?

You see, after all of the lessons learned and the After Action Reports (AAR) have been written and published, it seems to come back to the fundamentals.  It is history repeating itself.  Will our future world continue to be unpredictable?

If you said yes, then what are you doing about it?  Let's go back to that group of leaders sitting around the conference table.  Who have they engaged outside your enterprise to back them up to help them be more prepared, predictive and proactive?

The truth is, that you are behind the solutions curve.  Even your simple, yet effective Business Continuity Plan is outdated and gathering dust on the bookshelf.  The crisis team is far too preoccupied with the next news story or "Tweet," that may have an impact on the stock price.

The truth is, our unpredictable world is actually certain and we only have a limited amount of time until the next crisis, to prepare and adapt...

Unthinkable: Adapting in New World Disorder...

Will 2018 bring more data breaches, lost laptops and insider threats than 2017?  This is why CSO's, CPO's and corporate General Counsels have their teams working overtime.

When the enemy is increasing their attacks, utilizing new strategies and leveraging the existing base of compromised organizational intellectual and data assets, the future horizon becomes ever more clear. 

The statistics don't lie.  1579 documented Data Breaches occurred in 2017. Up 44.7% according to reports by the Identity Theft Resource Center (ITRC) compared to the previous year.  It is the new normal.

The Insider Threat Program (InTP) however, remains a key focus for Operational Risk Management (ORM) professionals because human behaviors are exaggerated during periods of stress, fear and uncertainty. This means that people who may have never considered doing something to jeopardize their reputations, may now be up against a wall.

When there is no obvious exit and no way out, people will do extraordinary things to get ahead, beat the odds and hedge their own risk portfolio of life.

In Joshua Cooper Ramo's book "The Age of the Unthinkable", "Why the New World Disorder Constantly Surprises Us and What We Can Do About It" the author discusses the concept of Deep Security. His analogy of how to think about "Deep Security" is the biological immune system:

"A reactive instinct for identifying dangers, adapting to deal with them, and then moving to control and contain the risk they present."

The key word in Ramo's writing is "Adapt".  Being Adaptive.  However, prior to this there are two other very vital words that we feel are even more imperative. Instinct. Identifying. In other words, Proactive Intuition.

Ask any savvy investigator on how she solved the case and you may hear just that, "I had a hunch."

Talk with a Chief Privacy Officer in any Global 500 company.  You might get them to admit they have a sense that their organization will be the target of an "Insider data breach" incident in the coming year or two.

Do you remember signing off on reading and your acceptance of the employee handbook?  When did your organization last make changes to the Corporate Employee policies?  We would start with the updates to the following sections:

• MEDIA CONTACT
• SOCIAL MEDIA POLICY
• REMOTE ACCESS POLICY
• E-MAIL, VOICE MAIL AND COMPUTER NETWORK SYSTEM PRIVACY
• (YOUR ORGANIZATION) RIGHT TO ACCESS INFORMATION
• SYSTEMS USE RESTRICTED TO COMPANY BUSINESS
• FORBIDDEN CONTENT
• PASSWORD SECURITY AND INTEGRITY
• INTERNET ACCEPTABLE USE POLICY
• POLICY ON USE OF SOFTWARE
• COMPANY PROPERTY
• PROTECTION OF TRADE SECRETS/NON-DISCLOSURE OF COMPANY INFORMATION 

Due to the increasing complexity of IT systems, cloud computing, data networks and the hundreds or thousands of laptops and mobile devices circling the globe with company executives and employees is enough to predict that a major breach will occur.

Being adaptive and having proactive intuition in the modern enterprise does not come natural. You have to work at it and it requires a substantial investment in time and resources to make it work effectively.  Proactive Intuition.

Once you realize that all of the controls, technology and physical security are not going to keep you out of harms way, you are well on your way to reaching the clairvoyance of "The Age of the Unthinkable."

Vigilance: The Casualty of the Truth...

On the other end of a planned cyber threat are the motives and plans by a person.  Sometimes that person puts into play the use of a "Bot" to carry out many of their planned steps in their scheme.  Operational Risk Management (ORM) professionals have been classifying these cybercriminals for a decade or more yet even now in 2016 they are getting more formal profiles:

BAE Systems, the London-based, multinational security company, recently released profiles of “six prominent types of cybercriminals” and detailed how they could hurt companies around the globe, officials say.

Threat intelligence experts at BAE Systems have compiled a list, “The Unusual Suspects,” that has been created from “research that uncovers the motivations and methods of the most common types of cybercriminals,” according to BAE. “The intention of the campaign is to help enterprises understand the various enemies they face so they can better defend against cyberattacks.” BAE Systems officials have profiled six cybercriminal types:

• The Mule – naive opportunists that may not even realize they work for criminal gangs to launder money;
• The Professional – career criminals who work 9-to-5 in the digital shadows;
• The Nation State Actor – individuals who work directly or indirectly for their government to steal sensitive information and disrupt enemies’ capabilities;
• The Activist – motivated to change the world via questionable means;
• The Getaway – the youthful teenager who can escape a custodial sentence due to their age;
• And The Insider – disillusioned, blackmailed or even over-helpful employees operating from within the walls of their own company.

These individuals and groups have caused billions of dollars in losses and caused significant harm to millions of people and organizations.  Now what?

It will be many more years to come, before the laws catch-up to the technology and those who use the vector of the Internet to carry out their crimes against humanity.  Law enforcement has their hands continually tied by the laws and the geographic challenges of a global epidemic.  Governments and politicians are in constant battle over the privacy vs. security philosophy and all the legal issues.

While the wheels of Parliament, or the U.S. Congress slowly turn and the mechanisms for law enforcement become more robust for evidence collection, investigations and prosecutions, there are significant strategies of resilience that we must focus our respective vigilance.  It is not anything new per se, just a renewed emphasis and a new commitment to redesigning our digital environments.  We can do better.

For now, what if we just pick one cybercriminal type to focus on.  The "Insider".

The "Insider" is most likely in almost every formal organization today, working diligently to mask and perpetuate their goals until they are revealed.  It is your "Duty of Care" to continuously deter, detect, defend and document within your enterprise.  The "Insider" could be anyone and so how can the organization work ever more so vigilantly?

It begins at the core of the business and the culture that surrounds those principles within your company, your team or your relationship with suppliers.  The environment you build and sustain shall have the transparency and the elements necessary to sustain a culture where the "Insider" is incapable of operating.  Where the culture itself, makes the environment impossible for the "Insider" to operate without disclosure.

We would encourage Operational Risk Management (ORM) professionals to incorporate new found strategies, new management tools and a renewed effort to extinguish the "Insider" threat across the globe.  The best way we can do this today, is to work on the culture and to establish the foundations for future "Trust Decisions" within the enterprise.  The root of changing the culture and achieving the desired future environment, begins with every single decision to trust.

The journey ahead will be long and full of new found challenges.  The vision of the future and the outcomes received will soon be more apparent.  Now the real work begins to start the journey with your own organization, with each person and understanding the environment and culture you seek.  And remember:

"In war, truth is the first casualty."

Aeschylus
Greek tragic dramatist (525 BC - 456 BC)

Beware of the Cowboy: Risk Driven by Fear...

Beware of the cowboy.  Operational Risk Management (ORM) spans the hazards on the flight deck on the USS Ronald Reagan (CVN 76) or behind enemy lines or even to employee behavior on the front lines of the private sector on Wall Street:

"The recent conviction of Michael Coscia in the Federal District Court in Chicago in the first prosecution for “spoofing” provides more clarity to high-frequency trading firms about how they can operate. The message is to tread carefully when a strategy depends on using orders that will be quickly canceled because the government may claim they are an effort to manipulate the market by fooling others into trading.

Spoofing was made illegal in the Dodd-Frank Act, which prohibits “bidding or offering with the intent to cancel the bid or offer before execution.”

Believe it when we say that people who try to be cowboys in your organization are operating without regard to risk. Now multiply the number of cowboys by the number of people that they surround on their team, who think that this is the way to operate. It doesn't take long to find out that these are the root causes of many of the operational risks in your organization. And it starts out with the basics even in the vast private sector beyond Wall Street:

• Revenue is not booked according to the rules. Products sit in the warehouse yet revenue ends up on the sales reps commission report because (s)he had a signed order.
• Assets are not valued correctly. Bank accounts are not validated to make sure they actually exist and accounts receivables are inflated.

These are just two of the many facets of occupational fraud that starts with a few cowboys who have little regard for managing risk and all the incentives to line their pockets with new found cash or bonuses.

From Leadership Lessons of the Navy SEALS

The Cowboy

"Neither of us knows if such a thing has ever been tolerated in modern commando teams. Yes, sometimes you need to charge forward. But, there are simply too many potential casualties and too much political currency resting on commando missions to entrust one to a cowboy. Authorization for an operation depends on the accurate calculation of operational risk. This requires an assessment of proven forces ability to perform a task. All this is contrary to the cowboy philosophy of depending on experimentation, pluck, and luck in order to succeed."

"The problem with being a cowboy is that your bosses won't employ you if they can't trust you, and they can't trust you if they don't know what you'll do. And then you're stuck with the reputation."
        --LT. CMDR. Jon Cannon

You might think that the reason is ego or just plain greed. However, the real motive may not be so clear. More than likely, the motive is fear. And that fear is something that grows until it gets to the point of creating harm, loss and destruction. You have to find the cowboys in your organization and you have to follow the mantra of quality gurus from years past, "Drive out Fear".

C²: Continuous Continuity in the Enterprise...

Many enterprises today understand the myriad of potential threats to its people, processes, systems and structures. It stands to be better equipped for sustained continuity.  Business Crisis and Continuity Management (BCCM) is a dynamic change management initiative that requires dedicated resources, funding and auditing.

Certainly the largest organizations realize that the risks are taking on different forms than the standard fire, flood, earthquake and hurricane/twister scenarios. These large catastrophic external loss events have been insured against and the premiums are substantial. What is less easy to analyze from a threat perspective, are the constantly changing landscapes and continuity postures of the many facets of the organization having to do with people, processes and systems.

The sources of significant loss events are changing as we speak. Here are a few that should not be overlooked in your Operational Risk Management (ORM) Programs:

· Public perception

· Unethical dealings

· Regulatory or civil action

· Failure to respond to market changes

· Failure to control industrial espionage

· Failure to take account of widespread disease or illness among the workforce

· Fraud

· Exploitation of the 3rd party suppliers

· Failure to establish a positive culture

· Failure in post employment process to quarantine information assets upon termination of employees

Frankly, corporate directors have their hands full, helping executives managing risk and continuity on behalf of the shareholders. The risk management process will someday have as big an impact on the enterprise, as other key functions because shareholders will be asking more questions about the changing landscape of managing risk for corporate governance.

Since effective BCCM analysis is a 24/7 operation, it takes a combination of factors across the organization to provide what one might call C², or “Continuous Continuity”. A one-time threat or risk assessment or even an annual look at what has changed across the enterprise is opening the door for a Board of Directors worst nightmare. These nightmares are “Loss Events” that could have been prevented or mitigated all together.

Most of the best practices talk about a BCCM plan that will be periodically updated. Periodic is not continuous. Change is the key factor here. What changes take place in your organization between these periodic updates? How could any organization accurately account for all the changes to the organization in between BCCM updates? The fact is that they can’t.

This will change over time as organizations figure out that this is now as vital a business component as Accounts Receivable. The BCCM will become a core process of the organization if it is not already, dynamically evolving by the minute as new change-based factors take place in the enterprise. As new or terminated employees, suppliers and partners come and go into the BCCM process, the threat profile is updated in real-time. This takes the operational management that much closer to C², or “Continuous Continuity”.

So what? Boards of Directors have the responsibility to insure the resiliency of the organization. The people, processes, systems and external events that are constantly changing the operational risk landscape become the greatest threat to an enterprise. It’s the shareholders duty to scrutinize which organizations are most adept at “Continuous Continuity” before they invest in their future.

Courage: Risk of Physical & Moral Fear...

The effective implementation of Operational Risk Management (ORM) requires two types of courage; both physical and moral.  What are some examples?  "Physical Courage" is the act by an individual to run into the burning building to save those caught on the upper floors.  "Moral Courage" is the decision to finally expose the multi-year fraud scheme executed by the company controller, who happens to be your boss and is a former college class mate.

The courage component is different, yet the same.  The existence of fear in a "physical sense" may be harder to overcome since it will expose you to bodily harm and potential death.  The fear associated in a "moral sense" will impact your reputation or standing in the community that you live in, or the profession you operate within.  This fear could be greater for some than even risking ones own life.

Is it possible to learn and improve your skills for both physical and moral courage?  The answer is yes and it has been a factor of education and training for hundreds of years.  The goal is to ensure that your organization, enterprise, team or community is learning both and creating effective habits.  The continuous and repetitive exercises to deal with the fear of bodily harm or blowing-the-whistle on your best friend is the bottom line here.

"What are you doing to overcome your fear to save a life?  What are you doing to overcome your fear of reputation loss?  The ratio of learning both and exercising them in the field or when needed inside the institution, enterprise or government is what is at stake."

Once the education and training programs are in place to learn new skills then the fear of action will diminish, when the time comes.  Who do you have coming to work each day who has the balanced ability to carry an adult out of the burning building or simultaneously detect a multi-layered accounts payable scheme?

Unfortunately, these are only two examples of a wide spectrum of courage that is required each day. In New York City or the Sahel, Board Room to the Break Room, from the Class Room to the Conference Room both physical and moral courage will be required.  In seconds.  The courageous decision you make may cause bodily harm or the end of a career.  What are you going to do to learn and train to deal with the fear that you will encounter?  What kind of courage will you be called upon to utilize in order to act, to behave correctly and expeditiously?

Operational Risk Management (ORM) is a vital factor in your city, your business and your virtual community.  It spans the spectrum of courage from physical to moral.  The question remains,  will you act when the time and moment arises?

TOC: The Implications of Consumer Privacy...

Operational Risks are pervasive in most every business both large and small. A small business can learn a tremendous amount from those failures by large corporate enterprises. Privacy laws in the United States are for all business owners whether they be a sole practitioner or a soon to be corporation with a $100 Billion valuation.  Operational Risk Management (ORM) is present in any serious business that makes important "Trust Decisions" on a minute-by-minute basis.

Consumer privacy and the risks associated with the protection of personal identifiable information of clients, members and customers is at stake. Learning the lessons from the organizations who have made changes and are working on a daily basis to comply with the regulatory frameworks, can be a very beneficial lesson to all.

Beyond the cost of a breach of data, Operational Risk Management (ORM) professionals understand that human behavior is the reason behind many of these incidents. Employees and supply chain insiders not clandestine hackers or malicious code sent from afar can be the major threat. So what can a Chief Privacy Officer or CISO do to mitigate the risks of employees and their behavior? All of the education and awareness campaigns may help, but the "Trust Decision" process itself is the place to begin.

Information Governance and the steps that are utilized to ingest or acquire and process that information is also paramount.  Hayley Tsukayama from the Washington Post highlights part of the issue:

Facebook came under fire Thursday from privacy advocates who say that changes to its ad network mark an unprecedented expansion of its ability to collect users' personal data. The advocates are also criticizing the Federal Trade Commission for allowing Facebook to make the changes and argue that the network's size gives it too much knowledge about its users.

Whether you are in the business of "Social Networking" like Facebook or you are the regional health care system in your state, the privacy of information of the consumer is at stake. Where that stolen information ends up in many cases, is in the hands of "Transnational Criminal Organizations" where it becomes of the lifeblood of their business operations to perpetuate their fraud schemes. These schemes are impacting the economic security of major organizations in the private sector and so the U.S. government (USG) has ramped up in the past 3 years to address the threat. Combined with other factors associated with legitimate business operations, organized digital crime syndicates have infiltrated the country and is costing the United States billions of dollars per year.

Here are several actions USG will be taking as the TOC strategy continues to be enabled:

Action

• Implement a new Executive Order to prohibit the transactions and block the assets under U.S. jurisdiction of TOC networks and their associates that threaten critical U.S. interests.
• Prevent or disrupt criminal involvement in emerging and strategic markets.
• Increase awareness and provide incentives and alternatives for the private sector to reduce facilita- tion of TOC.
• Develop a mechanism that would make unclassified data on TOC available to private sector partners.
• Implement the Administration’s joint strategic plan on intellectual property enforcement to target, investigate, and prosecute intellectual property crimes committed by TOC.
• Enhance domestic and foreign capabilities to combat the increasing involvement of TOC networks in cybercrime and build international capacity to forensically exploit and judicially process digital evidence.
• Use authorities under the USA PATRIOT Act to designate foreign jurisdictions, institutions, or classes of transactions as ‘‘primary money-laundering concerns,” allowing for the introduction of various restrictive measures on financial dealings by U.S. persons with those entities.
• Identify foreign kleptocrats who have corrupt relationships with TOC networks and target their assets for freezing, forfeiture, and repatriation to victimized governments.
• Work with Congress to enact legislation to require disclosure of beneficial ownership information of legal entities at the time of company formation in order to enhance transparency for law enforce- ment and other purposes.
• Support the work of the Financial Action Task Force, which sets and enforces global standards to combat both money laundering and the financing of terrorism.

The FTC is continuously working with companies like Facebook. The White House NSC is working on strategies that have a nexus with stealing consumers information to exploit the financial system. Yet all of this will be for nothing, if the private sector does not work in concert with government. Public-Private partnerships are in full swing and are making some progress.

In addition, nation state industrial intellectual property theft and economic espionage has eroded our global competitive advantage in several industry segments.  Ellen Nakashima explains:

A Washington think tank has estimated the likely annual cost of cybercrime and economic espionage to the world economy at more than $445 billion — or almost 1 percent of global income. 

The estimate by the Center for Strategic and International Studies is lower than the eye-popping $1 trillion figure cited by President Obama, but it nonetheless puts cybercrime in the ranks of drug trafficking in terms of worldwide economic harm. 

“This is a global problem and we aren’t doing enough to manage risk,” said James A. Lewis, CSIS senior fellow and co-author of the report, released Monday.

Changing peoples behavior inside your own business will require substantial oversight and continuous education. Remain vigilant at the risk of your organizations own peril!

Insider Threat: Corporate Integrity Culture...

In August 2011, this Operational Risk Management (ORM) blog posted the following.  In light of the increasing impact of "Insider Incidents" in 2013, this is worth revisiting:

Does your organization have a culture of "Corporate Integrity?" The depth and breadth of Operational Risks are apparent in the 2011 CyberSecurity Watch Survey by CSO Magazine, USSS, CERT and Deloitte.

46% of the respondents said damage caused by "Insider Attacks" is more damaging than "Outsider Attacks". The most common insider e-crime at 63% is unauthorized access to / use of corporate information. Here are the others:

• 57% - Unintentional exposure of private or sensitive data
• 37% - Virus, worms or other malicious code
• 32% - Theft of intellectual property

When asked which electronic crimes were most costly or damaging the results were:

• 38% - Outsiders
• 33% - Insiders
• 29% - Unknown

Regarding the "Insiders," the reasons that were given for not referring for legal action, the one that stands out in our mind is this one:

40% could not identify the individual(s) responsible for committing the eCrime.  And maybe even more astonishing is that 39% did not have enough information or a lack of evidence to proceed with either civil or criminal litigation.

So what is really going on with the facts presented so far? Even though the respondents say that "Insiders" are the most damaging, they have done little to collect enough evidence to identify who the responsible parties are to the incident. This may be for several reasons including the lack of internal expertise to preserve evidence and conduct timely investigations.

We have addressed the "Insiders" that make up one third of the digital incidents but what about the "Unknowns," who add an additional 29%. The combination of the two make up 62% of all the incidents in the study. This is where Operational Risk professionals can have a significant impact within the enterprise.

The unauthorized access to information and use of that information is at the center of this issue. When an organization realizes that this "information" has impacted them, the funds have been stolen, the trades have been placed or the press has published a trade or national security secret. To narrow this down further, you might say the Fraudsters and the WikiLeakers are bringing the institution into a torrential storm of criminal activities.

Regardless of the high tech tools utilized or the systems and controls within the organization there are always methods and processes that if properly implemented, will reduce the number of "Unknowns" and "Insiders." In your particular case, it just may come down to developing more effective situational awareness with your employees. This particular educational and awareness building process may indeed also uncover the individuals within your company, who may be already down a path of fraud, embezzlement, insider trading or corporate espionage.

Suppose you create a mandatory program for all employees that is focused on corporate integrity and each year the CEO kicks off the first session with their own attendance and their own direct reports, including the Board of Directors. Next, all senior staff attend the program and posted on the corporate Intranet are webcast shows with several 5 minute clips of parts of the one day session. Finally, the roll out for the remainder of the employees is tied to the annual 360 degree review, that each manager does with their subordinates in the company. This top down process for injecting the situational awareness of Operational Risks, Insider e-crimes and Corporate Integrity is sure to flush out those who are the current suspects and others who will flee the company.

No one that we know of can explain the basis for this process better than Martin T. Biegelman:

"Obviously, a poor working environment provides a motive and rationalization to commit fraud. Here's a quick health check: does management appear not to care about their employees? Does it have unreasonable expectations or financial targets? Is the organization autocratic or participative? Is there a lack of training or promotion opportunities? Does management say one thing but do another? Are senior executives treated differently than rank and file employees when it comes to discipline?" 

Employees must understand the ethical behavior expected of them. New employee orientation should detail the organization's mission, values and code of conduct, types of fraud, compliance, their responsibility to report violations of ethical behavior and impropriety, and details of the hotline or other ways to report fraud and other integrity concerns. Periodic training throughout an employee's career reinforces fraud awareness and the cost of fraud to an entity.

So what?  What does this have to do with with Operational Risk and those who are experts at deception?  Believe us when we say, they may be standing right in front of you.  Anton R. Valukas has also provided more context on the mindset of insider(s), what may be the most relevant lesson, for early detection of "Insider Threat."  "Information in plain sight.  Information in plain sight for what reason?"  What is missing?  Anton Valukas and his team uncovered the context, on why and how Lehman brought the United States to it's break point:

On January 29, 2008, Lehman Brothers Holdings Inc. (“LBHI”1) reported record revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending November 30, 2007. During January 2008, Lehman’s stock traded as high as $65.73 per share and averaged in the high to mid‐fifties, implying a market capitalization of over $30 billion. Less than eight months later, on September 12, 2008, Lehman’s stock closed under $4, a decline of nearly 95% from its January 2008 value. On September 15, 2008, LBHI sought Chapter 11 protection, in the largest bankruptcy proceeding ever filed.

There are many reasons Lehman failed, and the responsibility is shared. Lehman was more the consequence than the cause of a deteriorating economic climate. Lehman’s financial plight, and the consequences to Lehman’s creditors and shareholders, was exacerbated by Lehman executives, whose conduct ranged from serious but non‐culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by Government agencies, who by their own admission might better have anticipated or mitigated the outcome.

If your organization does not currently have a program as we have described earlier, then maybe it's time to start one. If you already have one in place, how effective is it in detecting the "Insider Threat" and the spectrum of Operational Risks within your organization?

Offshore Strategies: Global Integrity Risk...

Global 500 organizations are managing Operational Risks across their respective enterprises, utilizing a portfolio of controls, tools and strategies.  One of those strategies, is getting more attention by nation states and treasury departments.  Larger than Wikileaks, this ICIJ investigation, is a digital peek behind the offshore strategy that is legal in many jurisdictions across the world:

An anonymous source has provided extensive insights into a worldwide network of tax evaders. 

Media in more than 30 countries are currently sifting through a mountain of data.
260 gigabytes of documents - that's the printed equivalent of 500,000 copies of the Bible. 

This is the massive amount of data that was passed on more than a year ago by an anonymous whistleblower to the International Consortium for Investigative Journalism (ICIJ) in Washington. More than two million emails and other confidential documents sketch a picture of a dubious shadow world. More than 130,000 people from 170 countries are alleged to have secreted their money in tax havens. Analyzing the data is a mammoth task that is still nowhere near completion.

The governance and the transparency that a global enterprise displays to its shareholders, employees and the governments is continuously at stake.  Some countries are considered more corrupt and global organizations operating in that part of the world, shall be more aware of the risks of doing business there.

Some other interesting revelations:

• The largest shares of the people setting up offshore accounts live in China, Hong Kong, Taiwan, Russia or another former Soviet republic. 
• In turbulent Greece, both the upper and middle class are increasingly keeping their money in undeclared accounts — a situation that finance officials have since vowed to investigate.
• A number of the world’s largest collectors use offshore accounts to buy and sell art without paying taxes. 
• Offshore accounts are popular in Russia, where President Vladimir Putin has repeatedly asked politicians to stop using them: the deputy prime minister’s wife and top managers of Russian military contractors and government-controlled companies are thought to have secret offshore investments. 
• Offshore accounts are a major source of investment in China and Russia. China’s second-largest source of capital investment is the British Virgin Islands.
• You can read the full ICIJ report here.

Billionaires and politicians are hedging risks on the advice of tax attorneys, accountants and the financial strategies that are as old as tax laws.  Inside the private business compliance and legal departments, lie a vast staff of dedicated personnel who are tasked with mitigating risks to the organization.  Some global enterprises such as Siemens AG have paid the price, of a governance architecture that was in failure.  Today, those lessons learned are still being taught even as others are implicated in alleged wrong doing:

IBM Says Justice Department Investigating Bribe Allegations
By Sarah Frier on May 03, 2013

International Business Machines Corp. (IBM) is being probed by the U.S. Justice Department over corruption allegations in Poland, Argentina, Bangladesh and Ukraine, adding to bribery charges from the Securities and Exchange Commission. 

The Justice Department is investigating whether IBM violated the Foreign Corrupt Practices Act, the company said in an April 30filing (IBM). In Poland, the department is focusing on a transaction that the Polish Central Anti-Corruption Bureau already was studying, the company said. It involves allegations of a former IBM employee selling to the Polish government. 

The Justice Department probe adds scrutiny in new territory as IBM tries to settle with the SEC over activity in China and South Korea. The global reach of the investigation indicates that this isn’t an isolated matter, said Charles Elson, corporate-governance professor at the University of Delaware. 

“If it happens in one country, you can say it’s an individual,” Elson said. “If it happens in multiple, you have to ask, is it systemic? And how well was the compliance program put in place to prevent it?”

So what can a General Counsel, VP of Operational Risk, Chief Risk Officer or even the Audit Committee do, in light of these continuous incidents?  The trust that any person or organization has with its bankers, outside counsel, compliance subject matter experts, accounting advisory and management consultants is at stake.  The integrity of the entire global payments and economic ecosystem is at risk.  This source of systemic risk to governments, global enterprises, stock markets and average consumers is growing beyond control.

What can be done?  The serious conversation going on right now between your independent counselors  continues to focus on trust and the people who are behind that trust.  You have got to have that serious conversation as a CEO, not with your first line of management Vice-Presidents, but several layers below them in the corporate hierarchy.  Believe us when we say, as the CEO, you can't see two layers below you, where all of the real work on daily transactions is getting done everyday.  You are not on the front lines, where deals are being made and information is being exchanged that can have a material impact on daily business.

You see, it really all still comes back to people communicating information ethically.  How and when people act on that information.  Why people behave the way they do when they learn the information.  As a CEO in charge of a global enterprise you will never have the transparency or the integrity being controlled from HQ on the executive floor, or on your executive analytic GRC dashboard.  Your only chance is to reach those people, who are at the source of doing business in your line processes, not staff, but "line".  The "line" is the life blood of daily business commerce and the power base for making a difference on how business is done and the integrity behind it.  The future of your enterprise depends on these people, communicating information that is true, validated and researched to uncover any possible errors, omissions or other ethical issues.

The power base of the global economy is constantly changing.  The risks to the economic enterprise continues and the investigations are just beginning.  Offshore strategies are at the core of global integrity risk.

Legal Risk: Over-The-Horizon Digital Radar...

Operational Risk Management is a primary responsibility with an organizations General Counsel. Why?

"The definition includes Legal risk, which is the risk of loss resulting from failure to comply with laws as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of an institution’s activities."

So if you are a General Counsel or the Chief Legal Officer, your radar is consistently tuned to the "Over -The-Horizon" (OTH) risks that may impact your company, right?  The fact is that managing risk from the General Counsels office may be significantly different than what managing risk means from the CIOs office.

Loss events associated with peoples workplace behavior are many times treated differently than those events associated with a computer "intrusion" or a data breach, that was also caused by human behavior.  The law is a battleground that continues to keep an entire industry busy with offensive and defensive activities and the transfer of risks from one party to another.

What is the legal risk difference between the diversion of company funds to pay bribes in a foreign country and the theft of company trade secrets?  You see, the laws associated with these loss events have different statutes, penalties and legal risk:

On December 17, 2012, Germany-based insurance and asset management company Allianz SE paid more than $12.4 million to settle with the SEC over violations of the books and records and internal control provisions of the FCPA. The activity in question concerned improper payments to government officials in Indonesia. Following common FCPA procedure, Allianz did not deny or admit the SEC’s inquiry. The company disgorged $5.3 million in profits, paid a penalty of $5.3 million, with $1.8 million in prejudgment interest. 

The SEC stated that it uncovered 295 insurance contracts on government projects that were obtained or kept by improper payments totaling $650,626. The payments were made by Allianz’s Indonesian subsidiary. 

The conduct occurred from 2001 to 2008, at which time Allianz was considered an “issuer” under the FCPA because of its activity on the New York Stock Exchange. Even though it was not listed on the exchange, the presence of its bonds and shares on the market made it an issuer and subjecting it to the jurisdiction of the FCPA. The investigation was initiated internally using outside counsel after a whistleblower complaint in 2009.

On December 28, 2012, President Obama signed the Theft of Trade Secrets Clarification Act. S. 3642 (112th). The Clarification Act is a direct response to the Second Circuit’s decision in U.S. v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). (See details below.) In Aleynikov, the Second Circuit overturned a criminal conviction under the Economic Espionage Act 18 U.S.C. § 1831, et seq., after the court determined that the stolen source code was only used internally for a high-frequency trading system and was not “related to or included in a product that is produced for or placed in interstate or foreign commerce.” The Clarification Act expands Section 1832(a) to cover internal trade secrets “related to a product or service used in or intended for use in” commerce. In addition to the source code at issue in Aleynikov, this expansion could include internal processes of doing business or gathering information that may not qualify for traditional patent protection. More broadly, the quick reaction shows the importance that Congress attaches to this area of the law and puts individuals and companies on notice that increased indictments may occur down the line.

The ethics, compliance and legal components of Operational Risk Management comes down to "Achieving a Defensible Standard of Care" in your organization.  The risk exposures that face your organization will also occur from a more immediate impact, due to a loss of reputation and potential loss of market value.  On all fronts, the stakes remain high.

The modern day legal enterprise is still reactive and slow to respond to the changing environment around it.  The daily battle with legal risk is slow, compared with other risk management fronts within the institution.  The speed of response and the focus on preventive, preemptive or proactive actions is what sets apart the mental states of all of your security risk professionals.  Some people have seconds or minutes to decide and act, others have the luxury of days, months and years.

Unfortunately, for most the costs associated with legal risk are high, no matter who prevails in an incident or case. This fact alone, is why the introduction of a new generation of automated tools and the memory of computer-based evidence is so important.  Decision Advantage.  The law and the law industry is quickly playing catch up.  Practitioners from the technology and legal industry are now even more integrated, while the courts interpret the implications of their rulings on an accelerating mobile digital global society.

You and your team have a tremendous amount of new knowledge to gain, or your enterprise will be consumed by the volume of new Operational Risks unfolding before it.  How complex could this be?

From 'WarGames' to Aaron Swartz: How U.S. anti-hacking law went astray

The 1983 movie "WarGames" led to an anti-hacking law with felony penalties aimed at deterring intrusions into NORAD. Over time, it became broad and vague enough to ensnare the late Aaron Swartz.

Workplace Trust: Integrity, Ethics & Legal Risk...

Operational Risk Management professionals wonder about the "Tone at the Top" and decisions at the latest Board of Directors meetings to ignore or investigate a whistleblowers claims of ethics or governance violations in the workplace.

The financial services companies have for years been the target of scrutiny for claims of fraud, mistreatment of consumers and violations of several U.S. federal regulations many under further examination by the SEC.  As time goes on in the evolution of maleficence you will find examples of wrong doing in other private sector areas, such as the Defense Industrial Base (DIB), Retail and Information Technology (IT).  Think about your own company and ask yourself how you treat and respond to the 800 number Ethics Line and those who staff the Internal Audit, Risk Management or Information Security departments.  Are these enablers or impediments to your future success?  Your answer may be a clue to the issue at hand.

The professionals in the Inspector Generals office, the Operational Risk Management department and the General Counsels office are also there for a good reason.  Think about them as the last "Thin Blue Line" between your company becoming a success or falling into a cultural abyss that will plague the institution for decades.  Steven Pearlstein explains from the Washington Post:

Steven Pearlstein: How could SAIC miss this? By Steven Pearlstein, 

Last week in these pages, The Post ran a profile of John Jumper, the straight arrow former Air Force general who was brought in as chief executive of local contracting giant SAIC in the wake of an embarrassing overbilling scandal involving bribery, kickbacks, foreign shell corporations and a safe deposit box stuffed with $850,000 in cash. 

A year ago company officials were publicly denying that there were any problems at all with its contract to build a new timecard system for New York City, which by then was so late and so over budget that “CityTime” had become a frequent target for the New York tabloids and political embarrassment for Mayor Michael Bloomberg. 

It was just last June that SAIC executives and directors first informed shareholders that there might be a little $2.5 million overbilling problem with the contract and that federal prosecutors had brought criminal charges against six employees of an SAIC subcontractor. Shareholders had to read deep into Note 9 of that quarterly report to learn that there might be “a reasonable possibility of additional exposure to loss that is not currently estimable” that “could have a material adverse impact” on the company’s finances.

This episode by one DIB contractor, was not the first nor will it be the last.  One has to ask whether the advice these companies are getting from their outside counsel is always the right course of action.  The government and the internal risk management departments are going to be continuously deluged with new whistleblower claims.  Not just because new laws are in place to protect them and to provide them with the incentives to come forward.  It is because good people are sick and tired of having their organizations reputation tarnished and their respective ethical practices being jeopardized by a few bad cowboys or rogue actors.  Yet now, the Retail sector is being taught a serious lesson regarding a potential FCPA violation by Wal-Mart.  David Barstow at the NYT has this to report:

By DAVID BARSTOW 

Published: April 21, 2012  MEXICO CITY — 

In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country. 

The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico. 

Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”

Mitigation of Operational Risks in the workplace, such as fraud and corruption is different than it is outside the enterprise.  The difference is, that corporate executives do not always believe that their own employees would behave this way.  They could be naive to the reasons why fraud finds its way into the psyche of some of the organizations must trusted officers.  Corruption and the signs that an organization has lost its way from a place of cultural integrity and one that condones others to look the other way or for many to help perpetuate schemes of wrong doing, requires a massive organizational transformation.  A transformation that is lead by focused and talented Operational Risk professionals.

But most of all, even if you have these professionals on your team already, there are still some important ingredients to achieving your own "Defensible Standard of Care":

1.  If you think you have funded the risk management department in your enterprise adequately, you haven't.  Do not confuse your outside audit function with your internal risk management function. 

2.  If you don't understand how your 800 number ethics line works and the outsourced organization that runs this, then you need to do so immediately. 

3.  If you have a favorite outside counsel to help you with investigations, it might be time for a check up.  Even more importantly, it might be time to get your outside counsel firms and your outside audit firms invited to a meeting of the minds on corporate integrity. 

4.  If you find any indications that 1 through 3 have been ignored, pushed aside or been giving you a false sense of security, then you might consider making a career change.

Tech Inc., a rapidly growing software company operating in 45 countries, learns that the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are investigating payments made by its subsidiaries in Brazil and China for possible violation of the Foreign Corrupt Practices Act (FCPA). Bob, the general counsel for Tech Inc., suspects that the source of the investigation is an employee who anonymously lodged a hotline complaint alleging that the company was 1) paying independent sales agents excessive commissions and 2) providing generous discounts and rebates to some of its channel customers and distributors. The complainant also said he believed the problem extended beyond Brazil and China based on discussions he had with other employees.

Integrity & Ethics: Whistleblower Risk...

Operational Risk Management in your organization may be in need of a more robust awareness campaign.  Malfeasance and ethical wrongdoing is continuously perpetuated in the workplace when those who are victims or witnesses refuse to speak up. Many fear the retaliation by supervisors or other co-workers. This study emphasizes the issue at hand:

Labaton Sucharow LLP yesterday announced the results of its nationwide Ethics & Action Survey. Conducted by ORC International between November 17-20, the survey questioned 1,000 Americans on their knowledge of wrongdoing in the workplace and willingness to come forward and report it. With significant financial rewards and strengthened anti-retaliation and anonymity protections offered under Dodd-Frank, an overwhelming 78% of respondents indicated they would report wrongdoing in the workplace if it could be done anonymously, without retaliation and result in a monetary award. In fact, more than one-third (34%) of respondents knew about wrongdoing in the workplace. However, 68% were unaware that the Securities and Exchange Commission (SEC) has a new Whistleblower Program designed to protect and reward individuals who report violations of the federal securities laws.

This kind of Operational Risk doesn't have to involve insider trading or the SEC to be an issue.  Do you have a controlling boss or a bully in the organization who uses their position of power to get what they want at any cost or to force you to look the other direction?  What kind of facts point to their behaviors and the actions by others that contribute to a caustic and toxic work place setting or to further perpetuate the situation?  Whether it is your Fortune 500 public company or your tiny 501(c)3 non-profit does not matter.  When over one-third of the respondents of the ORC Ethics and Action Survey knowingly ignore or are afraid to report incidents of wrongdoing or ethics violations the culture is broken and in need of repair.  The people who have the fiduciary duty to see that this kind of behavior is deterred also have the responsibility to provide the tools and the mechanism for those being victimized and those who are observing the malfeasance to anonymously defend themselves.

So what should you do as an Operational Risk professional to make sure this doesn't happen to the people in your respective organization?  Here is a good start:

Many corporations have internal compliance programs for corporate misconduct. These programs are, in theory, designed to provide an audience for workers who want to report unethical or illegal corporate conduct. Whether to utilize internal compliance reporting procedures is not an easy question to answer. As a general proposition, some believe that where the wrongdoing is pervasive—as in the case of securities fraud—an internal compliance program will not provide an adequate means of redress. Some believe that where the issue involves massive overbilling to the Government, or an allegation that a corporation is receiving significant dollars in unlawful revenue through fraudulent conduct, the internal compliance system will not work.

It's imperative that you also become aware of and communicate to employees and volunteers what their rights are outside the formal processes that are in place within the organization. Sometimes the nature of the ethics violations will not easily fall into the category for the internal compliance department.

So even "A Decade After the Fall of Enron" the laws and the rules provide us with a false sense of security from the corporate and workplace malfeasance that so many U.S. citizens are being subjected to on a daily basis.  And based upon the current-state-of-play around the beltway in Washington, DC you can expect that the coordination and cooperation is increasing by the minute.

The increased collaboration among the alphabet soup of enforcement and regulatory agencies is also due to a collateral effect of the current financial crisis: declining agency budgets. In the current downward budget cycle, agencies are working in concert more than ever before. This trend is exacerbated by a change in the mission of the FBI in the post-Sept. 11, 2001, world, shifting resources to counterterrorism and creating a need for other agencies to play an increased role. The overarching lesson from this increased collaboration is clear: Gone are the days that inside or in-house counsel can assume that the state or federal agency with whom they are dealing is acting alone; it is increasingly likely there are additional state or federal agencies involved, resulting in overlapping criminal, civil or regulatory exposure.

If you are charged with the position of the Senior Operational Risk professional in your organization, this topic of wrongdoing in the workplace can not be overlooked any longer.  It is not too late to create a "Defensible Standard of Care" and to turn the word "Integrity" into a cultural pursuit for all to aspire to, before it is too late.

Occupational Fraud Risk: UBS Rogue Trader...

Kweku Adoboli, is no different than any other person who commits fraud. At UBS, this trader understood the controls that were in place to prevent the kind of naked unhedged bets that he was making in the market. UBS or any other firm is subjected to the testing by those people who are looking for the method and opportunity to circumvent the controls to commit fraud. Motivation is another topic.

In other words, this case very closely resembles that of Bernard Madoff, the man who has been described as the investment equivalent of Charlie Manson. Madoff told his clients, business partners and regulators that he was trading in a whole variety of stocks—when in fact the trades never took place. They were simply made up—as were the phony gains to client portfolios.

Here it seems that Adoboli was also able to simply make up trades and cover up the fact that he was not hedging. His trades involved UBS's funds, rather than that of clients. But if you are a UBS wealth management client you have to at least wonder whether any part of your portfolio is based on trades that were never actually made. If Adoboli could do it, certainly others could as well.

Now the question needs to be asked to their auditors. How is this possible? What controls failed and why? The analysis of the incident will slowly unfold and other firms in the industry will be examining the method and process that was utilized at UBS to perpetuate this fraud over the course of three years. When a fraud of this size is finally revealed, it is no different than the others that have preceded it. Many will ask about the systemic Operational Risk issues that may be prevalent within the UBS culture.

Three years ago it all began. And so goes the typical story line on the epic tales of fraud in the years past and the decades to come. Effective oversight and risk management walks a fine line between enabling innovation and insight and mitigating errors, omissions and significant losses. One thing is certain, the "Insider" threat in your organization exists today, tomorrow and next week. It's not going away regardless of the number of controls, personnel or systems put in place to eradicate it's existence in your institution.

Whether this incident will end up in the Fraud Museum is yet to be determined. What is more certain is that traders around the globe are under a new spot light and renewed scrutiny by oversight investigators. The goal now is to make sure that the combination of people, processes, and systems are fine tuned to the right tolerance levels and triggers for alerts. Only then will the correct balance occur between risk and reward.

What will certainly be an outcome of the investigation is the number of other people that will be implicated, either directly or indirectly by the incident itself.

Jerome Kerviel of Societe Generale and Bernard Madoff, will have a new member for the multi-billion dollar fraud club, Kweku Adoboli. What do all of them have in common according to the Association of Certified Fraud Examiners (ACFE) in the Report to the Nations:

Perpetrators of Fraud

• High-level perpetrators cause the greatest damage to their organizations. Frauds committed by owners/executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds. Executive-level frauds also took much longer to detect.
• More than 80% of the frauds in our study were committed by individuals in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing.
• More than 85% of fraudsters in our study had never been previously charged or convicted for a fraud-related offense. This finding is consistent with our prior studies.
• Fraud perpetrators often display warning signs that they are engaging in illicit activity. The most common behavioral red flags displayed by the perpetrators in our study were living beyond their means (43% of cases) and experiencing financial difficulties (36% of cases).