Does a recession lead to more financial fraud?

The last few years have left the world in shock. A pandemic and wars have scarred the earth, and a global recession is imminent.

Recession Brings New Challenges to an FI in an Evolving Fraud Landscape

The World Bank projects that global growth will fall to 2.9% in 2022 and remain at this level throughout 2023-2024. She and others attribute this recession to the disruptions caused by the war against Ukraine.

If we look at a recession as defined by the National Bureau of Economic Research, it is “a significant decline in economic activity that extends throughout the economy and lasts for more than a few months”. By this measure, it is likely that much of the world is, or will soon be, in recession.

Since previous recessions, much of the financial world has been digitized. But digitization poses challenges in controlling financial fraud. This means that financial institutions (FIs) and other organizations must now ask themselves: 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 consider the recession as a factor in the “Fraud Triangle” framework designed by the services company MNP to help us understand what drives people to commit fraud. The three sides of this triangle are:

  1. Timeliness, for example, deficiencies in internal control systems
  2. Motivation, for example, financial difficulties
  3. Rationalization, e.g. increased economic uncertainty

These three planets have aligned as recession grips global economies. The historical precedent for increased fraud during a recession is proof of this: an Association of Certified Fraud Examiners (ACFE) survey of the impact of the 2009 economic recession found that 55.4% of respondents observed a slight or significant increase in the level of fraud. during this period of recession. More than 49% of respondents said this increase in fraud was due to financial pressures on individuals.

Most recently, a TransUnion report 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 have benefited from these new access doors to financial structures. But recession-related fraud isn’t just about outside hackers.

A recession has its own set of fraud factors. And any change in financial dynamics opens up opportunities for those who seek them: economic uncertainty coupled with saturation of digital channels and the global cost of living crisis have created a perfect storm of opportunity and desperation.

Examples of Recession-Driven Fraud

Rental Fraud

During a recession, people struggle to find jobs and finances. If someone wants to rent a property, they may feel compelled to falsify information to get that property due to the recession. Renters may provide false salary information or other personal data. If these data points are not solidly verified, the landlord may end up with a tenant who cannot pay the rent. A report by HomePPL has identified a 100% increase in rental fraud attempts in the UK in the first half of 2022.

loan fraud

According to CoreLogic, loan fraud has increased by 75% in 2021. If people are in desperate need of money, they are more likely to take risks. These risks result in the use of false information when applying for a loan. The most common types of loan fraud identified by the Federal Trade Commission (FTC) are student loans, personal loans, and auto loans.

Online shopping and identity theft

The FTC Consumer Sentinel Network (Sentinel) service received more than 5.7 million fraud loss reports in 2021. These complaints included identity theft and consumer issues with credit bureaus, banks and lenders . In the same year, the FTC received nearly 1.4 million reports of impersonation. These stolen identities are used for online payment scams and thefts and to create other identities used in a cycle of cyber fraud.

mortgage fraud

During the 2008-2009 recession, the FBI saw mortgage fraud increase by 71%. The FBI has identified mortgage fraud perpetrators as insiders such as mortgage brokers, lenders, appraisers, underwriters, accountants, realtors, settlement attorneys, real estate developers, investors, builders and representatives of bank and fiduciary accounts. In 2022, mortgage fraud is on the rise again.

investment fraud

The UK Office for National Statistics (ONS) recorded a 42% increase in fraud involving financial investments between May 2020 and March 2021. The driver of 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

An economic crisis affects everyone, and fraud attempts can be driven as much by desperation as by a criminal mindset. In addition, insider threats, consumer fraud, and external cybercriminal activities put businesses at increased risk of fraud and drive them to action. There are, however, several ways for an organization to prevent fraud:

  1. Update your fraud risk assessment

The recession brings new challenges to an FI in an evolving fraud landscape. Update your fraud risk assessment to reflect these changes. This will help your organization focus on the most effective anti-fraud approaches. Additionally, it will inform your choice of technical measures to prevent fraud.

  1. Improve employee practices

Insider threats increase during a recession as risky behaviors become prevalent. Use security awareness training regularly to identify key areas where fraud can occur. This should include training in social engineering tactics that focus on individuals within an organization’s financial departments.

Additionally, review your hiring processes and policies to ensure that you are performing rigorous checks on potential employees. Also, make sure you have a system in place to remove access to corporate networks and applications when employees leave your company.

  1. Deploy solutions with intelligent analytics

Intelligent analytics is essential when the volume of fraud is higher during 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 reduce financial fraud.

An advanced AI-based anti-money laundering (AML) solution must work across multiple digital payment channels and detect fraud in real time. Know-your-customer (KYC) verification is another area where advanced smart technical measures can prevent fraud. Synthetic identities are the source of many types of fraud, but dynamic risk scoring and intelligent customer screening can prevent synthetic identity fraud and detect other fraud signals.

As the global economy approaches another recession, those who prepare wisely now will find themselves well positioned to weather the tumultuous times ahead. Now is the time to ensure that every effort is made to mitigate the risk of fraud.

About Joel Simmons

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