Direct Answer: Fraud risk management is the structured process by which organisations identify, assess, and mitigate the risk of fraudulent activity, both internal and external. It encompasses governance policies, internal controls, transaction monitoring systems, staff training, and incident response procedures. An effective fraud risk management programme does not eliminate fraud entirely; it reduces its likelihood, limits financial and reputational damage when it occurs, and satisfies the regulatory obligations that apply to every financial institution and regulated business.
What Is Fraud Risk Management?
Fraud risk management is the set of policies, systems, processes, and controls an organisation puts in place to prevent, detect, and respond to fraudulent activity. It spans the entire fraud lifecycle, from identifying where the organisation is most exposed, to building controls that reduce that exposure, to detecting fraud when it occurs despite those controls, and to responding effectively when it does.
The authoritative industry framework for this discipline is the COSO/ACFE Fraud Risk Management Guide, Second Edition, co-published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the Association of Certified Fraud Examiners (ACFE). It establishes five fraud risk management principles that apply to every organisation regardless of size, sector, or geography:
- Fraud risk governance — establishing visible, board-level commitment to fraud risk management
- Fraud risk assessment — identifying and prioritising the organisation's specific fraud exposures
- Fraud control activities — designing and implementing preventive and detective controls
- Fraud investigation and corrective action — responding to allegations swiftly and effectively
- Fraud risk management monitoring — continuously evaluating the programme's effectiveness
These five principles form the backbone of every section that follows.
Why Your Organisation Needs a Fraud Risk Management System
Global financial fraud losses in 2025 alone reached an estimated $442 billion, according to the INTERPOL Global Financial Fraud Threat Assessment. INTERPOL assessed the overall global risk as High and projected the scale to escalate significantly over the next three to five years, driven primarily by AI-powered attack tools and low barriers to entry for criminal actors.
That figure is not an abstraction. It represents real operational, financial, and reputational damage to organisations of every size. Here is precisely why your organisation cannot afford to treat fraud risk management as optional:
1. Financial Loss Prevention
Fraud directly erodes revenue, depletes assets, and distorts financial reporting. The average organisation now spends $4.60 managing every $1 lost to fraud, a 32% increase since 2022, according to the LexisNexis True Cost of Fraud Study. The cost is not just the stolen amount; it is the investigation, the remediation, the regulatory reporting, the legal exposure, and the customer compensation that follow.
2. Regulatory Compliance and Legal Obligation
Fraud risk management is not only good practice, it is a legal requirement for regulated organisations. In the UK, the FCA's Senior Managers and Certification Regime (SM&CR) holds named individuals personally accountable for control failures, including fraud. The US Department of Justice's Evaluation of Corporate Compliance Programs assesses whether an organisation's fraud controls were adequate when determining prosecution and penalty decisions. The absence of a documented fraud risk management programme is not a neutral position, it is evidence of negligence.
3. Reputational Protection
Public enforcement actions, fraud-related headlines, and data breach disclosures erode customer trust in ways that take years to rebuild. Nearly two-thirds of businesses, 64% reported a surge in fraud losses over the past year, according to Experian's 2026 research. Organisations that can demonstrate they had robust fraud controls in place, even when fraud occurs are significantly better positioned to maintain stakeholder confidence than those that cannot.
4. Operational Continuity
Fraud disrupts operations. An accounts payable fraud, an insider threat, or a successful phishing attack on a senior executive can paralyse business processes, trigger regulatory investigations, and divert significant management time away from core activities. Prevention is operationally cheaper than remediation by a substantial margin.
5. Building and Maintaining Trust
Fraud prevention is a top organisational priority for 71% of banks and 75% of fintechs. For customers, employees, and partners, an organisation's approach to fraud is a signal of its overall operational integrity. Firms that can demonstrate active, documented fraud risk management build the kind of institutional trust that sustains long-term commercial relationships.
The 5 Core Elements of an Effective Fraud Risk Management Programme
The following five elements map directly to the COSO/ACFE Fraud Risk Management Guide's five principles. Each is a non-negotiable component, the absence of any one of them leaves a structural gap in the programme.
1. Regular Fraud Risk Assessments
A fraud risk assessment is a systematic process for identifying where your organisation is exposed to fraud, how likely each exposure is to be exploited, and how severe the impact would be if it were. A structured fraud risk management framework requires planning regular fraud risk assessments and assessing risks to determine a fraud risk profile specific to the organisation.
In practice this means reviewing financial flows, access controls, third-party relationships, and product or service delivery mechanisms for potential exploitation points. For financial institutions, this includes reviewing transaction monitoring coverage, onboarding verification gaps, and correspondent banking relationships. For technology companies, it includes reviewing privileged access, API security, and data handling processes.
Risk assessments should be conducted at least annually and whenever there is a material change in the business a new product launch, a geographic expansion, a merger or acquisition, or a significant technology change.
2. Strong Internal Controls
Internal controls are the operational rules and structural safeguards that prevent fraud from occurring and create the conditions for detecting it early. The most consistently effective internal control is segregation of duties ensuring that no single individual has end-to-end control over a financial process without a second authorising party. One person should not be able to create a payee, approve a payment, and process a transfer without separate approval at each stage.
Other critical internal controls include:
- Access controls: role-based access to financial systems, with least-privilege principles applied so staff can only access what they need for their specific role
- Approval hierarchies: payment and commitment approval thresholds that escalate based on transaction value
- Reconciliation procedures: regular reconciliation of accounts, inventory, and asset registers against source records to detect discrepancies early
- Whistleblower channels: anonymous reporting mechanisms for staff to raise suspicions without fear of retaliation. ACFE research consistently shows that 43% of frauds are identified through tips, making internal reporting mechanisms one of the most valuable fraud detection tools available.
3. Transaction Monitoring and Detection Systems
Fraud detection cannot rely on controls alone. Sophisticated fraud, particularly external fraud against financial institutions, requires real-time monitoring of transaction patterns to identify anomalies that controls were not designed to catch.
71% of businesses are now investing more in fraud technology than in human analysts, recognising that manual reviews and rule-based systems can no longer keep pace with AI-driven fraud attacks. Modern fraud detection platforms use machine learning to establish behavioural baselines for customers and accounts, and flag deviations that match known fraud typologies, account takeover patterns, structuring behaviour, synthetic identity signals, and authorised push payment fraud sequences.
For regulated financial institutions, transaction monitoring also feeds the Suspicious Activity Reporting (SAR) process, alerts that cross defined thresholds are investigated and, where appropriate, reported to the National Crime Agency (UK) or FinCEN (US).
4. Fraud Awareness Training
To counter the development of increasingly automated and technically advanced fraud, organisations must implement updated education and training on AI capabilities across all lines of their fraud risk management programmes.
Training should be role-specific, not generic:
- Front-line staff need to recognise social engineering, impersonation attempts, and suspicious customer behaviour at the point of interaction
- Finance and operations teams need to understand payment fraud vectors, invoice fraud, and the red flags of internal fraud schemes
- Technology and security teams need current intelligence on phishing techniques, credential compromise, deepfake-assisted fraud, and ransomware delivery mechanisms
- Senior management and boards need to understand their personal liability under applicable regulatory frameworks and how fraud risk fits within the organisation's overall risk appetite
Training should be refreshed at least annually and updated whenever a new fraud typology is identified in the sector.
5. Clear Fraud Policies and Procedures
A fraud policy does three things: it defines what constitutes fraud in the context of the organisation, it specifies the consequences for individuals who commit or facilitate fraud, and it sets out the process for reporting, investigating, and escalating suspected incidents.
The ACFE/COSO Fraud Risk Management Guide, Second Edition, provides a blueprint for creating a comprehensive fraud risk management programme, including establishing a visible and rigorous fraud governance process and creating a transparent and sound anti-fraud culture.
A policy that exists only on paper does not constitute a fraud control. The policy must be communicated to all staff at onboarding, reviewed annually, and enforced consistently, including when the individual concerned is senior. The most damaging fraud cases are frequently those where known red flags were ignored because the suspected individual was perceived as too senior or too valuable to challenge.
Fraud Risk Management for Technology Leaders (CTOs, CIOs, CISOs)
For technology leaders, fraud risk management intersects directly with cybersecurity, system architecture, and access governance. The fraud risk priorities for this audience are:
1. Identity and Access management (IAM):
Privileged access to financial systems, customer data, and transaction infrastructure must be governed through role-based access control, multi-factor authentication, and regular access reviews. Credential compromise is consistently among the top three initial access vectors in fraud and cybercrime incidents — the FBI's IC3 reported $16.6 billion in losses from cybercrime in 2024, with credential abuse, vulnerability exploitation, and phishing as the leading attack vectors.
2. API Security and Transaction Integrity:
Financial APIs are high-value fraud targets. Every API endpoint that processes financial instructions, payment initiation, account modification, limit changes, must be authenticated, rate-limited, and monitored for anomalous usage patterns.
3. AI and Deepfake Threat Awareness:
Experian's 2026 Future of Fraud Forecast identifies agentic AI systems that can autonomously plan and execute complete fraud campaigns, from reconnaissance to execution, as a top emerging threat. CISOs need fraud-specific threat intelligence, not just generic cybersecurity feeds.
4. Fraud Technology Investment:
68% of business leaders admit their current security tools are no longer adequate to protect against modern fraud attacks. The technology investment case for modern fraud detection, including ML-based behavioural analytics, device intelligence, and real-time risk scoring, is not optional.
Fraud Risk Management for Compliance Teams (CCOs, MLROs, KYC/Fraud Analysts)
For compliance professionals, fraud risk management is the operational discipline that sits alongside AML, KYC, and sanctions screening. The distinction between fraud and financial crime is narrowing, the FRAML (Fraud-AML alignment) approach and Fusion Centres are enabling real-time intelligence sharing across fraud, AML, and cybersecurity teams, breaking down silos that have historically allowed financial crime to move between these domains undetected.
Practical implications for compliance teams:
1. KYC as Fraud Prevention:
Robust identity verification at onboarding, including liveness detection, document authentication, and beneficial ownership verification, prevents synthetic identity fraud from entering the customer base in the first place. Fraud that is stopped at onboarding costs a fraction of what it costs to remediate after account establishment.
2. SAR Quality over SAR Volume:
An effective fraud risk management programme produces SARs that are accurate, timely, and well-evidenced — not a high volume of poorly investigated disclosures. The NCA's SARs regime in the UK and FinCEN in the US both expect firms to demonstrate that their SAR decisions are risk-based and documented.
3. Fraud Risk Assessment Methodology:
The ACFE/COSO framework provides the industry-standard methodology for conducting fraud risk assessments that will withstand regulatory scrutiny. MLROs and CCOs responsible for programme design should align their assessment process to this framework to ensure it meets both internal governance and external examination standards.
Fraud Risk Management for Business and Management Leaders
For CEOs, CFOs, and board members, fraud risk management is a governance and financial performance issue, not a technical one.
1. The Financial Case:
Consumer fraud losses increased 25% year over year, reaching $12.5 billion in 2024 according to the Federal Trade Commission. Organisations that experience significant fraud incidents face not only direct losses but also regulatory fines, legal costs, remediation expenses, and the commercial cost of lost customer and partner trust.
2. The Governance Obligation:
Under the UK's Senior Managers and Certification Regime, individual executives can be held personally liable for fraud control failures that occur within their area of responsibility. Under the US Department of Justice's Corporate Compliance Guidelines, the adequacy of an organisation's fraud risk management programme is a central factor in determining whether individual executives face prosecution. Fraud risk management is therefore a board governance obligation, not a delegated technical responsibility.
The tone from the top: A structured fraud risk management framework requires that the organisational culture and structure is conducive and open to fraud risk management — with a dedicated entity, department or person leading all fraud risk management activities. Culture is set by leadership behaviour, not policy documents. When senior leaders visibly champion fraud reporting, enforce consequences for violations regardless of seniority, and resource the compliance function adequately, fraud occurrence rates fall measurably.
The Fraud Landscape in 2026: What Has Changed
Three developments are reshaping fraud risk management in 2026 that every organisation needs to account for in their programme design:
1. AI-Powered Fraud at Scale
AI-enhanced financial fraud is 4.5 times more profitable than traditional methods, and agentic AI systems can now autonomously plan and execute complete fraud campaigns, from reconnaissance to execution, without a human operator. This means the volume, speed, and sophistication of fraud attacks are increasing simultaneously, putting pressure on every manual control and rule-based detection system.
2. The FRAML Convergence
The traditional separation between fraud teams and AML/financial crime compliance teams is operationally no longer defensible. In 2025, financial organisations broke down silos between fraud, AML, and cybersecurity — the FRAML approach and Fusion Centres enable real-time intelligence sharing. Organisations that maintain separate fraud and AML functions with no shared data or intelligence face the risk that criminal activity moves between the two domains and is detected by neither.
3. Synthetic Identity Fraud
Synthetic identity document fraud surged 311% between Q1 2024 and Q1 2025. Synthetic identities — constructed from a combination of real and fabricated data, or from entirely AI-generated documentation — are now the fastest-growing fraud typology in financial services. Detection requires ML-based identity verification with deepfake detection capability, not document checking alone.
Frequently Asked Questions on Fraud Risk Management
1. What is the difference between fraud risk management and fraud prevention?
Fraud prevention refers specifically to the controls designed to stop fraud from occurring. Fraud risk management is the broader programme that encompasses prevention, detection, investigation, and response — as well as the governance and monitoring processes that keep the programme effective over time. Prevention is one component of fraud risk management, not a synonym for it.
2. What is a fraud risk assessment and how often should it be done?
A fraud risk assessment is a structured review of where an organisation is exposed to fraud — by customer type, product, process, geography, and access point — and how likely and severe each exposure is. The ACFE/COSO framework recommends conducting a formal fraud risk assessment at least annually, and whenever there is a material change in the business such as a new product launch, a merger, or a significant technology change.
3. Who is responsible for fraud risk management in an organisation?
Responsibility is shared but must be clearly assigned. The board sets the risk appetite and governance framework. Senior management, including the CCO, CFO, CISO, and relevant business line heads owns the design and operation of controls within their areas.
A dedicated fraud risk function or MLRO (in regulated firms) typically coordinates the programme. All employees have a responsibility to follow fraud policies and report suspicions.
Under the UK's SM&CR and the US DOJ's Corporate Compliance Guidelines, named individuals can be held personally accountable for failures in their area of responsibility.
4. What are the most common types of organisational fraud?
According to the ACFE's 2024 Report to the Nations, the three most prevalent fraud schemes are asset misappropriation (theft of cash, inventory, or assets), corruption (bribery, conflicts of interest, and kickbacks), and financial statement fraud (manipulation of reported figures).
For financial institutions specifically, external fraud, including account takeover, authorised push payment fraud, synthetic identity fraud, and transaction fraud, is the dominant category by volume and loss.
4. How does technology support fraud risk management?
Technology supports fraud risk management across three functions:
Prevention (identity verification, access controls, and authentication mechanisms at the point of customer or employee interaction), detection (transaction monitoring, behavioural analytics, and anomaly detection in real time), and investigation (case management systems, data analytics, and audit trail tools that support the investigation and reporting process). The most effective programmes combine technology with human oversight automated detection surfaces cases for analyst review, rather than replacing the analyst entirely.
5. What is the COSO/ACFE Fraud Risk Management Guide?
The COSO/ACFE Fraud Risk Management Guide is the global industry standard for fraud risk management programme design. Co-published by the Committee of Sponsoring Organizations of the Treadway Commission and the Association of Certified Fraud Examiners, it sets out five fraud risk management principles covering governance, risk assessment, control activities, investigation and response, and monitoring.
The second edition, released in 2023, includes updated guidance on data analytics, AI-era fraud typologies, and regulatory developments. It is the reference framework used by auditors, regulators, and compliance examiners when assessing the adequacy of an organisation's fraud programme.
6. What is FRAML and why does it matter?
FRAML refers to the integration of Fraud and Anti-Money Laundering functions within a single intelligence and control framework. Traditionally, fraud teams and AML teams operated separately with different data sources, different alert systems, and different reporting lines.
As criminal networks increasingly use fraud proceeds to fuel money laundering (and vice versa), organisations that maintain rigid silos between these functions have blind spots that sophisticated criminal actors exploit. FRAML integration addresses this by sharing transaction data, customer risk signals, and typology intelligence between fraud and AML teams in real time.
The Bottom Line
Fraud risk management is not a compliance exercise. It is the operational infrastructure that determines whether your organisation can withstand an increasingly sophisticated, AI-powered fraud environment, and whether your senior leadership can demonstrate to regulators, investors, and customers that they took the obligation seriously.
INTERPOL expects the global scale of financial fraud to escalate significantly over the next three to five years. The question every technology, compliance, and business leader needs to answer is not whether fraud will attempt to enter their organisation, it will, but whether their programme is built to catch it.
Youverify's fraud risk management solutions, including AI-powered KYC verification, transaction monitoring, and customer risk assessment, are designed to address each layer of the fraud risk management framework described in this guide. Book a demo to see how Youverify maps to your organisation's specific fraud risk profile.
