Fraud risks grow as cost of living soars

The legacy of the Covid-19 pandemic, a global lack of goods and materials, and Russia’s war in Ukraine have each combined to produce a cocktail of economic woes that is proving hard to swallow. Add to this underlying anxiety regarding the climate.

Whether this conveyor belt of crises is unique to our age or is the permanent nature of human affairs is anyone’s guess. What we do know is there is a significant minority who will act to rescue or improve their financial health. Just as fraud grew during the pandemic, so will it now flourish with prices at historic highs.

One could argue this is due, in part, to fatigue: constant vigilance against a plethora of threats, abetted by advantageous conditions like the pandemic, takes its toll. This is a problem, and we need smart thinking to prevent morale from being sapped by wave after wave of novel fraudulent activity.

Whether this is the reason fraud is rising so fast or not, there is little doubt it is. The question is just how widespread this will prove to be and what can be done to help prevent it.

Economic danger

To try and answer this, we need to acknowledge the size of the problem heading toward us, which means taking a moment to reflect on the perilous economic difficulties in which some countries are mired.

This summer has seen prolonged and serious protests in Sri Lanka, for example, where inflation is above the 50 percent mark. Problems there are so profound that it is difficult to know where to start. More than $50 billion is owed to foreign lenders, and fuel and other vital provisions are in short supply. Power cuts are a daily occurrence; in June, schools were closed for two weeks in the capital to conserve energy.

Things aren’t quite as serious as that in the United Kingdom, but interest rates there have been raised to their highest level in 27 years. Inflation, meanwhile, is at a 40-year high, with experts warning of further hikes this winter. The Bank of England has forecast five successive quarters of contraction.

Sri Lanka and the United Kingdom are just two among scores of countries facing similar pressures, which will affect businesses just as it will individuals. And with economies and families under intense financial strain, there has seldom been a worse time to fall victim to fraudsters.

The troubling thing is the fraud threat is already widespread. In early August, the United Kingdom was revealed to be the “card fraud capital of Europe.” The United Kingdom possesses the unenviable accolade of having the highest number of victims (per 1,000 people) and the highest financial losses to card fraud of any European country.

An inevitable rise in fraud

Some crime is premeditated, some opportunistic. Given the times that are almost certain to come—thought to even include rationing and blackouts in the United Kingdom—both are expected to rise. Now is the time to act to strengthen existing anti-fraud defenses.

The first troubling area to address is authorized push payment (APP) fraud, which has grown exponentially. Huge losses have been reported in the United States and Europe, with criminals having honed their skills during coronavirus lockdowns.

As ever, making the public aware of the danger is a relatively straightforward and beneficial first step, and most banks’ apps now have an immediate warning on APP when a customer logs on.

The reputational harm caused by not properly protecting or responding adequately to APP victims should serve as a warning to firms. Media reports of customers angry and upset at a perceived lack of action by banks are plentiful, with the U.K.’s APP scam code—a voluntary program to which many banks belong that aims to treat fraud victims with greater consistency—recently described as a “toothless joke” by one major newspaper.

Financial institutions should ensure they take proactive steps to reverse this perception and protect themselves and their customers. A repeated failure to do so will not go unnoticed by customers, whose ability to voice their dissatisfaction to a wide audience is very quick and easy.

To avoid this, firms must look at the detail and identify fraud trends.

Interestingly, the niche within APP fraud that now leads all others is investment scams. Cryptocurrency scams are riding the crest of a wave. In the United States, digital assets comprised almost half of the $1.1 billion lost to fraud on social media in the 15 months prior to March 2022.

We are also going to witness a massive spike in demand for credit. Vulture-like fraudsters are already primed to take advantage of the plight of ordinary people. Financial institutions have an obligation to protect the vulnerable and must prepare themselves for a likely rise in attempts at customer exploitation.

Finally, one must not overlook employee fraud: a perennial issue that is particularly potent now that bills are rocketing. It is imperative sound systems and controls are in place and robustly monitored to minimize the chances of success for any bad actors.

What firms can do

Businesses must look to always protect themselves from fraud, especially during periods of economic hardship.

First, firms must be alert to the threat, including the nature and potential damage different types of fraud are capable of inflicting. This message must then be relayed without delay to colleagues across the organization, and compliance departments will be the determining factor in how readily it is absorbed and acted upon.

Those firms that possess a culture of continuous learning —a learning habit central to any successful individual or organization—will be at the forefront of any fraud resistance. It is those firms whose staff possess the appropriate knowledge and critical-thinking skills that will be agile enough to respond to changes in criminal behavior.

Regular risk assessments and testing should be performed to identify areas of weakness and vulnerability and steps taken to address these in a timely manner. On the customer-facing side, understanding their needs will be the central pillar around which a durable anti-fraud defense will be built.

An understanding by compliance of burgeoning areas of fraud is also key. Crypto fraud, as mentioned, is growing, and it is no longer sufficient, given its adoption by so many individuals and firms, for compliance professionals to be unaware of its potential for criminality.

Protecting against every type of fraud with total success is unrealistic. But it’s not unrealistic to expect appropriate, targeted, and effective action to be taken by firms to protect themselves and the public. When economies do recover and the current crisis begins to subside, those firms that avoid this obligation won’t be forgotten.

The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.