Building an Effective Fraud Risk Assessment

Fraud is one of the most dynamic risks financial institutions face. Check fraud, account takeover, synthetic identities, authorized push payment scams, and insider fraud continue to evolve, often faster than controls can adapt. An effective fraud risk assessment helps an institution stay ahead by identifying where it is most vulnerable and focusing resources where they matter most.

Leading frameworks, including the Fraud Risk Management Guide published by COSO and the Association of Certified Fraud Examiners (ACFE), treat the fraud risk assessment as a core part of fraud risk management, alongside governance, control activities, investigation and corrective action, and ongoing monitoring.

Below is a practical, step-by-step approach to building a fraud risk assessment that is useful, not just a compliance exercise.

Step 1: Establish ownership and scope

A fraud risk assessment needs a clear owner, executive support, and board oversight. It also needs input from across the organization, because fraud risk does not sit in one department.

• Assign an accountable owner and define how results will be reported to senior management and the board
• Build a cross-functional team that may include fraud, BSA/AML, operations, deposits, lending, payments, IT and information security, and customer service
• Define the scope: which business lines, products, channels, and fraud types are included

Step 2: Identify potential fraud schemes

Start by listing what could go wrong. Consider both external fraud, committed by customers or third parties, and internal fraud, committed by employees or insiders.

• Inventory products, services, and channels, such as deposit accounts, checks, ACH, wires, cards, digital banking, real-time payments, and lending
• For each one, identify realistic fraud schemes, such as check alteration and counterfeiting, account takeover, new account fraud, synthetic identity fraud, scams that manipulate customers into sending payments, loan fraud, and employee misconduct
• Draw on internal loss and incident data, near misses, customer complaints, frontline experience, regulatory alerts, and industry intelligence

Step 3: Assess inherent risk

For each scheme, assess the level of risk before considering controls. This is the inherent risk.

• Likelihood: How likely is this scheme to occur, given your products, customers, volumes, and recent trends?
• Impact: What would the consequences be, including financial losses, customer harm, reputational damage, and regulatory exposure?
• Use a consistent rating scale, such as low, moderate, and high, with clear definitions so ratings are comparable across the organization

Step 4: Identify and evaluate existing controls

Next, map the controls that address each scheme, and evaluate whether they actually work.

• Preventive controls stop fraud before it happens, such as identity verification, authentication, transaction limits, and segregation of duties
• Detective controls identify fraud after it starts, such as transaction monitoring, exception reports, reconciliations, and employee and customer reporting channels
• Evaluate both design, meaning whether the control addresses the risk, and operating effectiveness, meaning whether it works in practice. A documented policy is not proof that a control is effective

Step 5: Determine residual risk and respond

Residual risk is what remains after controls are considered. Compare it to the institution's risk appetite to decide on a response.

• Accept the risk when it is within appetite
• Mitigate it by strengthening or adding controls
• Transfer part of it, for example through insurance or contractual protections
• Avoid it by changing or discontinuing a product, service, or process
• For every risk that needs action, create a remediation plan with an owner, a deadline, and progress tracking

Step 6: Use data and analytics

Data turns a fraud risk assessment from opinion into evidence. It also helps detect emerging schemes earlier.

• Analyze fraud losses, attempted fraud, and near misses by product, channel, and scheme
• Track trends over time to spot new or growing threats
• Use analytics to test whether controls are working, such as reviewing how much fraud was caught by monitoring versus reported by customers

Step 7: Monitor, report, and refresh

Fraud risk changes constantly, so the assessment should be a living process, not a one-time document.

• Refresh the full assessment at least annually
• Update it when significant changes occur, such as a new product or channel, a new third-party relationship, a major fraud event, or a new scheme affecting the industry
• Report results, key metrics, and remediation progress to senior management and the board

Common pitfalls to avoid

• Treating the assessment as a checklist completed once a year and then forgotten
• Focusing only on external fraud while overlooking insider risk
• Rating controls as effective without testing them
• Working in silos, with fraud and BSA/AML teams not sharing information. Fraud often results in suspicious activity reporting obligations, so coordination between the two functions strengthens both
• Failing to connect assessment results to budget, staffing, and technology decisions

The bottom line

An effective fraud risk assessment gives leadership a clear, evidence-based picture of where the institution is most exposed, and what is being done about it. Done well, it becomes a practical tool for prioritizing investments, strengthening controls, and protecting both the institution and its customers.

How COASO Risk Partners can help

COASO Risk Partners helps financial institutions design and strengthen fraud risk management programs. Our practitioners facilitate fraud risk assessments, evaluate and test controls, support fraud detection technology and monitoring, and provide experienced investigators and Certified Fraud Examiners through our managed staffing services.

← Back to Insights