Does a recession lead to more financial fraud?
The last few years have caused the world to shake. A pandemic and war have scarred the earth, and a global recession is imminent.
Recession brings new challenges to an FI within a changing fraud landscape
The World Bank predicts that global growth will fall to 2.9% in 2022 and remain at that level through 2023-2024. It and others attribute this recession to the disruption caused by the war against Ukraine.
If we look at recession as defined by the National Bureau of Economic Research, it is “a significant decline in economic activity that is spread across the economy and lasts more than a few months”. By this measure, it is likely that much of the world is, or will soon be, in a recession.
Since previous recessions, much of the financial world has been digitized. But digitization presents challenges in controlling financial fraud. This means that financial institutions (FIs) and other organizations must now ask: will this new global recession mean more financial fraud, and if so, how can this fraud be prevented?
Fraud follows the money
It is useful to think of the recession as a factor within the framework of the “Fraud Triangle”, developed by the service firm MNP to help us understand what drives people to commit fraud. The three sides of the triangle are:
- Possibility, e.g. gaps in internal control systems
- Motivation, e.g. financial difficulties
- Rationalization, e.g. increased economic uncertainty
These three planets have aligned as the recession grips the world’s economies. The historical precedent for increased fraud during a recession is in evidence: a survey by the Association of Certified Fraud Examiners (ACFE) on the impact of the economic recession in 2009 found that 55.4% of respondents saw a slight or significant increase in the level of fraud in the the decline period. Over 49% of respondents said this increased fraud was due to financial pressure on individuals.
Recently, a report by 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 exploited these new doorways into financial structures. But recession-driven fraud isn’t just about external hackers.
A recession has its own set of fraud drivers. And any change in financial dynamics opens up opportunities for those who look for them: financial uncertainty combined with digital channel saturation and the cost of living crisis around the world have created a perfect storm of opportunity and desperation.
Examples of recession-driven fraud
Rental 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. Tenants may provide false salary information or other personal information. If these data points are not robustly verified, the landlord may end up with a tenant who cannot pay the rent. A report by HomePPL identified a 100% increase in attempted rental fraud in the UK in the first half of 2022.
Loan fraud
According to CoreLogic, loan fraud increased by 75% during 2021. If people are desperate for money, they are more likely to take risks. These risks translate into using false information when applying for a loan. The most common types of loan scams identified by the Federal Trade Commission (FTC) are student loans, personal loans and car 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 problems with credit bureaus, banks and lenders. That same year, the FTC received nearly 1.4 million reports of identity theft. These stolen identities are used for online payment fraud and theft and to create other identities that are used in a cycle of online fraud.
Mortgage fraud
During the 2008-2009 recession, the FBI saw a 71% increase in mortgage fraud. The FBI identified the perpetrators of mortgage fraud as insiders such as mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, developers, and bank and trust account representatives. In 2022, mortgage fraud is on the rise again.
Investment fraud
The UK’s Office for National Statistics (ONS) recorded a 42% increase in fraud involving financial investments between May 2020 and March 2021. 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 scammers take advantage of this behavior.
What FIs and other organizations can do to prevent financial fraud
A financial crisis affects everyone, and attempted fraud can 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. However, there are several ways an organization can prevent fraud:
- 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 organization focus on which anti-fraud approaches work best. In addition, this will inform your choice of technical measures to prevent fraud.
- Improve employee practices
Insider threats increase during a recession as risky behavior becomes widespread. Use regular security awareness training to identify key areas where fraud can occur. This should include training in social engineering tactics that focus on individuals within the finance departments of an organization.
In addition, review your hiring processes and policies to ensure you perform robust screening of potential employees. Also, make sure you have a system in place to remove access to company networks and apps when employees leave the company.
- Implement solutions with intelligent analysis
Intelligent analysis is important when the volume of fraud is higher in 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-powered anti-money laundering (AML) solution must work across the many digital payment channels 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 types of fraud, but dynamic risk scoring and intelligent customer screening can prevent synthetic identity fraud and detect other fraudulent signals.
As the global economy heads into another recession, those who prepare wisely now will find themselves well-positioned to navigate the tumultuous times ahead. The time is now to ensure that everything is done to reduce the risk of fraud.
