Fraud Prevention & Risk Management: A Guide for Financial Services

Fraud can happen anywhere and to any financial service or institution. It can be huge, such as those reported by the media, but there are also minor incidences of fraud that are dealt with internally. Simply put, no financial entity is free from the risk; that’s why it’s vital to be proactive and set business fraud prevention protocols to protect against breaches. 

While advanced tools and technologies are helping businesses enhance their security systems, they can be a double-edged sword. Fraudulent activities have become more sophisticated; hence, cybercriminals also use innovative tools and methods to conduct data breaches and cyberattacks.

According to the Association of Certified Fraud Examiners Global Fraud Study, a business loses about 5% of revenue to fraud every year. 

With that in mind, you need to know what you can do to strengthen your business’s fraud risk management and protection protocols to address the vulnerable parts of your organization’s security system. This infographic details what you need to know about financial institution fraud, including the different types and ways to prevent it. 

Fraud Prevention & Risk Management: A Guide for Financial Services

Fraud on the Rise
  • In 2021, digital fraud attempts against organizations rose 46% around the globe, with the financial services industry (57.49%) experiencing the second-highest rise in suspected digital fraud attacks out of nine industries. (Source: Credit Union Times)
  • In the United States, financial services fraud attempts grew by 109%. (Source: GlobalNewswire)
  • Lack of internal controls makes for nearly one-third of frauds. (Source: Association of Certified Fraud Examiners)
  • About 1 in 8 cases of fraud were discovered by an external auditor or law enforcement personnel and 1 in 25 by non-owner executives. (Source: Business Fraud Prevention)
The Most Common Types of Fraud in Financial Services
  • Identity theft This can take the form of bank account or credit card impersonation by stealing or forging personal information to open accounts, transporting money, and conducting illegal activities.
  • Money laundering This pertains to the process of converting money generated through criminal activity to make it look like it came from a legitimate source.
  • IP infringement Intellectual property (IP) fraud occurs when one party gains access to another’s work and is copied or exploited without authorization.
  • Account takeover – This happens when a fraudster gains access to a target’s financial accounts and poses as a real user to commit fraudulent transactions.
  • Phishing This type uses email or pop-up notifications that appear legitimate, directing the victim to an unsecured site to steal their personal information.
  • Invoice fraud Invoice fraud involves scammers impersonating business suppliers and asking clients to update the payment details that invoices are paid to but diverting funds to their accounts instead.
  • Asset misappropriation This happens when an employee, executive, or business owner uses their role to steal from the company.
What Is Fraud Prevention & Risk Management? And Why Is It Important?

Fraud prevention and risk management is the development of a strategy to identify and prevent fraud risks. Evaluating the risk of fraud, both internal and external, is crucial to detect fraudulent activities before they happen and develop a comprehensive approach to mitigating and managing their risks.

The Principles of Fraud Risk Management
  • Governance Fraud risk management should be part of an organization’s core. There should be a governing body in charge of upholding fraud prevention protocols.
  • Assessment – There must be a concrete understanding of which areas of the company show opportunities for fraudulent attacks. Organizations must assess all types of risks and costs involved with each probability.
  • Prevention Fraud risk management involves using tools or internal controls to identify and stop fraud before it happens.
  • Detection Fraud risk controls or tools can be installed to alert employees about fraudulent behavior. Employees should know how the controls work and how to proceed following a fraud alert.

  • Monitoring & Reporting This should be done to constantly improve fraud prevention and risk management and develop a better approach for corrective action.
Data Security Measures to Prevent Fraud
  • Authentication: This technology verifies user credentials through PINs, passwords, or a swipe card. 
  • Biometric Facial Recognition: This authentication method measures and matches the user’s unique features for identity verification.
  • Encryption: Data encryption software heightens security by utilizing an algorithm and encryption key, converting regular text into ciphertext.
  • Tokenization: This involves hiding data or private information by concealing letters and numbers with proxy characters. The mask can only be lifted when authorized people receive the data.
  • Data Masking: Data masking is when unique random characters replace sensitive information without compromising the original data’s security. 

 

What Financial Services Should Do to Prevent Fraud
  • Perform a thorough background check on all new employees.
  • Secure your computer network.
  • Understand your business inside out.
  • Check customer or supplier details.
  • Determine if there are vulnerable areas for fraud.
  • Implement proper fraud prevention and detection strategy.
  • Know when to get professional or legal advice.
fraud prevention and risk management guide

 The Most Common Types of Fraud in Financial Services

All organizations are susceptible to business fraud, even tech giants like Google. This is mainly due to the different types of fraud cybercriminals who are trying to penetrate organizations.

Identity theft

Identity theft is an umbrella term for fraudulent activities done by criminals who maliciously obtain and use another person’s information, such as a bank account number, to perform a transaction without that person’s knowledge. This can go undiscovered until the victim receives their credit report and sees transactions they did not authorize.

A new type of fraud called synthetic identity fraud uses a combination of fake information to create accounts. One way to prevent synthetic identity fraud is by using a biometric data collection system for verifying information and transactions.

Money laundering

In simple terms, money laundering is an act wherein criminals make illegally obtained money (“dirty money”) appear legitimately acquired to conceal the actual source. 

Often, the dirty money is moved around or distributed to several accounts to cover its tracks and generate confusion. In addition, some money launderers move around funds in small increments and sneak them into foreign countries to fend off suspicion.

Intellectual Property (IP) infringement

IP infringement occurs when an asset has been sold, stolen, or distributed without authorization. An example of IP that financial companies safeguard includes online transaction systems, a developed internal software, and patents. A company can file an IP infringement lawsuit if a party is proven to have stolen trade secrets related to the company’s assets. 

Account takeover

Account takeover (ATO) is a form of cyberattack that involves the unauthorized ownership of online accounts using stolen usernames and passwords. 

Fraudsters typically purchase a list of credentials from the dark web that are often procured via data breaches, phishing methods, and social engineering attacks. They then launch a horde of bots across popular bank, ecommerce, and retail sites among others to test username and password combinations.

The ensuing list of valid credentials is used and abused or sold, so fraudsters get additional profit from this form of identity theft.

Phishing

Phishing attempts performed through email aim to trick users into revealing corporate login credentials, banking information, credit card numbers, and other sensitive data, effectively stealing and using them for illicit purposes. In 2018, financial services companies reported 93 cybercrime attacks, with more than half of them involved phishing.

Invoice fraud

Also known as business email compromise, invoice fraud is done by a scammer who poses as a vendor or supplier, asking them to pay for services that were never rendered to an offshore account. Tech giants Google and Facebook have fallen victims to this fraudulent act.

Asset misappropriation

Asset misappropriation occurs when someone from the company uses their power or position to steal from the organization. Examples include check forgery or tampering, falsifying sales to pocket commissions, forged expense reports, cash theft, unrendered services, IP theft, and credit card abuse.

What Is Fraud Prevention & Risk Management? And Why Is It Important?

Fraud prevention and risk management is the act of executing a strategy to detect, prevent, and address fraudulent actions against a company or entity and stop them from causing financial and reputational harm to customers and the organization.

A study shows that the implementation of anti-fraud controls is lined with lower fraud losses and faster fraud detection. Fraud prevention and risk management are essential to maintain your company’s integrity and avoid significant financial loss. Companies should involve the entire organization to tackle it strategically and be proactive to catch fraudulent acts before they happen or succeed.

The Principles of Fraud Risk Management

These principles establish an effective and robust fraud risk management foundation against data breaches and fraudulent attacks.

  • Governance A fraud risk management process should be included in policies to establish the expectations of senior management, stakeholders, and other team members about the nature and management of fraud risk.
  • Assessment This requires companies to do an in-depth evaluation and analysis of the risks present in the company, how they are likely to occur, how much loss they may entail, and how to build a strategy to counter them.
  • Prevention Prevention strategies are implemented based on understanding fraud risk policies, procedures, and events to protect whistleblowers and amplify fraud risk prevention from the top down.
  • Detection Fraud risk management detection techniques and tools are used to recognize fraudulent acts or events when preventive methods fail. These can include internal communication software that flags fraud while protecting the company and customer data.
  • Monitoring & Reporting The above principles must be continuously implemented, monitored, and reported. Companies use fraud risk management monitoring and reporting systems to ascertain if necessary changes or improvements address weaknesses for better prevention.

Data Security Measures to Prevent Fraud

Utilizing the right technologies can boost your security, but fraud risks can also increase if there are vulnerabilities in the system. Cybercriminals are adapting their methods to match sophisticated anti-fraud safeguards of organizations. Below are some examples of protection that you can incorporate into your business.

  • Authentication. Authentication tools are used to validate if a person’s credentials used to get into the database match the systems’ reference. Standard authentication technologies to verify an authorized user include passwords, PINS, tokens, biometrics, swipe cards, or a single sign-on method.
  • Biometric Facial Recognition. Facial recognition for fraud protection utilizes high-level accuracy technology and liveness detection to authenticate a user. Combining these features with spoofing detection and other verification methods strengthens biometrics facial recognition.
  • Encryption. Encryption is utilized for safeguarding sensitive information with ciphertext. To unauthorized people, the ciphertext is unreadable. A user can only decrypt it with an authorization or encryption key.
  • Tokenization. Tokenization represents and converts sensitive data into “tokens” of the same length and format. Unlike encryption, token values are stored in a secure database or internal system for use and do not need to be decrypted. Meanwhile, the actual data is on a secure platform.
  • Data Masking. This involves the use of unique or proxy characters to “mask” sensitive data. The data lies behind the masking and can only be retrieved and returned to its original value when an authorized user receives it.

What Financial Services Should Do to Prevent Fraud 

Business fraud, especially for those in the financial service industry, can seem terrifying and complex to understand—and the financial and reputational loss can be massive if not given the attention it needs. But there are ways you can take action, protect your organization, and reduce the risk of fraud. 

Here are some preventive measures you can take to maintain security and safety for your business and staff:  

  • Know that fraud can come from anywhere, even from your employees, so it’s vital to perform a thorough background check.
  • Secure your computer network, back up your systems, and protect your IP against cyberattacks.
  • Understand your business inside out—how you operate, your target audience, the products or services you offer, and the cash flow, among others. This can help you instantly recognize if there’s something suspicious.
  • Check customer or supplier details and understand who you do your business with to spot requests or transactions that don’t feel right.
  • Determine if there are vulnerable areas for fraud within your organization.
  • Implement appropriate fraud prevention and detection strategies along with fraud controls and procedures.
  • Know when to get professional or legal advice to prepare for the worst and minimize potential fraud losses.

Related: 6 Fraud Prevention Tips for Businesses

The Bottom Line

Make sure to have the right understanding of fraud risk to take practical steps and establish enhanced procedures for prevention, detection, and response. Starting with the basic principles, understanding the common types of fraud, and knowing the various ways you can mitigate them and boost your security are excellent precautions to start with to avoid becoming a victim of fraud. 

To strengthen your company’s fraud risk management, you can reach out to Q5ID, a data security company that can help you set up biometric authentication and identity proofing for more robust data security.

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