Four Faces of Fraud: Identity, 'Fake' Identity, Ransomware & Digital Realizing the wide scope of fraud should be at the top of every business executive's to-do list. Here's some practical advice to help you stay safe.
Fraud has a long history. Old-fashioned confidence schemes, scams through the mail (such as fake lotteries) or via telephone (false bill and tax collectors), and cyberattacks all share a common thread: the desire for easy cash by criminals who may never see their victims in person.
Business executives and their teams of systems/security operations pros running any critical network of devices and people — from banks and government to tech companies, insurers, and retailers — are realizing just how pervasive fraud is. The biggest development is that fraudulent activity is coming from a multitude of sources, both human and machine. While ransomware and phishing attacks show up in the headlines, fraud is often an inside job, conducted by unhappy employees looking to make some quick money and get revenge on their company.
But the main goal of most thieves is financial gain; they can achieve it by obtaining personally identifiable information, manipulating identities, and making transactions. Or they can work from inside of a company, obtaining common business practices and policies so that they know how to avoid them; this could mean working closely with a compromised employee who also stands to gain. Here are four major types of fraud:
1) Identity theft: Criminals steal an existing identity to commit fraud and rob an institution; they often get one chance at this crime before their activities show up on a person’s credit card statement, and thus damages are limited. Much identity theft today is carried out via email and text-message phishing schemes, either targeting large groups (such as all employees at a company) or a single person, based on his or her worth.
2) Synthetic fraud: Some criminals have used various forms of synthetic fraud, meaning the creation of a fake identity. This can, for example, be used to steal new cars from dealers or receive tax refunds and other undeserved payments. Instead of using a real name, criminals choose a new "synthetic" identity and then pick up the car they ordered and drive away. Banks are now losing more to this crime than ever before — around $2 billion per year, per research from TransUnion.
3) Ransomware: Ransomware has exploded in the past few years. Hospitals have been entangled with ransomware that encrypts their information and demands a Bitcoin ransom since 2016.
4) Digital fraud: Cyberattacks have a different feel — but despite the high-tech gloss, the result is the same. The motivations for such attacks can be blackmail, embarrassment, or both. Think about the 2015 Sony Entertainment hack, competitive spying (such as how Uber spied on Lyft), and even political objectives. Lastly, fraud and attacks may be motivated by social objectives, such as how users of 4chan target their perceived enemies — in one case, the social blogging site Tumblr.
Reputational damage can be severe for brands, particularly those centered around security or data quality. Because an increasing amount of the value of a company is tied up in its brand, the consequences of reputational damage are always increasing.
The results of fraud and cyberattacks are as varied as their potential targets. While having a few systems caught up in a botnet or having some cryptomining software running on your enterprise servers probably won't make too much of a dent, this can lead to worse consequences. Financial losses, legal or regulatory liability for organizations holding certain types of information or failing to meet service-level agreements, diminished competitive position, or loss of trust from customers and partners are all midlevel consequences of cyberattacks.
Practical advice to help your company avoid the perils of fraud includes having an end-to-end strategy that starts with assessing the situation and taking a pre-emptive strike on losses. Of course, companies will vary in their tolerance for fraud, based on possible losses and exposure; and thus, their approach to fraud protection will need to fit appropriately. Here is some step-by-step best practices to follow:
- As a first step, set parameters for the types of fraudulent activity that your organization will be focused on.
- Build a comprehensive list of the different ways someone could defraud your company, and then rank the easiest and most damaging paths to fraud.
- Introduce more-thorough background checks for any employee or contractor connecting with the company in the hiring process.
- Structure ongoing checks in the future, of the same persons. Case in point, no one with a criminal record (even for a petty crime) would be eligible to be employed by banking and credit institutions or government agencies.
- For businesses that involve sales of products, such as retailers, think about warranty fraud. Realizing that a certain percentage of customers will make false claims for refunds, and building rules and policies against this, will enhance defenses.
- More-advanced steps, applied to companies with thousands of transactions (such as medical or insurance billing), involve taking advantage of data mining, and setting up a system and algorithm that correlates past anomalous patterns that may be fraud, and then enables real-time alerts that stop the crime in action.
- Get outside help: In many cases, hiring a consultant with deep experience in loss prevention can be a worthy investment.
- Seek the company of others in the fight against fraud. Many industries are creating consortiums and forums that gather business leaders together to share ideas, isolate new and emerging scams, and define best working practices that may become a new standard in the fight against fraud fight.
As business leaders, start at the foundation of your business to prevent fraud, and teach your management and staff how to think about losses and the behaviors that may cause them. Put practices in place, starting with background checks, monitoring systems, and other methods that make outsiders earn trust.
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David Shefter serves as Chief Technology Officer for Ziften Technologies, where he brings an expansive background in security, IT, and emerging technologies for finance. Previously, he served as Senior VP of Innovation and Emerging Technology at Citigroup. Shefter is ... View Full Bio