Much of the fraud reported on of late has been perpetrated by third parties, but financial crime officer Casey Pozarowszczyk explains the real – and rising – risk of first-party fraud during the pandemic and while employees continue to work from home.
Job loss, financial difficulties, health concerns and change of personal circumstances are some of the byproducts of the current pandemic affecting the public. Over a period of weeks, the vast majority of the U.K. population have felt the effects of a rapidly changing economy, but what are the financial crime implications of the U.K.’s change in personal circumstances?
The National Crime Agency, among other public bodies, has issued a wave of consumer and business communications providing insight on the wave of third-party fraud wave sweeping the nation. An influx of coronavirus-related scams, phishing e-mails and cyberattacks by fraudsters and criminal groups are being regularly reported. With these acts aiming to capitalize on the public’s fear and curiosity during this period of remote working and confinement in our homes.
Noticeably, reporting is focused on how not to be a victim, with a lack of oversight on how not to be a criminal. Arguably, the greater threat to the U.K. economy, first-party fraud, is being overlooked and underreported.
What is First-Party Fraud?
First-party fraud (or consumer fraud) is committed by the genuine party (the consumer). They’re not hiding their identity, but engaging in acts which are dishonestly acceptable. The joint Cifas and WPI Economics Report found that one in seven U.K. adults has admitted to engaging in first-party fraud in their lifetime.
This statistic is from 2019; these consumer acts aren’t a new wave of concern. But why should regulated businesses reassess the impact of first-party fraud now?
Dishonest acts by “long-trading” and “good” consumers are possibly being overlooked. Consumers who, through no fault of their own, have found their financial situation greatly impacted in the current climate – furlough schemes, redundancies and the self-employed being impacted by business closures – are placing more consumers in financial difficulty.
These circumstances, demonstrated by the 2009 recession, drive individuals to feel new pressures that lead them to rationalize illicit acts, including claiming an unnecessary chargeback (or several), opening and utilizing a credit account/method of finance with the intention of not repaying, making dishonest claims for high-value goods in order to gain a benefit and making false-representations on applications for financial services.
A dishonest culture and the view from consumers that these acts are victimless needs addressing by businesses before a surge in public engagement, as seen in previous financial crises.
In recent weeks, the Financial Conduct Authority (FCA) have exercised strong commitments to financial crime prevention initiatives, but more noticeably (Business Plan 2020/21), have highlighted their expectations of firms to prioritize fraud in the fight against financial crime – a revisited focus for the FCA.
Regulator focus is always a motivator for firms to re-evaluate current process. At present, firms should become self-aware of their financial position in the current economy and how first-party fraud losses may be jeopardizing their financial security.
Consider a single consumer defrauding a company of £300; this can be written-off in losses or looked at as bad debt. How about 10 consumers repeating this act over a month, 20 consumers in a week or 30 consumers within a day? The figures can soon become substantial.
These losses may seem minor when reviewed on a micro level, but when amalgamated, the impact can be severe.
Implications from COVID-19
Coronavirus has placed unforeseen pressures on businesses, with a crippling blow to the U.K. economic infrastructure. An unprecedented 70 percent of firms have furloughed staff, with coronavirus collapsing businesses.
Therefore, firms should be more alert than ever to fraud losses and take steps to mitigate and prevent the detriment; it could be the difference between a firm furloughing 30 employees instead of 10, or more importantly, declaring bankruptcy.
It is already industry best practice to have procedures and processes in place to mitigate third-party fraud, including system-driven transaction monitoring and fraud analytics to counter fraud rings, cybercriminals and bots to prevent identity fraud and facility takeover.
The Challenges of Combatting First-Party Fraud
1. Operational Challenges
Social distancing has meant the upheaval and re-deployment of workforces remotely. This operational change comes with a mass of challenges. Combined with this, furlough schemes have meant some workforces have been stripped back while others have led to employees being redeployed into different areas of the business.
2. Increased Business Demand
Some businesses are experiencing an increase in product/service demand due to closure of competitors in the industry. Although demand is a positive for overall profits, increased transactions with reduced/reformulated operations present a risk.
3. Lack of an Appropriate Tone at the Top
Many firms aren’t distinguishing from first-party and other types of fraud, instead prioritizing resources on third-party fraud, thus negating awareness of other fraud typologies and leaving them undetected and unreported – and causing a loss.
What Can Be Done
1. Be Aware of the Risk
Awareness of first-party fraud activity prevalent in the firm’s sector can enable a response plan to be compiled. Consciousness of red flags can tailor controls and enable knowledge to be cascaded throughout the workforce, aiding in staff culture and awareness.
2. Staff Culture and Awareness
Compliance professionals should ensure a risk assessment of the workforce is undertaken in light of revised operations, leading to a continual review of processes to ensure they are being adhered to. This will ensure detection, prevention and deterrence strategies are being upheld and losses minimized.
Firms should look to maintain an effective anti-fraud culture, utilizing communication channels to engage employees while they work from home. Look to re-educate on reporting lines, anti-fraud processes and awareness of first-party fraud red-flags; knowledge is the key to success.
3. Data Sharing
Reporting identified fraudsters by sharing data is key to reduce this behavior in the wider economy. Cifas (the National Fraud Database) and Action Fraud are bodies firms can share data with (and receive insights from) to reduce instances of fraud and financial crime.
By collaborating, firms can fight the war on first-party fraud together, increasing anti-fraud awareness and reducing the “victimless” crime culture to fight the recurring pattern of increased economical financial pressure and consumer engagement in crime.
This piece was originally shared on the International Compliance Association’s Insight blog and is republished here with permission.
The joint Cifas and WPI Economics report ‘Tackling first party fraud’, 2019
 British Chambers of Commerce, Press Release, April 22 2020