In the financial services industry, fraud has stood as a grim monument to the enduring nature of financial deception. Determining what different fraud types are trending and how they work can help financial institutions counteract hard dollar fraud losses.
1st-party fraud is one typology that continues to cause losses for financial institutions and their clients. This type of fraud is perpetrated by an account holder in their own name. Rather than stealing someone's identity or using a friend or family member's details, the account holder is who they say they are and uses their account to commit fraud—for example, applying for a loan with no intention of paying it back or filing a false chargeback claim. The scam here is an inside job, making it inherently more elusive. 1st-party fraud is especially disheartening to financial institutions, who are tasked with knowing their customers and ensuring that they are trustworthy.
Given the current economic climate in the United States, it is essential to understand the effect personal financial security has on 1st-party fraud. 1st-party fraud costs merchants $89 billion annually, with an estimated 60% of charge offs due to fraud. Nearly 62% of fraud reported by financial institutions is considered 1st-party fraud. Economic downturns or challenges might spur individuals towards 1st-party check fraud as an emergency financial lifeline. And those same economic factors might lead financial institutions to curtail vital investments like anti-fraud technologies, making themselves more vulnerable.
Recognizing the gravity of the situation, the Financial Crimes Enforcement Network (FinCEN) identified fraud as a national priority. FinCEN's emphasis underlines financial institutions' need to incorporate fraud within their risk assessment framework. It's no longer a discretionary measure but an imperative one. Moreover, an AML program that is robust and comprehensive becomes a vital component in this fight, with fraud detection software being essential. If they haven't already, it would benefit financial institutions to examine their AML and fraud functions to ensure collaboration between the lines of defense. Regulators will be expecting this as they examine institutions for FinCEN priority preparedness.