Types of fraud perpetrators and their detection complexity

Fraudsters often signal their actions in advance with clear red flags. The most common behavioral red flags were living beyond one’s means, financial problems, close ties to supplier/customer, control issues, unwillingness to share tasks, divorce/family problems, and wheeler-dealer attitude.

Types of fraudsters

The greater the perpetrator’s level of authority, the greater the fraud losses. Employees often use schemes to bypass independent audits and other anti-fraud checks, allowing them to steal larger amounts of money.

Fraud is often committed by first-time offenders. While background checks can be useful in screening out bad applicants, they may not predict fraudulent behavior. Most fraudsters have years of work history before they start stealing; therefore, ongoing monitoring and understanding the risk factors and warning signs of fraud are much more likely to identify fraud than pre-employment screening.

Fraudsters almost always exhibit certain behavioral traits, such as living beyond their means or having exceptionally close ties with suppliers or customers.

First party fraud

Have you ever considered changing your personal details slightly to get a credit card or a more attractive mortgage from a bank? Misrepresenting your identity or personal circumstances in any way – no matter how small – to get unsecured bank loans is in fact a form of first-party fraud.

First-party fraud also involves borrowing money or using credit without the intention of paying it back. For example, someone might order a new flat-screen TV on credit and spend more than usual. An unusual purchase event might cause a bank to call their customer and ask if the unusual purchase is real.

If the account holder claims that they did not make the purchase or receive the goods, the bank will often refund the money, leaving the merchant empty-handed as the bank requests a chargeback.

Third party fraud

Third-party fraud is harder to detect. It occurs when legitimate account holders knowingly provide their personal information or credentials to a friend or acquaintance to commit fraud. The employee may order goods or services from a device that is not linked to the account, giving the fraud the appearance of legitimacy.

Banks have a hard time proving that the customer was complicit in the crime. This is commonly referred to as ‘friendly fraud’. An intriguing twist in this type of fraud occurs when customers are lured by fraudsters who advertise ways to make $200 fast.

In order to receive the money, the legitimate account holder must agree to accept and transfer money to and from their bank account on behalf of a third party. In return, they get to keep a portion of the money. In reality, this is money laundering, and the people who shared their bank details are called “money mules.”

However, because the accounts involved are owned by real people with legitimate credentials, it can be difficult to detect fraudulent activity.

Third party fraud

This is what most people think of when they think of types of fraud. It differs from first and second party fraud in that the customer is not aware of the fraudulent activity; in this case, the customer is clearly the victim. The fraudster pretends to be them and uses real-life facts to scam their bank.

Account Takeover is a common example of this type of fraud (ATO). A fraudster gains access to a victim’s account by using personally identifiable information (PII) obtained through hacking or social engineering techniques such as phishing.

This is when a fraudster poses as a trusted entity to trick their victim into revealing sensitive information. This results in taking over the victim’s account, resulting in fraudulent transactions or purchases or the removal of funds.

Another popular technique is loan stacking. This is when a criminal uses one person’s information to apply for multiple small loans from different lenders. The profits can be huge, but the victim’s credit score suffers.

Why can any type of fraud be difficult to detect?

This type of fraud is difficult to detect for several reasons.

• You can’t doubt the customer: With first-party fraud, it can be difficult to determine whether customers are telling the truth. Questioning a customer’s monthly expenses is not good customer service, and a bank can’t go to a customer’s home to see if there’s a brand new TV hanging on the wall. This type of fraud is hard to detect and even harder to prove.
• No one will confess: Third party fraud presents similar challenges. If you ask an individual directly if they have ever shared their banking details with anyone else, the bank will get nowhere as the answer will inevitably be a defensive ‘no, of course not’. Because the individual has knowingly allowed this fraud to occur, all personal details are correct and most of the usual indicators of fraudulent behaviour are absent. When individuals refuse to acknowledge their involvement, banks will struggle to find solid evidence to prove it. It’s a case of one man’s word versus another’s.
• Complexity Enveloped: A fraudster will often combine several techniques to complicate their attempts to detect suspicious activity. For example, they may target people with low credit scores who are unlikely to fall victim to fraud. They may then use credit piggy-backing, which involves adding another cardholder’s information to boost their credit score.

Combating these various forms of crime

Because fraudsters range from organized criminal gangs to loyal, highly valued customers, it is difficult to come up with a one-size-fits-all solution that can combat all three major types of fraud.

There is a way. Banks can create unique profiles for each customer and understand what “normal” looks like by combining device assessment, malware detection and behavioral biometrics. If something deviates from the norm, they have the ability to take action.

This could be the most subtle change; for example, if a user lies to get a loan, he or she may hesitate on some answers as he or she wrestles with his or her conscience. While typing slowly or retyping information is not a crime, it may warrant further investigation.

Final thoughts

Fraudsters are usually no different from other employees of the same company in terms of demographics or physiological profile. Most perpetrators have a similar personal profile to an honest person, and therefore victims and colleagues are often surprised by the unethical behavior of the disloyal employee when the fraud is discovered.

As mentioned earlier, fraudsters are typically motivated by a sense of pressure or discomfort (either professional or from other sources), combined with the presence of a favorable scenario (opportunity) and a self-justification of their actions (rationalization).