By Saeed Patel, Group Director at Eastnets
The last few years have left the world reeling. Pandemics and wars have scarred the earth, and a global recession is imminent: the World Bank predicts that global growth will slump to 2.9% in 2022 and stay at that level throughout 2023-2024. It and others attribute this recession to the disruption of the war on Ukraine.
If we look at recession as defined by the National Bureau of Economic Research, it’s “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” By this measureit’s likely that much of the world is, or will soon be, in a recession.
Since previous recessions, much of the financial world has been digitised. But digitisation brings challenges in controlling financial fraud. This means that Financial Institutions (FIs) and other organisations must now ask: will this new global recession mean more financial fraud, and if so, how can that fraud be prevented?
Fraud follows the money
It is useful to think of recession as a factor within the “Fraud Triangle” framework devised by service firm MNP to help us understand what leads people to commit fraud. The three sides of that triangle are:
- Opportunity, e.g., gaps in internal control systems
- Motivation, e.g., financial hardship
- Rationalisation, e.g., increased economic uncertainty
These three planets have aligned as recession gains hold of the world’s economies. The historical precedent of increased fraud during a recession is the evidence: a survey from the Association of Certified Fraud Examiners (ACFE) on the impact of the 2009 economic recession found that 55.4% of fraud experts experienced a slight or significant level of fraud during that recession period. Over 49% of respondents said this increased fraud was due to financial pressures on individuals.
More recently, a report from TransUnion found a 149% increase in fraud attempts in the first four months of 2021. Fraudsters follow the money: as the pandemic has forced the use of digital channels, fraudsters took advantage of these new doorways into the financial structures. But recession-driven fraud is not just about external hackers.
A recession has its own set of fraud drivers. And any shift in financial dynamics opens opportunities for those who look for them: economic uncertainty coupled with digital channel saturation and the cost-of-living crisis around the world have created a perfect storm of opportunities and desperation.
Examples of recession-driven fraud
During a recession, people struggle with jobs and finances. If someone wants to rent a property, they may feel compelled to falsify information to get that property because of the recession. Renters may provide false salary information or other personal data. If these data are not robustly verified, the landlord may end up with a tenant who cannot pay the rent. A report from HomePPL identified a 100% increase in attempted rental fraud in the UK in the first half of 2022.
According to CoreLogic, loan fraud rose by 75% during 2021. If people are desperate for money, they are more likely to take risks. These risks translate to using fake information when applying for loans. It is estimated that 5-20% of bad debt is due to fraud. The most common types of loan fraud identified by the Federal Trade Commission (FTC) are student loans, personal loans, and auto loans.
Online shopping and identity fraud
The FTC Consumer Sentinel Network (Sentinel) service received more than 5.7 million reports of fraud losses in 2021. These complaints included identity theft and consumer issues with credit bureaus, banks, and lenders. In the same year, the FTC received nearly 1.4 million reports of identity theft. These stolen identities are used for online payment scams and theft and to create other identities used in a cycle of cyber-fraud.
During the 2008-2009 recession, the FBI saw mortgage fraud increase by 71%. The FBI identified mortgage fraud’s perpetrators as insiders such as mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives. In 2022, mortgage fraud is raising the roof again.
The UK’s Office for National Statistics (ONS) recorded a 42% increase in fraud involving Financial Investments. The driver behind this fraud was a 59% increase in pyramid or Ponzi schemes.Desperate people will resort to desperate measures to find money quickly, and fraudsters take advantage of this behaviour.
What FIs and other organisations can do to prevent financial fraud
An economic crisis affects everyone, and fraudulent attempts may be driven by desperation as much as a criminal mindset. In addition, insider threats, consumer fraud, and external cybercriminal activity put companies at increased risk of fraud and under pressure to act. There are, however, several ways that an organisation can prevent fraud:
1. Update your fraud risk assessment
Recession brings new challenges to an FI within a changing fraud landscape. Update your fraud risk assessment to reflect these changes. This will help your organisation focus on what anti-fraud approaches work best. In addition, this will inform your choice of technical measures to prevent fraud.
2. Improve employee practices
Insider threats heighten during a recession as risky behaviour becomes prevalent. Use security awareness training regularly to identify key areas where fraud can happen. This should include training on social engineering tactics that focus on individuals within the financial departments in an organisation.
In addition, review your hiring processes and policies to ensure that you carry out robust checks on potential employees. Also, make sure that you have a system in place to remove access to corporate networks and apps when employees leave your company.
3. Deploy solutions with intelligent analytics
Research from “The Federal Reserve” found that 85-95% of synthetic identity fraud attempts were not flagged as fraudulent when using traditional fraud models. Intelligent analytics is essential when the volume of fraud is higher during times of crisis, such as a recession. Artificial intelligence provides the dynamic capability needed to detect current fraud events. In other words, AI-powered identity checks can help alleviate financial fraud.
An advanced AI-driven AML solution must operate across the multiple channels of digital payments and detect fraud in real-time. Know Your Customer (KYC) verification is another area where advanced intelligent technical measures can prevent fraud. Synthetic identities are behind many fraud types, but dynamic risk scoring and intelligent customer screening can prevent synthetic identity fraud and spot other fraudulent signals.
As the global economy nears another recession, those who wisely prepare now will find themselves well-positioned to navigate the tumultuous times ahead. The time is now to ensure that every effort is made to mitigate the risk of fraud.