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Fraud Alert: Have Your Employees Been Compromised?

More sophisticated and emerging forms of cyber fraud demonstrate how easy it is to fall victim to this type of threat.
By: | December 1, 2017 • 5 min read

Call it spear phishing, social engineering or business email compromise. This type of scheme has gotten plenty of coverage in recent years — when fraudsters posing as the boss or a vendor, or client convince an authorized employee to wire transfer funds to a fraudulent account, never to be seen again. Historically, it’s been a form of fraud that offers a quick payout and requires little work on the part of the perpetrator.

But now the thieves are changing their tactics.

“The methods used to perpetrate these fraudulent events are evolving. The fraudsters are investing more effort in orchestrating them, as the payouts can be significant. The targeted “windfall” has expanded too. No longer is it limited to a transfer of funds. We’re now seeing schemes resulting in the fraudulent transfer of tangible property,” said Patricia Barrett, Vice President and Head of Fidelity, Starr Companies.

Criminals are setting their sights on a company’s goods, not just their cash.

To pull that off, thieves use a hybrid of traditional fraud and sophisticated cyber tactics. Through hacking and malware, they can spy on a company’s operations, gathering valuable intelligence on executives and employees. Then they use social engineering tactics to trick workers into unwittingly sending a shipment of products their way.

An Emerging Form of Fraud: A Case Study

Patricia Barrett, Vice President and Head of Fidelity

The experience of one small business — a distributor of small electronic devices — demonstrates how easy it is to fall victim to this type of theft. To sell its products, this company relied on its executives traveling to trade shows throughout the year, often for weeks at a time.

A fraudster, posing as a prospective customer, sent a link in an email to the company’s sales department. Once opened, the link set loose malware that allowed the perpetrator to “lie in wait,” watching the moves of company insiders. The fraudster knew who was scheduled to travel, when, and what type of property the traveler would need to have delivered. The fraudster knew the vernacular used by traveling executives, and what the protocol was for change requests.

Back at the office one day, an employee received an email that appeared to be from the chief executive. “Joe, the trade shows are going really well,” he said, “In fact, I’m down to less than a dozen mobile devices; I’m likely to run out before reaching my next stop.” He instructed the employee to send an additional shipment of electronics to the location of the next show in Las Vegas.

But there was a wrinkle. He’d had to change some travel plans and would no longer be staying at the conference hotel. He booked a room at the hotel across the street. He asked the employee to direct the shipment there instead.

Everything about the request made sense. It was feasible that the executive might need more products. He stated correctly where the next show would be. There was no reason to doubt that he had decided to switch hotels.

“The employee never questioned that the instruction came from the chief executive, so he transferred that property to the hotel and the entire shipment was lost,” Barrett said.

Hybrid Tactics

Executing this theft requires in-depth knowledge of a company’s hierarchy, business processes, and of the employees themselves. Because the potential payout is so large, these fraudsters often spend months gathering information before hitting “send” on that fraudulent email.

Malware is often part of their intel-gathering and may be introduced through social engineering. A phony email asking an employee to click a link or download an attachment could be all it takes to get a virus into the system.

By gaining access to the company’s network, thieves can examine billing systems, transaction records and vendor lists, getting a sense of what a normal transfer of goods looks like and who performs them. They can even obtain the executive’s travel itinerary.

They can also glean personal details and communication styles easily from social media.

“The target employee may have posted that he left work early Friday afternoon to attend his son’s baseball game. The copycat executive in the fraudulent email might ask, ‘How was your afternoon off? Who won the game?’” Barrett said. “It builds familiarity. The employee wouldn’t suspect that anyone else would know that level of detail.”

Email is not the only way to perpetrate this type of fraud, however. Criminals can be just as convincing over the phone.

At one organization, the Accounts Payable department received a call from one of their purported vendors, stating that the vendor had consolidated some banking relationships and needed to change the account listed on their contract.

The accounts payable employee sent a change form to an email address provided by the caller. She did not check the master vendor file, but trusted that the email given to her was correct. She did not phone the vendor at a previously verified phone number to validate the request. The caller posing as a vendor sent back the updated form within 15 minutes, and the change was initiated.

The organization proceeded to make three payments to the fraudulent account totaling $700,000. The mistake was not discovered until the real vendor followed up, asking why their payments were delayed.

“The payments slipped through because this was a multi-million-dollar business relationship; and it was not uncommon for them to transact significant business in a short period of time,” Barrett said. “The same tactic could be used to make change orders, diverting a shipment of inventory.”

Coverage Questions

“Though several insurers will consider providing coverage for fraudulent impersonations that result in a loss of funds, a coverage gap still remains for a loss of other tangible property,” Barrett said.

As with the loss of funds, recovering the stolen property in most cases is next to impossible.

“Once discovered, the trail can go cold very quickly,” Barrett said. To recoup the loss, insureds may have to navigate the intersection of crime, fidelity, cyber, and professional liability coverages.

Coloring in the Gray Areas with Prevention and Targeted Coverage

As cyber criminals grow more sophisticated, calculating and patient, companies need solutions that fill in those gray areas so prevalent in the world of cyber threat and fraud.

Starr Companies crafted an endorsement to its crime and fidelity coverages that covers the loss of other tangible property, in addition to loss of funds, resulting from fraudulent impersonation scams.

“The expanded Fraudulent Impersonation endorsement allows a company to secure coverage for loss of funds and loss of other tangible property; The endorsement is flexible in its structure. This allows the coverage to address the risks that are of most concern to a company. Whether the company is concerned about a loss of funds, a loss of other tangible property, or both the endorsement can be crafted to meet that company’s interests,” Barrett said.

It is widely recognized that one of the best defenses against social engineering risks is education at all levels of a company.

With that in mind, Starr’s Fraudulent Impersonation endorsement is accompanied with the offer of the Starr Companies-KnowBe4 Risk Management Program. KnowBe4 is an internationally recognized IT security firm. This program provides valuable risk management tools to assist in reducing the risk to fraudulent impersonation (social engineering) losses. The downloadable documents are designed to be circulated to employees at every level of the insured company/organization. This program is offered by Starr Companies at no cost to the insured. Upon binding, the Insured company will receive an information packet with instructions on how to access an exclusive area of the KnowBe4 website.

“We believe that the combination of this risk management program and the insurance protection is a winning one for businesses of all types and sizes,” Barrett said.

“Our knowledge and expertise enable us to connect clients with expert resources and to tailor coverage to meet each client’s particular exposures and buying needs,” Barrett said.

Reach out to Starr’s Crime & Fidelity team for more information on how a Starr solution can work for you or visit www.starrcompanies.com/insurance/crimeandfidelity.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.




Starr Insurance Companies is a global commercial insurance and financial services organization that provides innovative risk management solutions.

More from Risk & Insurance

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4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]