Introduction
Fraud remains a pressing global issue in 2024. Its widespread prevalence means that individuals must avoid countless attacks, from money mule schemes wrapped up in fake job postings to deceptive romance or charity scams. The US Federal Trade Commission’s most recent data reported that 2.4 million consumers filed a fraud report in 2022, marking an increase of more than 30% from the previous year, with imposter and online shopping scams representing the most prevalent categories. Financial institutions dealing with fraudulent transactions stand to lose enormous sums, bearing the transactions’ value and the necessary compliance resources. As fraud cuts into profit margins, it’s a significant priority for firms. Complementing this is a political will surrounding fraud in recognition of its negative societal and economic impact. Governments and regulators are making significant efforts to combat it, notably in the UK. This article delves into the state of fraud in 2024, looking at some of the most prevailing trends, pioneering government responses, and implications for financial institutions and compliance professionals.
Prevalent fraud trends
Synthetic identity fraud isn’t a new challenge of 2024, but it continues to be one of the fastest-growing types of financial crime. Research suggests that the Asia-Pacific region (APAC), in particular, is poised to see a significant increase in synthetic identity fraud in 2024. In the US, lenders’ exposure to synthetic identity fraud is approaching $3 billion. And for financial institutions, an estimated 95% of synthetic identities go undetected during onboarding. These alarming figures highlight this type of fraud’s growing challenge and complexity.
What is synthetic identity fraud?
Synthetic identity fraud involves the creation of fake identities using a combination of real and false information. For example, a fraudster could combine a stolen Social Security Number with a fictitious name and genuine postal address. This type of fraud is notoriously difficult to detect, especially as fraudsters use sophisticated technologies like graphics processing and deep fake tools to assemble convincing counterfeit documents.
The growth of deepfake technology further complicates the fraud landscape. Deepfake technology, which includes voice cloning, makes impersonation scams more convincing and challenging to detect. In the UK, banks are increasingly encountering deep fake scams to pass Know Your Customer (KYC) checks for account openings or credit card applications, signalling an increased area of focus from a compliance viewpoint.
Adding to this, the advancement of generative artificial intelligence (AI) has contributed to a significant increase in fraud, creating fake identities at scale. Generative AI has also benefited authorised push payment (APP) fraud, where fraudsters can commit more convincing social engineering scams, engaging people’s trust and tricking them into sending money more efficiently. This includes scams such as romance, investment, or otherwise. Such technology use also contributes to the prevalence of fraud-as-a-service, where criminal groups offer professional services to execute attacks. As technology continues to evolve, emerging digital realms like the metaverse may provide unique challenges in a virtual space, being a potential hotbed for fraud and scam and blurring lines with cybercrime.
Government and regulator responses
Governments and regulators are implementing strategies and regulatory changes to address escalating fraud rates, though to different degrees. Most prominently, the UK’s Payment Systems Regulator (PSR) will require mandatory reimbursement for victims of APP fraud starting in October 2024. Under these new rules, both the sending and receiving payment institutions must fully reimburse victims, with an equal share of liability on a 50/50 basis. This development cements the UK’s role as a leader in offering guarantees for victims of fraud.
In the US, current regulations only require banks to refund customers for payments made without their consent. However, refunds are not mandated when customers initiate transfers themselves, as in the case of APP fraud. Discussions are ongoing to potentially expand the scope of the Electronic Fund Transfer Act (EFTA) to include authorised fraud, a change that could significantly shift banks’ responsibilities in these scenarios. In a notable move last year, the Consumer Financial Protection Bureau (CFPB) ordered Zelle, a peer-to-peer payment solution, to refund victims of fraudulent transactions, marking a significant shift in how financial institutions may be forced to handle and compensate for fraud-related losses.
These regulatory developments could indicate a broader trend, signalling potential shifts in other jurisdictions as they grapple with the increasing fraud challenges. This trend reflects a growing recognition of the need for stronger consumer protections, particularly in peer-to-peer platforms.
Implications for financial institutions and compliance professionals
The current fraud landscape requires a collaborative approach in the financial services sector. Regardless of size, financial institutions and regulatory technology firms are increasingly focusing on sharing data and insights to counter complex fraud schemes, including synthetic identity patterns. Even in the face of compliance and data privacy challenges, this emphasis of collaborative action is becoming increasingly vital.
Alongside meaningful collaboration, adapting to technological advancements and regulatory changes is crucial. Financial institutions must prioritise proactive strategies like real-time monitoring and innovative technologies such as behavioural biometrics for fraud prevention. Enhanced customer verification and due diligence processes can be instrumental in helping differentiate legitimate customers from fraudulent entities. These advanced tools are pivotal in improving the accuracy of customer onboarding and ongoing monitoring.
Integrating fraud prevention and anti-money laundering (FRAML) strategies is also a noteworthy strategy. Particularly for smaller institutions where resource optimisation is key, this unified approach can streamline efforts and enhance overall effectiveness in combating complex financial crimes. It requires developing diverse skill sets within teams and fostering closer collaboration between fraud prevention, AML, and cybersecurity departments. This comprehensive approach can help effectively navigate the challenges of fraud.
Conclusion
In its current state, fraud is marked by sophisticated, technology-driven schemes, including innovations like deepfake technology. Amidst this dynamic climate, the UK leads the way with a mandatory reimbursement policy for APP fraud victims, possibly signalling the start of a global trend towards stronger consumer protections. Financial institutions and compliance professionals must continue forward with a strategy rooted in collaboration, continuous technological innovation, and a deepened understanding of fraud methodologies.
Written by | Victoria Sztanek
2.https://fintechnews.sg/83655/fintech/fraud-and-identity-trends-2024/
4.https://legal.thomsonreuters.com/en/insights/articles/trends-in-synthetic-identity-fraud
5.https://www.ft.com/content/515e344d-9ec1-4c3e-888f-10ff57712412
6.https://fintechmagazine.com/articles/the-risks-of-money-laundering-in-the-metaverse
