Answering the call to combat financial fraud

The risks associated with financial fraud continue to affect the financial services sector as well as the customers of financial institutions around the globe. The Financial Fraud Action UK report suggested in 2016, financial fraud continued to increase, with losses valued at over USD $980 Million. According to a study conducted by MetLife, seniors are especially at risk, losing nearly USD $3 billion annually in reported cases of financial exploitation.

Much of today’s financial fraud involves the online theft of personally identifiable information (PII) and account access information. With this information, fraudsters are exploiting the growth of online financial transactions and e-commerce, along with their inherent vulnerabilities. For the purveyors of technology-assisted financial crimes, identity, account access, and payment data are the golden keys that open the door to these organizations’ proverbial bank vaults.

The true costs of financial fraud

A 2017 LexisNexis True Cost of Fraud report indicated every dollar of retail fraud costs financial institutions approximately $2.66. For organizations selling digital goods and/or primarily transacting business through remote channels, the cost was estimated to be even higher, at $3.48. Looking at the bottom line, fraud costs were estimated to be nearly 2% of annual revenue across retail, e-commerce, financial services, and digital lending businesses. Businesses that sell digital goods and/or conduct transactions primarily online take an even harder hit, with losses estimated at 2.51% of annual revenue.

Colin Bristow, a Fraud & Anti-Money Laundering Specialist at SAS UK & Ireland, has stated (the article is password-protected), "Criminals are changing their avenue of attack and [these] crime figures reflect how fraud is now one of society's biggest problems as we increasingly move online.” According to Bristow, companies need to exploit the information they collect regarding financial transactions to identify trends and anomalies and to prevent fraud losses before they occur.

Bristow suggests, “the financial services sector needs to do more to use personal information to find new ways of solving society's biggest challenges. This includes fraud. Applying powerful analytics to the volume of data available, using advances in technology, and developing strong operational processes will enable us to regain the edge against savvy fraudsters. It will allow us to proactively interrogate data and build multi-layered defenses using anomaly detection, machine learning, and fraud networks (to) embrace a holistic approach for effective fraud detection."

FINANCIAL RECOVERIES LAG BEHIND LOSSES

Like their individual and commercial customers, financial institutions are also victims of financial fraud. Banks routinely make their customers whole when fraudulent activities involving their accounts occur, and in the unlikely event of a financial recovery, the actual amounts recovered by the affected bank are routinely only pennies on the dollar. The reputation costs within the industry associated with these fraud schemes may be more damaging than the actual dollar losses incurred.

EXTERNAL AND INSIDER THREATS

Financial sector losses span the breadth of the industry and include credit fraud, mortgage fraud, identity theft, and theft associated with traditional retail and e-commerce. Fraudsters include individual and organized criminal actors, and employees who exploit their access to corporate financial systems and privileged customer information.

In 2011, the Manhattan District Attorney’s Office indicted 94 individuals on charges related to the deposit of fraudulent checks into savings accounts and the immediate withdrawal of the fraudulent funds through bank ATMs, bypassing the typical waiting period. The District Attorney estimated losses to the bank could be as much as $1 million.

In another case, the Manhattan District Attorney indicted 18 defendants on charges of accessing the personally identifying information from bank customers and using that information to manufacture and negotiate more than 1000 counterfeit checks. The defendants were alleged to have stolen more than $1.4 million drawn from 500 accounts at more than fifteen different financial institutions.

Combatting fraud in the financial services industry is a priority of federal, state, and local law enforcement in the United States. During July 2018, the US Attorney’s Office in the Eastern District of North Carolina indicted a 20-year-old suspect alleged to have engaged in a multi-state, multi-bank scheme involving identity theft and manufacture of counterfeit checks. At the time of his arrest, the suspect was reportedly in possession of more than 50 bank account numbers and 25 counterfeit credit cards.

A DIVERSE, MULTINATIONAL PHENOMENON

Facilitated by the use of the internet, today’s financial fraud threat regularly crosses international borders. Disrupting and dismantling transnational criminal organizations requires the cooperation of international law enforcement counterparts and effective information sharing.

In February 2018, the US Department of Justice announced the indictments of 36 suspects in the US, Australia, the UK, Italy, France, and Serbia allegedly involved in identity theft. The suspects were alleged to have compromised credit and debit cards over a period of seven years, resulting in losses of more than $500 million.

In March 2017, indictments were announced in an international investigation led by the FBI, Interpol, the US Department of the Treasury, and the US Department of Homeland Security that targeted nineteen suspects who allegedly bilked 170 victims out of more than $13 million. The suspects, located in the US, Hungary, Bulgaria, Germany, and Israel, allegedly engaged in online vehicle fraud and business email compromise schemes, as well as unlicensed money transmittals and money laundering activities.

According to a 2016 TD Bank survey, fraud will become a bigger threat to the financial services sector over the next two to three years. TSYS, a provider of credit card processing and other services estimates total fraud losses incurred by financial institutions and merchants was $21.4 billion in 2015 and will reach $31 billion by the year 2020.