Elliot Berman
There has been a lot of information circulating about fraud during the pandemic. Many organizations, including AML RightSource, have discussed this challenge. What is most confounding about fraud is that it is always with us; and it is getting more prevalent.
Let’s start at the beginning – what is fraud? The Association of Certified Fraud Examiners (ACFE) defines it as: “In the broadest sense, fraud can encompass any crime for gain that uses deception as its principal modus operandus. Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.[1]” As you can see from this definition, fraud is a very broad term and can take many forms.
According to multiple sources, the first recorded instance of fraud occurred in 300 BC. A merchant named Hegestratos attempted to deceive the insurers of a shipload of goods; he sunk the ship, kept the cargo and claimed the loss from the insurers. Since then, as commerce has expanded in scope and form, fraud has expanded right along with it. Fraud can occur wherever there is an exchange of value; business-to-business (B2B), person-to-person, government benefits, government contracts, medical billing, tax return filing, and investments (hardly a complete list). With the robust expansion of payment types and channels, this makes fraud harder and harder to control.
Fraud started in the B2B space with our “friend” Hegestratos. In the 2400 years since his ground-breaking act, fraud has grown and morphed. When barter trade gave way to currency-based trade, fraud evolved, spawning counterfeiting, fraudulent billing, and counterfeit goods. When commerce moved online and to apps, fraud evolved, spawning identity theft, business email compromises and synthetic IDs.
The size of the problem in the US continues to expand. According to the Federal Trade Commission (FTC), in 2017 there were 1.3 million consumer frauds reported; reports in 2018 increased to 1.5 million and to 1.7 million in 2019[2]. In all three years, people aged 20-29 reported the largest number of frauds and people 70-79 reported the least, but the average loss by older people for each instance of fraud was nearly four times that of younger people. This data only reflects consumer frauds and precedes the COVID-19 pandemic. These numbers do not reflect the magnitude of total consumer fraud in the US. In the FTC’s survey, Mass-Market Consumer Fraud in the United States: A 2017 Update, published on October 2019[3], it estimated that there were 61.8 million incidents of mass-market consumer fraud in the US in 2017.
As noted earlier, fraud started in the business part of the economy and continues to flourish there. PwC stated in its 2020 Fighting fraud: A never-ending battle[4], that 42% of the over 5,000 respondents had experienced fraud the preceding 24 months, totaling $42 billion in accumulated losses. Many of these frauds were perpetrated by customers, involved cybercrime, asset misappropriation or bribery and corruption.
As we know from many sources[5], the pandemic is magnifying the amount of fraudulent activity. In April 2020, ACFE reported that “90% of respondents reported that they have seen an increase in scams targeting consumers.[6]” via a survey of its members about the effect of the pandemic and fraud.
Most financial services companies have anti-fraud processes in place. There are lots of numbers, and a fair amount of doom and gloom - so what can you do about it? Start by looking at what is working:
- Can your effective efforts be expanded to cover more of your business?
- Are you looking at the problem from a risk-based perspective?
- Do you have an up-to-date fraud risk assessment?
- Does your risk assessment gather information from all parts of your company – all products and services, geographies, and processes and systems?
- Do you use your risk assessment to actively manage your anti-fraud activities?
- Is executive management and your board familiar with the key elements of your risk assessment and anti-fraud program?
- Have you established a mechanism to identify emerging risks as your operating environment changes?
This list is not exhaustive, but gives you an outline of things to consider in building or enhancing an anti-fraud program.
[1] https://www.acfe.com/fraud-101.aspx
[2] These numbers reflect frauds reported to the FTC’s web reporting portal.
[3] https://www.ftc.gov/system/files/documents/reports/mass-market-consumer-fraud-united-states-2017-update/p105502massmarketconsumerfraud2017report.pdf
[4] 2020 Fighting fraud: A never-ending battle, PwC’s Global Economic Crime and Fraud Survey https://www.pwc.com/gx/en/forensics/gecs-2020/pdf/global-economic-crime-and-fraud-survey-2020.pdf
[5] See reports from many government agencies and law enforcement agencies on our COVID-19 Resource Page https://www.amlrightsource.com/covid-19-resources
[6] https://www.acfeinsights.com/acfe-insights/covidfraudsurvey