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A Complete Guide to Loan Fraud: Statistics, Facts, and Prevention Tips

By March 20, 2023Blog

Cybercrime continues to be a prevalent issue. In 2021, Americans lost more than $5.8 billion to fraud, which is expected to rise in the coming years. Unfortunately, these crimes aren’t limited to individuals but are also a growing cause of concern for organizations and government entities.

PwC’s Global Economic Crime and Fraud Survey found that 52% of companies with more than $10 billion in annual revenue experienced financial fraud in the past two years. Smaller companies (with less than $100 million) experienced less fraud at 38%. Moreover, 1 of 5 respondents reported that their losses reached $50 million.

Whether you’re a huge or small enterprise or a consumer just abiding by their daily financial duties, financial fraud does not discriminate in the size of its target.

The fourth most common type of identity theft is loan fraud, as noted by the Federal Trade Commission. As you optimize your security infrastructure, a better understanding of loan fraud may help you avoid this threat through preventive measures that can inhibit major financial losses.

What is Loan Fraud?

In a nutshell, loan fraud is financial fraud that involves taking advantage of the loan process. It uses another person’s personal information to obtain loans with typically no intent of payback. They come in different forms depending on the method by which the loan is obtained.

Regardless of the reason, the loan fraud victim will likely experience decreased credit scores, or personal bankruptcy. Victims may also hurt their chances of obtaining future loans such as for a car, home, education, or other loan types.

Personal loan fraud

In personal loan fraud, the fraudster doesn’t need new identities. They’ll deliberately provide falsified information by exaggerating their financial situation to appear trustworthy enough for the loan they are applying for. One of the most popular cases is Ana Sorokin’s attempt to amass a $22 million loan from the Fortress Investment Group.

Second-party loan fraud

Second-party loans are typically committed by the victim’s family or friend. These fraudsters possess the victim’s information and make the loans on their behalf. This fraud is one of the most difficult to spot because the information provided to lending institutions will seem legitimate because of their relationship with the victim.

Identity theft

In identity theft, criminals use another person’s identity to obtain loans. They can get creative by also building synthetic identities. Synthetic identities involve meshing various information about real individuals to craft a new persona. This can increase their chances of taking bigger loans by building this fake persona’s credit score before striking for the huge loans they never intend to pay.

Loan stacking

Loan stacking involves stacking multiple loans into a person’s name simultaneously. It takes 30 days before loans display on an individual’s credit profile, making it the perfect time to get as many loans as possible.

About 197,967 loan fraud cases were reported in 2021, making up 8.5% of identity fraud cases of the same year. Fraudsters victimize people of all ages, but most of their prey are those with established credit scores from ages 30-39 years old, totaling 67,437 people. A consumer’s financial loss can also be a business entity’s loss because they’re prone to loans that fraudsters will never pay back.

Personal and business loans are the most frequent ways fraudsters steal from companies, mainly because they’re the most feasible ones to obtain. Financial fraud has been growing in previous years, and Consumer Sentinel Network’s annual data book calls loan fraud the 4th most popular type of identity theft.

How do scammers obtain these illegal loans despite financial institutions’ verification methods and protocols? The malignant actors know how to navigate through subtle loopholes.

How Does Loan Fraud Work?

1. Fraudsters gather sensitive information on an individual

It begins with the dark web. It’s no surprise that the dark web is a portal to many illegal transactions. Some marketplaces sell stolen or hacked user information which any hacker can obtain. These personal data are packaged via fullz—internet slang for a person’s full information. It includes a person’s first and last name, ID documents, and sometimes their credit card number.

2. They fabricate credit history

An impressive credit standing qualifies for greater loan amounts. Fraudsters circumvent this rule by purchasing fullz from individuals with excellent credit scores. In some cases, criminals choose children’s Social Security numbers because they’re a clean slate, and then they build up an impressive credit history before amassing copious amounts of cash.

3. They deploy OpSec tools to conceal their identities

Fraudsters keep themselves from getting caught by concealing their identities. They scrap location information from their IP addresses through IP lookup tools or spoof IPs using emulators and proxies. This way, no one will know or discover their whereabouts.

4. They create a synthetic identity and fake identification

  • Pass KYC (Know Your Customer) standards – IDs are no longer proof enough of someone’s identity because fraudsters easily acquire ID information via fabrication or dark web purchases.
  • Generate phone numbers – OTPs (One-Time Passwords) are one of the most common verification methods. Fraudsters mimic actual human behavior by generating phone numbers via specialized tools available in app stores to be used in burner phones.
  • Create a bank account – This can go two ways: via account takeover or an account hacking from online black markets.

5. They apply for the loan and cash out via crypto exchanges

Once the steps are completed, the fraudster applies for a loan. Less meticulous lenders who cater to niche demographics are prone to approving these fake accounts. After approval, fraudsters may immediately cash out from bogus bank accounts or place it in crypto exchanges for future use. A fraudster could easily try again with new synthetic identities when loans fail.

How to Prevent Loan Fraud

1. Familiarize yourself with various phishing/loan scams

Research is key. You must read about various deceitful methods that fraudsters use, like synthetic identities, and deepfake types. Knowing how criminals use these schemes and tools puts you at the forefront of fraud prevention. You may also investigate these two techniques:

  • Data phishing happens when fraudsters pretending to be part of a legitimate financial institution easily acquire data via SMS, email, call, or personal visits.

  • Predatory loan apps are unverified apps that post attractive to zero interest rates. Apps that do this do not conduct deep background checks and should immediately raise red flags on your end. When it’s too good to be true, it probably is a fraud.

2. Leverage biometric authentication

Fraudsters easily obtain IDs on the black market, so it’s best to require more information than just the single ID through the use of biometric authentication.

Most online applications require facial recognition by snapping quick selfies of the applicant while holding the ID they submitted. Facial verification software then scrapes the photo for verification and then confirms a match.

3. Validate identity data

Cross-referencing is crucial for lending institutions but is often neglected for speedy processes. By doing this, data with public and private databases often reveals inconsistencies and possibly flags synthetic identities.

4. Acquire financial documents from a bank or employer

To avoid loan applicants from easily tampering with documentation, directly request employers/banks for financial records. This way, fraudsters won’t have the opportunity to fabricate documents themselves because verification processes are conducted discreetly among business entities.

5. Validate bank accounts

Some bank accounts can be fabricated. Bank account validation ensures the applicant has an existing bank account by which they make loan payments. Verify the existence of a bank account by doing micro-deposits and asking the applicant for the actual deposit amount. If they answer incorrectly, then you spot a fake loan applicant.

6. Utilize knowledge-based authentication

No, you won’t ask the applicant about their mother’s maiden name or first pet’s name. These questions are already easily obtained via the dark web. It would be best if you asked the applicant about information that only they will know, referencing their credit reports, and asking about their previous purchases and other recent financial transactions via multiple choice questions.

7. Verify via phone and social media

Not every loan applicant will be social-media active, but this step is worth trying for added verification. Social media verification is a scrape of the applicant’s social media activity. After that, you’ll search for consistency in their pattern compared to other applicants in their area. You may also send push notifications to verify whether their device registers to a mobile network and other hosting sites.

8. Conduct a video/audio conversation

After cross-checking consistencies in documents, it’s often still best to meet the loan applicant in real-time. Some countries require a personal conversation with an applicant through video or audio calls. Loans are a serious matter. Once they fall into fraudsters’ hands, the loaned amount may be gone forever.

Protect Your Company Against Loan Fraud

Loan fraud affects companies and individuals. Financial losses are emotionally draining for every victim because every loss is well-accounted for. Despite billions of dollars lost, unfortunately, many of these cybercrimes are left unsolved due to the intricate anonymity of criminals.

 To help prevent loan fraud and the potential loan losses, explore financial fraud prevention. If you’re looking for a trustworthy digital security partner, you may request a demo with Q5id today.

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