These days, perpetrators of fraud don’t need to pick locks, break windows, or crack top-secret codes to access other people’s money. They only need to overuse promo codes, flash an ancient student ID, take extra liberties with their employee perks, or shave income off a tax return.
With tax fraud alone surpassing $1 trillion a year in the U.S., the fight to prevent theft via tax, marketplace, education, and internal fraud is a big lift for even the smallest companies. Fortunately, technology is gaining on the grift.
What is fraud prevention?
Fraud prevention is the use of policies and procedures to counteract fraud and other financial crimes before bad actors attempt theft and deceit. For many financial-related businesses today, Know Your Customer (KYC) is the best fraud prevention tool that exists. (More on KYC below.) It is also widely mandated by regulatory agencies and law enforcement, depending on the industry.
Fraud prevention vs. fraud detection
In general, fraud detection (identifying fraud) is an element of fraud prevention (stopping fraud). However, the terms do differ in one key aspect: Fraud detection assumes that theft is already happening and seeks to snuff out further losses, while fraud prevention is primarily proactive — its goal is to deter fraud or stop it from happening in the first place. Fraud prevention can also include reactive steps like resolving fraud and recouping losses, such as through legal action.
Fraud prevention isn’t free. But failing to protect against theft is just as costly, especially if regulators get wind of shortcomings. In May 2024, SoFi Securities was fined $1.1 million by FINRA for fraud prevention failures, including not maintaining adequate customer identification practices.
Benefits of fraud prevention
For forward-thinking businesses seeking to optimize their investments when complying with regulations, prevention can even pay for itself
A strong compliance program can:
- Reduce costly fraud events
- Deter potential fraudsters
- Protect against regulatory enforcement actions and fines
- Assure customers, investors and the public that the company is committed to safety, security, and integrity
Types of fraud
Depending on the industry and your user population, fraud can come in many forms. It can also come from the least likely sources.
Below, we highlight major fraud types and offer potential solutions to help reduce losses to bad actors.
Financial fraud
Financial fraud is the use of deceptive practices to directly acquire financial resources or assets. It is a criminal act that can range from register and revenue shortages to tax avoidance and loan fraud, and, perhaps most notoriously, money laundering. These crimes carry some of the most severe penalties from law enforcement and regulatory agencies across the globe. In recent years, these punishments have included companies being shuttered, billion-dollar corporate fines, and prison sentences for executives and individual perpetrators. Money laundering is especially targeted by law enforcement due to its ties to crime syndicates, drug cartels, terrorism, and human trafficking rings.
Solutions:
- Know Your Customer (KYC) and Know Your Business (KYB), its company-specific sibling, are widely utilized to prevent money laundering and other financial crimes. Their job is to ensure that companies know who their customers are, where they are located, and what their intended use of financial products is.
- KYC and KYB are umbrella compliance terms that encompass several processes, including:
- Customer due diligence, where additional documentary evidence and information are collected, depending on the risk presented by the customer’s industry, geographic footprint, and product usage.
- Identity verification, which involves confirming and screening IDs of users and other key individuals to confirm that they are who they claim to be.
- Transaction monitoring, which provides ongoing identification of suspicious activity.
Marketplace fraud
Marketplace fraud is any fraud that happens on online marketplaces—online sites where people or companies sell goods or services to other people or companies. (Think ticket resale sites, or Etsy, or Fiverr.) Often, fraudsters target weaknesses in technology during high-demand periods. For example, during the global rush to buy Taylor Swift tickets in early 2024, marketplaces saw an enormous amount of fraud, as fraudsters knew that in people’s rush to grab tickets, they’d be less likely to notice fake IDs or stolen credit card numbers and that emotional buyers will be less on guard and more willing to spend large sums.
Marketplace fraud is a vast category but can also include:
- Promo abuse occurs when promo codes and other purchase discounts are exploited for ill-gotten gain. Fraudsters, for example, may use promo codes to purchase items at a discount, and then resell them for a profit.
- Referral abuse which, like promo abuse, occurs when individuals create hundreds or thousands of new accounts to illegally take advantage of referral discounts.
- Fake accounts and related false product listings are used in nefarious pursuits to “sell” to fake buyers in order to launder money or to sell fake products to unsuspecting buyers.
Failure to address marketplace fraud can result in regulatory fines, negative experiences that erode customer and public trust, and a drop in sales and revenue.
Solutions:
- Link analysis is highly effective at identifying these types of fraud by sussing out patterns and outliers and searching for originations across sites and applications.
- Expanded identity verification, such as by assessing the risk of email addresses and phone numbers through analysis and screening for validity, age, and other important information.
Internal fraud
Fraud carried out by an organization’s own employees is considered internal fraud. This can range from activity like overusing employee perks such as free meals or unlimited time off to falsifying information or violating data privacy rules. The most severe forms of internal fraud, like embezzlement and insider trading, are felonies in the U.S.
Companies that do not carefully screen new employees and then train them on proper methods of privacy, secure record-keeping, and responsible data and financial management put themselves at greater risk for internal fraud. This kind of fraud can produce significant financial losses, reputational risk and even the demise of the company.
Solutions:
- Know Your Employee (KYE), which is an identity verification process conducted during hiring and onboarding, can help employers assess the risks of employees who might have criminal records or ties to sanctioned individuals or countries.
- Verification steps can include verifying identities, backgrounds, and credentials to confirm employees have provided legitimate information.
Education fraud
Cheating has come a long way since the days of stolen answer sheets and crib notes. Education fraud, or using deceitful practices to target educational institutions, loan providers, and students, is a money-maker for many bad actors now. Well-heeled families are paying for people to take their children’s exams and complete their courses. At the same time, thieves are finding ways to create fraudulent student identities in order to receive and disappear with ill-gotten student aid money from government and private funders.
Even legitimate student IDs and email addresses are being targeted now by companies losing money to student discount or promo fraud.
Solutions:
- Identity verification can help ensure that only legitimate students are accessing platforms.
- Link analysis can assess patterns in usage and determine if there are common or suspicious details across multiple accounts or profiles. Link analysis can recognize, for example, if certain courses are attracting high sign-ups from newly enrolled students with no academic rationale for taking the course.
- Email verification can validate email addresses for applicability.
Online fraud
Digital platforms are often ripe for online fraud, or deceptive practices designed to gain information, account access, or money from other people. Certainly, anyone who has tried to meet a partner online can confirm that social media and dating and networking sites are littered with fake profiles using stolen and doctored images of real people. Even online gaming platforms are being used for romance scams and pig-butchering schemes that have left victims in financial and emotional ruin.
Solutions:
- Government ID verification can help a company ensure that only legitimate individuals are using the platform.
- Link analysis can alert a company if suspicious external sites are being suggested to users or if common or suspicious details are appearing across accounts, profiles, or in user-to-user communication.
- Email and phone number verification can validate users.
Deciding the right strategies for your business
There is no “secret sauce” when it comes to adequate fraud protection. Every business needs to recipe-test what combination of solutions works best for their industry, location, customer base, and risk appetite, both now and as the company scales.
One way to determine which strategies to implement is to conduct a thorough risk assessment to fully understand where the gaps are in order to prioritize solutions.
Another option is to study the prospect-to-customer funnel and identify friction points where compliance, legal and human resources might be spending unnecessary time that could be better allocated to income generation or asset protection. For example, is the overall usage rate of an employee discount in line with the number of employees? Can individual use be drilled down to a team or even an individual? And is the verification or validation process appropriate, onerous, or underutilized?
How Persona can help
Persona’s products can aid in many of the above scenarios and beyond.
For example:
- Identity verification (IDV) can be installed for use during initial sign-ups
- Expanded data verification efforts, such as Selfie Verification, during high-traffic or high-risk events
- Graph, a link analysis tool, to understand how newly created accounts might be related
- Cases to make manual escalations and reviews easier to track
Want to learn more about how Persona can enhance your fraud prevention efforts? Contact us to learn more or get started for free.
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