What Are the Different Types of Financial Fraud?

Financial fraud is intentional deception used for financial gain. There are many different types of financial fraud, including insider trading, embezzlement, falsifying financial records, and Ponzi schemes. Understanding some of the different types of financial fraud can help watchful individuals identify fraudulent schemes and report them to the proper authorities.

Insider trading is a kind of financial fraud that involves the trading of securities using proprietary information. This occurs when a person who has non-publicly disclosed information about a business or entity uses this information to buy or sell stock or other securities. For example, if a company executive finds out that his company is in secret negotiations to be sold, he would be committing financial fraud by selling his stock, or warning others to sell stock, before the sale of the business is publicly disclosed. Insider trading can artificially inflate or deflate stock prices, and is considered a serious crime in many regions.

Embezzlement occurs when a person entrusted with funds intentionally misuses them for his or her gain. The key factor in this type of financial fraud is that the offender must be in a position of trust and control over the funds. For example, a trustee for a minor child might choose to dip into trust funds for his or her own expenses, even though the money actually belongs to the child. Banks and other financial institutions are frequent targets of internal embezzlement attempts; many enforce strict security programs to ensure that no one person has unfettered access to funds.

Many different types of financial fraud are accomplished through the falsification of financial records. Embezzlement schemes may use this method to hide the tracks of the embezzler; for instance, an embezzling bank manager could invent records for a non-existent employee and transfer the salary for this phantom worker into a false account. Companies sometimes commit this form of fraud by making it look as if they have earned less than they actually have in order to avoid taxes.

Ponzi schemes are a tricky form of financial fraud that are often very difficult to track. In these scams, the schemer convinces people to invest in a project or business that promises high yields. Initial investors are paid returns, but using funding from new investors, rather than actual profits. The success of this type of financial fraud relies on re-investment by initial investors, based on the falsified returns, plus the continual pool of new investors, brought in by word of mouth following the falsified high yields.