Employee Fraud: Detection, Prevention, and Compliance Strategies in 2026

Fraud costs businesses staggering sums of money. On average, US companies lose an estimated 2.5% of their revenue each year to fraud, and employee fraud is a particularly sensitive form of fraud due to the highly personal nature of the deception. Employee fraud is much more serious than pocketed paper clips or taking an extra five minutes for lunch. It includes costly schemes like payroll fraud, inflated expense claims, and misrepresentation, with devastating consequences for corporate culture and reputation.

Due to reduced in-person supervision and greater opportunities to access or misuse company data unnoticed, remote and hybrid workplaces are creating new vulnerabilities for employee fraud, sometimes resulting in nightmare scenarios. Indeed, multiple studies (including PwC’s Global Economic Crime and Fraud Survey and reports from ACFE) confirm that remote work correlates with higher risks of internal fraud, data theft, and policy circumvention. 

In 2025, we’ve seen North Korean operatives posing as remote IT workers to infiltrate corporations and cases of individuals using fake identities to exploit payroll and vendor systems at scale. Generative AI tools are being used to create fraudulent expense reimbursements—complete with fabricated itemizations, realistic layouts, and signatures—with one report noting that 14% of flagged fraudulent submissions in a month were AI-generated.

To help organizations stay ahead, we have prepared this guide, which explains what employee fraud is, how to detect it, and how to prevent it.

What is employee fraud?

Employee fraud, also known as internal fraud or workplace fraud, is when an employee intentionally deceives or steals from their employer for personal gain. It can involve misappropriating funds, falsifying documents, manipulating expense reports, or sharing confidential data. Employee fraud is ultimately fraud committed by employees against their employer.

This differs from employer fraud, where a company or manager defrauds workers or clients, and from employment fraud, which generally involves recruitment scams targeting job seekers. Employee fraud happens within organizations when someone trusted to protect company assets instead exploits that trust to commit fraud.

Why fraud in the workplace should not be overlooked

Fraud in the workplace is a systemic risk that affects finances, day-to-day operations, and reputation.

The financial impact of employee fraud can be significant. Allianz Trade’s 2025 Fraud Trend report of Benelux companies found that 39% of internal fraud incidents caused losses above €100,000 ($115,000), and that 78% of organizations faced at least one fraud attempt in the last two years. Of course, even low-value fraud can be critical for smaller businesses.

Fraud in the workplace also harms reputation and operations. Fraud understandably changes business culture and how firms manage and monitor their employees. Business leaders can end up spending considerable amounts of time rebuilding processes and trust after incidents of internal fraud.

Common types of employee fraud

There are many ways an employee can steal from a company. The most common types of employee fraud include:

• Misappropriation of assets: Where an employee steals or misuses company property or funds for personal gain (e.g., misusing company credit cards). As per KPMG’s Global Profiles of the Fraudster, asset misappropriation is the most common type of fraud.
• Report fraud: Where an employee submits false or inflated expense reports (e.g., charging twice for the same claim). Generative AI is also making it easier for workers to defraud employers with AI-generated receipts.
• Simple theft: Where an employee steals company property (e.g., money, resources, goods).
• Bribery: Where an employee uses their position to receive or solicit bribes or colludes to inflate costs. As noted in the 2025 KPMG survey, 38% of misappropriation cases involved procurement fraud.
• Payroll fraud: Where an employee manipulates the payroll system to receive higher compensation (e.g., declaring more hours than actually worked).
• Data theft and insider information abuse: Where an employee steals sensitive company information with the intention of benefiting from it (e.g., selling it to a third party).
• Fraudulent identity and credential abuse by employees: Where employees misuse synthetic identities or fake credentials to exploit systems, either to lie about their achievements, who they are, or even to fabricate a “ghost employee” to receive funds from the company.

Suggested read: Payroll Fraud: Schemes, Examples & How to Prevent Them in 2025

The role of AI in growing employee fraud

As with just about everything else, AI is rapidly transforming employee fraud. Deepfaked audio and video make it more important than ever to take verification seriously, as the costs for failing to do so can be steep.

Workers are also increasingly using generative tools to create realistic fake receipts and expense documentation, often indistinguishable from genuine submissions without sufficient checks.

At the same time, AI is lowering the barrier to far more technical abuses, and the rise of agentic AI is exposing businesses to new, potentially devastating risks.

In short, AI can now facilitate almost every category of employee fraud, particularly document forgery and data theft.

To counter AI-fueled insider threats, businesses need to fight AI with AI, deploying a multi-layered approach, including AI-powered monitoring, identity verification, and behavioral analytics to detect anomalies early and keep internal systems safe.

Fraud and misrepresentation in the workplace

Fraud in the workplace may occur when an employee intentionally deceives their employer for personal or professional gain. It must involve a deliberate act of dishonesty—such as falsifying invoices—with the aim of securing an unlawful benefit. Fraud is a criminal offense in most jurisdictions and can expose both the individual and the organization to prosecution, regulatory penalties, and civil liability.

Misrepresentation, meanwhile, refers to making false or misleading statements that make another party act in a way they otherwise would not have done. In the workplace, this can include exaggerating credentials during hiring, concealing conflicts of interest, or providing inaccurate information in reports. Misrepresentation may not always be intentional, but when done knowingly or recklessly, it can be considered fraud by misrepresentation, which is a crime.

Both fraud and misrepresentation breach fundamental principles of workplace ethics, eroding trust and integrity within teams. For employers, clear policies, internal fraud monitoring, and regular ethics training can help ensure that honesty and transparency remain part of organizational culture.

Employer fraud vs employee fraud

Employer fraud and employee fraud both involve deception within the workplace, yet have key differences in terms of intent, scope, and detection. Understanding the distinction helps organizations design stronger compliance frameworks and internal controls that benefit everyone.

Global perspectives on employee fraud

Employee fraud isn’t just unethical, it’s illegal in most jurisdictions. Those who engage in fraudulent activity can face civil penalties, criminal charges, and even imprisonment, depending on the severity and local laws. The legal treatment and enforcement vary significantly by region.

European Union (EU)

In the EU, fraud affecting corporate assets, public funds, or the financial interests of the Union is clearly treated as a criminal offense. For example, under Directive 2017/1371/EU (on the fight against fraud to the Union’s financial interests by means of criminal law) the offending acts (including false statements, misappropriation, attempts, aiding & abetting) must be criminal offences in every member state (except Denmark) and punishable by effective, proportionate and dissuasive sanctions, including at least four years of imprisonment in severe cases.

In practice, this means that internal fraud (e.g., false invoicing, payroll manipulation, vendor collusion) that hits public funds or EU‑funded programs may lead to prosecution. For example, a case in Romania involved 14 indicted persons accused of creating fictitious employment to obtain subsidies.

In an EU context, employee fraud can indeed be a crime, especially when public or inter-state funds are involved, and many national systems reflect this model.

United States (US)

In the US, employee fraud is considered a form of criminal activity when it involves making false statements, misappropriating funds, embezzling, or engaging in wire/bank fraud. For instance, under 18 U.S.C. § 1920 (Employee Compensation Fraud), it is a federal crime for a person to knowingly make a false statement in connection with obtaining compensation benefits, punishable by fines or up to five years in prison (more if the amount is large). Under 20 U.S.C. § 1097, misappropriation or theft of funds under certain federal programs is criminal. 

In the US, the perception of internal fraud extends beyond compliance and HR issues. It is also a business and legal risk issue. Companies often face regulatory scrutiny, criminal investigations, and public exposure when employee fraud occurs. As internal employee fraud is generally a crime in the US, organizations should treat it with the seriousness it deserves.

Latin America (LATAM)

In Latin America, the situation varies. The perception is that employee or insider fraud is a serious governance and operational risk, with relatively high median losses reported. But the legal regimes vary greatly by country, as does enforcement. Some countries have criminal codes that cover crimes such as embezzlement, fraud, appropriation of social security funds, and the misuse of employee data. For example, in some Central American jurisdictions, withholding social security contributions and appropriating them is considered a criminal offense.

In corporate compliance terms, countries like Argentina have enacted laws such as Law No. 27,401 (Corporate Criminal Liability Law), imposing corporate liability for fraud and bribery, although individual employee criminal liability will depend on national penal codes. 

In terms of perception, many employers treat fraud as a misconduct issue (leading to dismissal), but not always immediately as a criminal issue until further investigation or public funds are involved. While employee fraud can indeed be a crime in Latin America, the threshold for being treated as a crime and subsequent enforcement varies widely.

Asia‑Pacific (APAC)

In the Asia‑Pacific region, there is growing recognition of internal fraud, but the legal and enforcement frameworks show variations and, in some cases, weaker deterrence or fewer prosecutions of employees. For example, in Thailand (and by extension, other APAC countries), fraud by an employee (such as misuse of influence or conflicts of interest) may not automatically be treated as a criminal offense unless it meets certain criteria. 

In Vietnam, although employees who commit theft or embezzlement can be dismissed and face criminal charges, in practice, penalties are less predictable, and termination is complicated by labor-law processes.

Employers in APAC often view internal fraud as a control or compliance issue, and while the risk of criminal action exists, the path to prosecution is less consistent. Thus, internal employee fraud may sometimes be a crime in APAC jurisdictions. However, the legal certainty, enforcement, and employer reporting culture may differ from those in the EU and the US.

Early warning signs of workplace fraud

Fortunately, there are often red flags that indicate workplace fraud. Employees who commit employee fraud often display behavioral or transactional fraud indicators that can serve as early warning signs.

Behavioral red flags:

🚩Employees start living beyond their means

🚩Reluctance to share duties or take leave 

🚩Resistance to audits or reviews

🚩Close personal relationships with vendors or clients

🚩Signs of stress or dissatisfaction, or defensiveness when questioned

🚩Overly protective of their computer or workspace

🚩Frequent complaints about perceived unfair treatment or workload

Transactional red flags:

🚩Unexplained changes to records 

🚩Unexpected payroll communications and access

🚩Unusual procurement or purchasing patterns (e.g., one vendor consistently winning contracts without justification)

🚩Requests to send wages to new or suspicious accounts

🚩Consistently high overtime hours without clear reasoning

🚩Repeated rounding errors or unusual journal entries

🚩Duplicate or multiple payments

🚩Employees sharing bank accounts

🚩Unauthorized changes to vendor or payroll data

🚩Missing records

🚩Payroll records not matching HR data

🚩Payments issued to ex-employees or individuals with identical information

🚩Sudden spikes in expenses or inventory shortages

Identifying these fraud indicators early enables organizations to initiate internal fraud investigation processes before financial or reputational damage occurs. 

Suggested read: Bypassing Facial Recognition—How to Detect Deepfakes and Other Fraud

How to detect and investigate employee fraud

Effective employee fraud detection combines data analysis, internal controls, transparent reviews, and reporting.

1. Identify patterns and anomalies: Use internal fraud monitoring tools and basic data checks to detect unusual activity such as unexplained charges, duplicate invoices, or suspicious expense claims. Fraud analytics can help flag these patterns in real-time, reducing the chance of work fraud or fraud by misrepresentation going unnoticed for an extended period.

2. Secure evidence: Keep relevant records so they cannot be altered or deleted. Limit access to the affected systems or accounts while avoiding tipping off the suspected party prematurely. Assess the potential scale of the loss and urgency of the case to decide the scope of the internal fraud investigation.

3. Conduct an internal audit: Reconcile transactions against supporting documents and approvals, check the segregation of duties, and compare activity against policy to confirm whether inconsistencies are due to error, control gaps, or deliberate employee fraud.

4. Review the digital trail: Fraud often leaves a digital footprint. Investigators should analyze login history, IP addresses, and device data for unusual access and trace changes to sensitive data (such as vendor information, payroll, or user roles) to identify who made them.

5. Report and address gaps: If fraud is suspected, escalate the matter to the relevant departments. Decide on internal disciplinary measures and whether to notify regulators, law enforcement, or insurers as necessary. Finally, close gaps in control by updating policies, tightening approval processes, adjusting access rights, and enhancing fraud-prevention measures.

Building a fraud-prevention culture at work

Preventing employee fraud isn’t just about rules and audits, it starts with empathy and creating a supportive workplace. When employees feel stressed or undervalued, the temptation or pressure to commit fraud can increase. 

Organizations can counter this by fostering a culture where employees feel seen, heard, and supported. Regular employee surveys, access to workplace psychologists or counselors, wellness programs, and benefits like gyms or flexible schedules help employees manage stress and build loyalty. 

When employees feel their well-being is prioritized, the idea of stealing or cutting corners becomes unthinkable. Even the most advanced fraud-detection systems are only as strong as the corporate culture behind them. 

However, a strong approach to fraud prevention based on transparency and accountability across every level of the organization can’t be overlooked.

This approach should include multiple confidential channels to ensure reports trigger a structured review. Transparency in how reports are handled builds trust and encourages early detection.

In addition to demonstrating transparency and communicating zero tolerance for fraud in the workplace, it helps to provide training to counter fraud. Employees and employers alike should know how to recognize the indicators of fraud and feel confident reporting them without fear of retaliation. 

It is important to take employee fraud seriously and treat it as an ongoing issue that goes against everyone’s interests, potentially causing extensive damage if undetected. 

When the importance of workplace ethics is communicated effectively, it helps employees view anti-fraud measures as a means of protection rather than a sign of distrust. 

Suggested read: Employment Verification: What It Is and How to Simplify the Process 

Experts’ insights on internal fraud

Annamaria Terescenko, Lead Compliance Expert: Industry Compliance (iGaming) & Product Compliance (Anti-Fraud) at Sumsub, says:

When we talk about insider risk, we are not talking about watching employees. We are discussing understanding how people utilize systems and data in the ordinary course of their work. Every employee develops a natural working pattern, the systems they log into, the documents they touch, and the pace and timing of their activity. It first appears in small, work-related shifts that disrupt a person’s usual pattern. When those patterns change without a clear business explanation, the change itself becomes a meaningful security signal. These early indicators are typically straightforward: repeated access to files outside the person’s responsibilities, unusual navigation through sensitive folders, or a gradual shift toward another department’s data. None of this is “evidence” on its own, but taken together, it shows that behavior, access, and purpose are no longer aligned. What surprises many organizations is how stable these patterns usually are.

The reason these signals matter is the same reason analysts rely on digital traces: people leave consistent footprints, and deviations are far more informative sometimes. Context gives the signal its weight - timing, frequency, endpoints used, and whether the action aligns with the employee’s actual duties. Even small artefacts, like file previews, directory listings, or cloud-sync metadata, often reveal the true intent behind an action more reliably than permissions alone. What counts is not a single alert but a cluster of aligned hints. When several weak signals point in the same direction, they form a clear behavioral timeline that separates confusion from preparation.

A mature insider-risk approach doesn’t monitor people - it monitors whether activity makes sense. It does this transparently, proportionately, and with a focus on security-relevant events only, keeping the process fully aligned with GDPR. The goal is simply to notice when everyday behavior changes in a way that no longer matches the role. When access, patterns, and purpose diverge, even slightly, that divergence becomes an organization’s earliest and most reliable warning.

Annamaria Terescenko

Lead Compliance Expert at Sumsub

Another expert, a fraud detective and founder of Fraud Hero, Marc Evans—interviewed on Sumsub’s What The Fraud? podcast on insider fraud—says “The first thing you want to do is look out for patterns… consistent transactions, activities or behaviors over a period of time.” 

In his experience, insider schemes typically run for around 18 months before they are caught, often starting small and snowballing into tens of thousands per month. One example he shares is a remote accountant who created fake vendors and bank accounts. By the time anyone checked, more than $1 million had been siphoned off, and the accountant had already quit. 

Evans notes: “Early policies and company culture are probably the biggest factors when it comes to internal fraud. There’s usually a lack of policy, and the culture doesn’t encourage whistleblowing. But the biggest [factor] is a lack of oversight.” These vulnerabilities can often easily be addressed. Relatively easy-to-implement controls like segregation of duties and simple rule-based alerts are often overlooked.

Evans also warns against over-relying on technology alone: “One of the biggest failures I see is the lack of proper training. If employees don’t understand what to look for or what actions to take once a red flag is triggered, the technology alone won’t be enough.”

Digital tools to prevent internal fraud

Employee fraud prevention relies on combining a strong internal fraud-prevention culture with advanced technology. Manual audits alone are unable to keep up with the complexity and scale of today’s workplace fraud threats, especially in remote or hybrid environments.

Sumsub’s all-in-one verification and compliance platform helps organizations detect and deter employee fraud before it escalates. Through automated checks, continuous internal fraud monitoring, and configurable risk rules, Sumsub helps companies to:

• Verify employee identities and credentials during onboarding to prevent impersonation or synthetic profiles.
• Monitor transactions and account access in real time, flagging anomalies that may indicate fraud by misrepresentation or collusion.
• Automate approval workflows such as multi-step verification for high-value transfers to reduce the risk of manual error or insider manipulation.
• Simplify investigations with digital audit trails.

By integrating anti-fraud automation with compliance controls, companies can reduce false positives, uncover more fraud, and strengthen workplace ethics. 

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FAQ

• What are the six types of employee fraud?

  • Credit card fraud
  • Report fraud
  • Simple theft
  • Bribery
  • Payroll fraud
  • Data theft

• How to identify employee fraud

  Here are some ways to detect employee fraud::

  • Background check
  • Rotation of duties
  • Regular audits
  • Anonymous hotlines

• What are the red flags of employee fraud

  • Living beyond means
  • Close relationship with a third party representative
  • Secretive employee behavior
  • Inconsistencies with reports
  • Reports of fraud from other employees