How does the FBI define fraud?
“The intentional perversion of the truth for the purpose of inducing another person or other entity in reliance upon it to part with something of value or to surrender a legal right. Fraudulent conversion and obtaining of money or property by false pretenses.”
Decoding this: fraud is someone lying to another party to steal something of value. And financial fraud has been happening since the beginning of time, well nearly. One of the first instances of fraud recorded was in 300 B.C. involving a Greek merchant, Hegestratos, an insurance fraud, a cargo of corn, and some angry crewmates. It didn’t end well for Hegestratos.
Unfortunately, fraud often does end very well for criminals. It’s estimated fraud costs the global economy around $3.7 trillion each year. Fraud is big business, highly profitable, and problematic for governments, companies, and citizens the world over. The prevalence and seriousness of fraud led the UK government to upgrade it as a “…threat to national security, giving it the same status as terrorism.”
One of the major issues for those trying to combat fraud is the vast variety of fraud typologies that take place, emerge, and are thought-up all the time. Moody’s Analytics Grid database confirmed more than 16,000 new fraud risk alerts to customers in July 2023 alone.
There are endless ways to defraud people, companies, charities, and governments. New public funds for instance, inevitably mean new types of fraud. Take the grants established to support people and businesses after the Covid-19 pandemic, they immediately became a target for criminals.
There is a vast array of scams too – from highly organized and professional fraudsters taking hundreds of billions of dollars in taxpayers money to romance scams and lone wolves praying on vulnerable individuals.
Anything and everything can be a target for fraud if it is perceived to have value. The changing nature of fraud, its many guises, and the different types of people willing to commit it make fraud a particularly tricky area of financial crime management.
The good news is there are effective means to tackle and prevent fraud – starting with better fraud intelligence.
Ensuring fraudsters aren’t onboarded to legitimate companies, i.e., cutting them off from resources, and limiting their access to the financial systems, are key barriers to their success. This starts with businesses, governments, and other organizations understanding whom they are working with and determining whether they can or should do business with each third-party before onboarding.
Establishing trust in customers and suppliers can be developed through a know your customer (KYC) or know your business (KYB) process.
KYC/KYB will typically involve identity & verification (ID&V) checks, address checks, negative news screening, ultimate beneficial ownership (UBO) data checks and so on. The exact nature of the screening undertaken depends on whether an individual or an entity is going through the due diligence process. It will also depend on what the third-party is actually applying for – grants for public funds, new bank accounts, and insurance policies will all have a different set of compliance and due diligence requirements for onboarding.
Whether KYC or KYB, organizations of any type can build on their anti-fraud strategy by integrating rich and varied data sources with an existing application fraud solution to prevent fraudsters being onboarded.
Ongoing control and mitigation of fraud risk is part of a fraud risk management program. This will have clear policy expectations to periodically assess and control evolving fraud risks.
Digital solutions, such as those offered by Moody’s Analytics, allow organizations to implement preventive measures against key fraud risks, which will be tagged for that specific purpose, helping to maintain a robust reporting system and investigation process for timely response to fraud alerts and new fraud typologies.
Effective fraud management solutions are those that have a risk-based approach to fraud at their core. As different types of organization will be exposed to different types of fraud risk, having a tailored and configurable solution is essential. This approach helps ensure control mechanisms aren’t static – we already know fraudsters won’t stand still.
Without a dynamic element to fraud prevention and access to datasets that will provide intelligence about whom you are working with, the disparity between fraud risks and controls become exponential. These gaps make organizations, their customers, and society vulnerable to fraud risks that have been evolving since the beginning of time.
Moody’s Analytics KYC solutions automate customer onboarding and continuous risk monitoring across a range of compliance processes, including fraud detection and prevention. Integrated with leading global data sets, organizations can conduct due diligence and enhanced due diligence with a platform that delivers an always-on view of risk for individuals or entities.
We help customers mitigate the risk of fraud and other types of financial crime in 197 countries, across 211 jurisdictions: completing +45 million new customer and third-party checks each day, including screening against our database of +19 million risk profiles, +460 million entities, and +17,000 sanctioned entities.
Please get in touch to discuss your approach to fraud prevention, we would love to hear from you.