12 Categories of Financial Misconduct

Financial institutions, being aware of the various forms of financial fraud, will enable them to protect their assets and maintain the trust of clients and stakeholders since fraud and illicit activities are now gaining more ground.

This extensive guide will provide insight into 12 categories of Financial Misconduct, offering brief definitions and practical examples, while focusing on best practices concerning the detection and prevention of these advanced illicit activities in finance.

1. Credential Theft

Credential theft entails a form of fraud through the unlawful acquisition and use of information like social security numbers or bank account details. Owing to technological advancement, the very means of effecting identity theft are becoming even more sophisticated.

Therefore, an employee in the financial services should be watchful and match any customer identities to prevent unauthorized access to accounts. Such accounts should be subject to strict customer-based authentication, in addition to constant vigilance against identity theft, with the ultimate aim of preserving the purity and integrity of financial transactions and, hence, the trust of stakeholders. Scammers use many forms through which one can perform identity fraud. They include-but are not limited to:

Phishing: Phishing involves using extremely bogus subterfuges to defraud knowledgeable people into surrendering their secret data, perpetrated mainly through annoying fraudulent emails or fake text messages. Some common impersonated bodies in phishing schemes include banks, regulators, or colleagues. Phishing with malicious intentions could range from collecting credentials from a login form to gaining access to private financial documents without authorization. It is very necessary to understand phishing as failing to hinder such initiatives can lead to heavy consequences; the whole operations run counter to the individual’s or even an institution’s footsteps in terms of security.

Physical theft and mail interception: A method that is not only rigged well but also quite simple can mean the successful stealing of the wallets of unsuspecting targets or the purses from the hands of women. It is effective because the victims of this crime provide personal identification and/or credit and bank cards to the perpetrator, who may easily use them. Another method some criminals use to identify information, such as bank statements. This means that they get into mail and garbage containers looking for sensitive material.

Exploiting large data breaches: Malicious actors can also exploit mass data breaches to access sensitive information, like clients’ or employees’ personal and financial information. Criminals gain unauthorized access through the exploitation of cybersecurity vulnerabilities.

2. Payment Deception

Those practices refer to the frauds on financial transactions such as credit card and check frauds. Financial institutions need to be in tune with the erratic behaviors in payments and exercise diligence when processing the transactions.

The strong anti-fraud measures such as real-time transaction monitoring plus verification checks can, therefore, guarantee the safety of a firm’s business assets and customer funds against unauthorized payments.

3. Automated Clearing House Scam

Examples of ACH fraud consist of acts whereby the offender manipulates or gains unauthorized access to the ACH system to create fraudulent transactions that divert funds from legitimate accounts. Techniques used with an evil purpose to compromise any sensitive account information in the ACH system may include account takeover, phishing, malware, and social engineering.

ACH fraud, considered in its entirety and in full depth, inflicts damages that are not counted simply in terms of economic loss or liability, but also include damage to reputations and regulatory considerations. In counteraction, strict authentication and continuous scrutiny with sophisticated fraud detection must be placed in financial institutions for electronic fund transfer systems as security measures.

4. Unauthorized Account Access

Account takeover fraud, or ATO, takes place when a criminal gets access to another individual’s online account in order to steal money or sensitive data. The approaches that these cybercriminals use can vary: it ranges from buying details from the dark web to using keylogging software to capture a password and email address.

If anything, even if the two concepts are not strictly synonymous, there are many similarities between them. Account takeover ATO is usually performed by either credential-stuffing or brute-force attacks.

Credential stuffing is the act of using automated tools and bots over a list or database to find a match. This is especially troublesome because, like most people, they have the same email and passwords on different sites. When one of them is breached, so are many. Brute force attacks include bots that guess a client’s password on a site by using random words.

In addition, educating customers always plays a great role in ensuring account safety. Employees must communicate the significance of multi-factor authentication to customers, assist them in the regular changing of passwords, and provide customers with an option to notify them of a request for an increase in their credit limit.

5. Upfront Fee Fraud

Regardless of the different variations of cold calls used for thousands of years, their frequencies have soared due to the increasing popularity of constantly evolving digital communication platforms in social media services, encrypted chat applications like WhatsApp, and unwavering dependence on email.

Advance fee frauds generally encompass the perpetrators inducing the victims into making some highly unfeasible investments or stupendous winning, such as winning a non-existent lottery, and thus extracting money from their victims by taking the bait as an upfront fee. Afterwards, the victim will find himself in a dead end or, if things get worse, will have to fork out more money to unlock access to even better prizes.

In this matter, FIs are quite important in the risk mitigation against advance fee frauds – the institutions ought to sensitize their customers to the signs of advance fee scams.

Both parties, sender and receiver, are required to authenticate and verify communications within organizations. Authenticity should also be verified for the outside organization in an instance where an entity does not correspond with the recipient, say, through reputable online sites confirming business registration. Staying aware of small details, misspellings of URLs, or the correct addresses in the message sent, is another example of a possible fraud scheme involved here.

The most common kinds of such scams include bogus loans, overpayment, winning lottery or cash prizes, vacation rentals, unanticipated inheritance, and investment possibilities. Customers should be counseled to be extra alert to such messages.

In addition, consider the overall message content, which should include the key indicators of an offer that seems too good to be true, unusual pressure, typographical errors, and a general reference to nonrefundable up-front fees.

Romance scams are becoming more common now these days. Thus, the scammers will tell a person that he is a potential romantic partner via social networks or dating apps and will drag him through emotional manipulation before putting that victim into trust.

Once the money is trusted, the scammer often asks his target to send money or invest in lucrative business opportunities that were often based on some cryptocurrency. These kinds of frauds are called pig butchering, and they fatten a person up before slaughter. Thus, FIs should use customer relationship management (CRM) channels such as e-mail or social media to raise awareness among customers with such ploys.

6. Card Cloning

Basically, the scheme to exploit a credit card forms one of the commonly perpetrated identity thefts. It involves an unauthorized use of the card to withdraw cash or buy goods in interest of a person.

There are two major types of card cloning: card-not-present (CNP) scam and card-present scam. CNP fraud is rampant nowadays, where stolen credit card information is able to facilitate numerous online transactions. These may involve either high-value purchases or bulk buying in order to abuse any potential downtime in detection response.

CNP fraud in offline instances could involve payment form filling with stolen information in either message or phone submission-stealing at physical locations, phishing through mediums like emails or texts, or using public Wi-Fi vulnerabilities further facilitates credit card fraud.

Card-present fraud is infrequently committed now because of the adoption of chip, PIN, and mobile payment technology. Card-present fraud consists of the criminal act of stealing credit cards in someone’s home or from a person, losing cards, cloning via skimming from ATMs or stores, as well as having new cards intercepted in the post.

FIs must have active measures to monitor and detect suspicious credit card activity, implement thorough transaction monitoring and fraud detection systems, and train customers about safe credit card usage.

7. Securities Fraud

Different schemes and methods of investment fraud enter into the various types discussed in this guide. Some of those will be more visible than others, as scammers will try their best to make any websites, documents, or details discussed look like the real thing.

Teaching the customers and staff to be alert for possible signs discussed below can provide extra protection from fraudulent investment schemes:

Be wary of cold calls unless you’re really sure of the person’s association with that company or organization. For every company that offers investment opportunities, check their online reviews and contact their local financial authority. Also request formal documentation regarding the proposal and seek professionals’ opinions in case one is unsure.

8. Retail Scam

Consumer fraud refers to the illegal actions that are designed to defraud a person or group of persons on a financial basis. Some of the most common types of consumer fraud include:

Identity fraud: Is the act of stealing online or physically a person’s identity or credit card details. Once stolen identity is assumed by the perpetrator, fraud will be attempted using unauthorized access to a person’s bank account and instigating a fund transfer to another bank account.

Property or Housing loan fraud: The topic deals with property fraud. It also deals with fraud in mortgages. Mortgage fraud is one of the most famous types of fraud based on the misrepresentation of facts in the mortgage lending process, where the consumer gives false information to obtain the desired mortgage loan or to affect the terms for admin of the loan.

False advertising occurs when a business falsely describes the qualities or benefits of its product or service in contravention to its legal obligations to ensure the accuracy of advertisements and subject to the scrutiny of watchdogs. Such methods are used mostly to make false statements concerning a drug’s effectiveness in enhancing health, mental prowess, or cognitive capacity.

9. Fake Donations

Fake donations misuse public goodwill by asking scam victims to give money for what appears to be charitable donation purposes. Sometimes, forged determined campaigns are produced, using names of reputable organizations or already established causes, even when they don’t exist.

Applicants who submit their card or personal information while giving donations on a website may be inadvertently exposing themselves to identity theft or credit card fraud because the crook will use those possibly for illicit purposes.

FIs can contribute significantly to the coercion of the entire process as far as protection against losing funds to fraudulent charities or organizations is concerned, by:

The transaction monitoring mechanism, or unusual pattern detection, is associated with possibly fraudulent charities. Numerous software options exist for FIs to configure alerts for huge or inconsistent donations.

Ensure a sound CDD process is in place that ensures thorough vetting of charitable organization applicants for account set up.

Real-time screening of charities against global watch lists and sanctions.

Keeping customers informed about red flags, including urgency, general mission statements, and contracts from charities they don’t recognize.

Promoting this kind of donation behavior should extend to storefronts with verified channels where donations are accepted through a charity’s registered site.

10. Fake Returns

The exploitation of fraudulent return activities generally refers to acts committed by customers to gain from the goods and services return systems through which most retail and e-commerce businesses suffer.

There are various forms of return fraud, including returning stolen property, using counterfeit receipts, as well as fiddling with return systems to acquire an illegitimate refund or credit at retail. Some of the typical methods include:

Receipt fraud: Generally includes stealing or falsifying receipts to return a product and benefit from the refund. It more subtly involves false advertising that accidentally leads to a reversal of an item’s value for profit advancements.

Bricking: That is a case where an offensive threat actor materialized an electronic item, leaving it unusable, and then returning it consequently, for some credits. We can also talk about switch fraud- which is where one buys a working item and attempts to return a previously damaged one just to profit from the returns policy.

Stolen merchandise: Where the item is stolen and then returned to get a full cash refund.

The best prevention and detection practices are transaction monitoring for return fraud patterns, like frequent or unusual return behavior. Companies should also implement biometric authentication and MFA to further screen customers making returns.

Collaboration with retailers is fundamental in sharing information regarding known return fraud cases and educating and combating future attempts together.

11. False Dispute Claim

Chargeback fraud constitutes a situation where the customer raises a dispute against the merchant through the payment provider without proper grounds. Chargeback fraud can have heavy financial consequences for both the FIs and merchants, not just causing unnecessary costs but further energizing other sinister activities.

To classify a chargeback as fraudulent, it is essential to differentiate between legitimate and fraudulent ones. Fraudulent chargebacks occur when the customers lay down false claims against the legitimate dispute categories, such as unauthorized charges or non-receipt of goods. Their resolution, therefore, requires businesses to show on their end that the charge was legitimately placed. When merchants suspect the claim to be unsubstantiated, they may choose to present a chargeback challenge, and therefore, the knowledge of legitimate and illegitimate grounds is critical for assessing where resources should be channeled to guarantee an effective prevention of unwarranted claims. The measures firms develop to prevent chargeback fraud should be part of a general risk management system.

To ascertain and validate claims that are disputed, full documentation used in the customer onboarding, detailed customer records, and transaction records are considered.

A transaction monitoring system that is effective can also uncover subtle patterns that can indicate fraudulent behavior, especially in the case of repeat offenders.

12. Digital Scam

Cybercrime is arguably one of the greatest threats emerging today against financial institutions, businesses, and individuals across the world. Money-laundering activities from cybercrime are projected to reach $10.5 trillion by the year 2025 as per some experts. The term cybercrime in general covers innumerable criminal activities occurring online, among them:

Phishing: As mentioned earlier, this involves fraudulent attempts to obtain sensitive information or steal an individual’s identity. A common swindle where cyber attackers ask for the identity of a person, generally a financial institution or else a well-regarded organization.

Malware: Malware means malicious software, referring to the ways negative entities exploit viruses or devious computer programs to damage an individual computer system or its devices.

Cryptojacking: Hackers secretly use a victim’s computer to mine cryptocurrencies without informing or consenting from the victim. This is usually after a successful installation of a malware.

Ransomware: Locking files and devices to deny access to users is what ransomware does. Ransom is paid, usually in cryptocurrency, to get the user’s files and devices unlocked by the cyber criminals.

In compliance with the Financial Action Task Force (FATF) recommendations, banks and financial institutions shall establish basic AML/CFT programs in a risk-based approach to address possible cybercrime threats.

This involves doing thorough risk assessments on customers and taking proportionate and commensurate responses. More specifically, in the area of cybercrime, companies must focus on identifying customers and on their continuous monitoring.

Identifying and Avoiding Fraud

In an everlasting fight against anyone attempting to commit fraud, financial institutions should apply best practices from this guide. Staff training and customer awareness programs will continue to be an integral component of a company’s defense strategy. Moreover, rules and policies are of utmost importance with fraud detection systems. With the use of AI, supported by rules, these systems protect businesses from fast-growing payment fraud scenarios.

Using appropriate software, it can create individual limits for FIs, which may trigger immediate notifications once potentially fraudulent conduct has been identified, thereby effectively preventing payments fraud, ACH fraud, and other illegal practices. Additionally, intelligent alerts offer evidence for the reasons behind the generation of each alert, resulting in a gain in efficiency for analysts and a reduction of possible 70% false positives.

In isolation, the Fraud and Anti-Money Laundering (AML) teams often confront common issues that may adversely influence their investigations of related persons or entities. Luckily enough, dynamic fraud software is integrated into a FI’s existing systems with great immediacy so that personnel and software are tightly aligned.

Lastly but most importantly, conduct regular forensic audits on different processes of your organization to ensure any potential attempts of fraud can be identified and addressed timely.