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Fraud - the crime that effects us all
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In this fascinating article, we analyse the latest fraud trends and statistics and their implications for the financial services sector. We argue that fraud containment strategies should look at process review and innovation at the point of sale before expensive IT solutions.
The passing of the Proceeds of Crime Act (POCA) 2002, which came into effect early this year, and the issuing of the Financial Services Authority discussion paper on developing their policy on fraud and dishonesty, has put fraud high on the agenda for UK business. It is important to realise that not only the financial services industry and regulated businesses are affected, but business in general.
First Some Facts and Figures
In the last quarter of 2003 returns to the British Bankers Association showed a year on year increase in fraud of 32%. This figure includes increases of 3% for fraudulent alterations (changing cheques for example) and increases in forged instruments (say letters of credit) of some 58%.
The Credit Industry Fraud Advisory Service (CIFAS) also reports increases last year of:
- 12% in first party fraud (ie. perpetrated by a customer), which in the authors view is significantly under-reported;
- 19% in identity fraud; and
- 49% in application fraud.
The Association for Payment Clearing Services (APACS) reported an overall increase in plastic card fraud of 3% hiding increases of:
- 15% in card not present;
- 37% in ATM fraud;
- 39% in mail non-receipt;
- 41% in identity theft; and
- 86% in internet fraud.
Overall fraud losses for the industry as a whole are difficult to ascertain, but figures above £2 billion a year would not be an exaggeration - KPMG estimates that fraud costs UK businesses alone £13 billion a year.
The Ifs and Maybes
Presenting sensible facts and figures as a basis for discussion is itself a problem since there is a well known lack of accurate management information within companies, and indeed often a reluctance to report fraud at all. This makes developing value for money solutions to the fraud problem difficult and often leads to a leap to install very expensive IT solutions rather than improve processes or use more innovative techniques at the point of sale or customer contact. There are however, understandable reasons for this. Admitting significant levels of fraud will often necessitate revising accounting procedures, pointing the finger at staff (often at management level) or acknowledging that extant processes are antiquated, non-existent or by-passed by staff.
Future Trends - Organised Crime
Industry estimates attribute approximately 70% of fraud to some form of organised crime. To make it more difficult to use fraudulently obtained cards or details, shoppers will be increasingly required to enter a PIN number when making a purchase using a credit or debit card. Industry insiders, however, expect that rather than see their revenues substantially reduced, the criminal gangs will target other areas of fraud. We are already seeing rising numbers of identity fraud, application fraud, first party fraud and staff fraud. Technology has been very successful in combating plastic card fraud, unfortunately, other types of fraud are not so susceptible to a technology based solution - despite the claims of many IT vendors.
A Typical Fraud
Take for instance first party fraud, a fraud that illustrates many of the issues discussed above. First party fraud is any fraud perpetrated by a company’s own customers. The following is a typical scenario. A new customer opens an account at a branch using two acceptable forms of identification and proof of address as required by the regulators. At this point it is very difficult for the teller to judge whether or not these documents are real proof. Is the person present who they say they are? Are the documents forgeries? Is this person actually living at the address presented? If I refuse this customer will I make my sales targets? The teller makes an initial judgement and often there follows back-office checks that will include using credit reference agencies and other information repositories such as the Credit Industry Fraud Avoidance System (CIFAS) and National Hunter.
The good fraudster will pass these checks.
Typically, the fraudster will then take 18 to 24 months building up a good credit profile, making sure that regular payments are made to the account (often from another fraudulent account), buy some high profile products such as health insurance and house insurance and perhaps open an internet account too. In the meantime the fraudster, on the back of a good credit rating, will have accumulated several cards with significant levels of credit available, several cheque books (as many as ten!), a cash card and possibly an invitation to take out a loan at a preferential rate.
Now comes the bust-out! The fraudster will very quickly, usually in a matter of hours, take out a large loan, purchase many high priced goods and take out cash with cards and/or cheque books – no wonder within the fraud containment industry they are known as runaway spenders. Until this point the fraudster looked like a good customer to the bank and this is why this type of fraud is so often not recorded as a fraud at all but rather bad debt, ending up in recoveries or collection Once the account comes under suspicion and is investigated it turns out that the customer is not who they say they are, does not live where they say they did and probably is long gone repeating the whole process with another organisation. Even more perniciously the fraudster may be operating in concert with other fraudsters to maximise the hit – this is the so called fraud ring.
Prevention and Containment
Preventing this type of fraud is difficult and requires a combination of process improvement, increased vigilance, improved identification and verification techniques and technology – although the latter is not a silver bullet. It is also important to admit that staff collusion may be involved. Developing a fraud containment strategy that is fit for purpose in terms of meeting increasingly stringent regulatory burdens and stopping the fraudster needs an holistic approach. Such an approach will include:
- understanding the appetite for risk of the host organisation;
- reviewing processes and procedures including authority levels;
- improving staff recruitment and monitoring procedures; and
- harnessing the best that technology can offer – though it has to be said that much can be improved without large-scale commitment to technology.
In addition, it is important to develop appropriate governance structures, management information strategies, and policies for fraud containment. Implementing the overall strategy should be geared to achieving quick wins that tackle the most obvious frauds giving the most positive return. Remember every pound lost to a fraudster requires £10-20s of extra revenue to recoup.
If you have any questions about the subjects covered in this white paper or you would like to find out more about how Oakleigh Consulting could help your organisation, please contact us on 0161 835 4100 or email us.
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