Financial Services Sector Fraud: With Examples

Financial Services Sector Fraud

Some emerging, or fast-growing, types of financial fraud include Synthetic Identity Fraud, using deep fake technology for identity theft, peer-to-peer (P2P) payment fraud, and the Paycheck Protection Program (PPP) Loan Fraud. Synthetic identity fraud is the fastest-growing type of financial crime, and deepfakes are an emerging technology criminals use to bypass biometric authentication. P2P payment fraud is becoming increasingly common as more and more transactions are conducted online, while PPP Loan Fraud has been in vogue from the beginning of the program.

1. Synthetic Identity Fraud

  • Synthetic Identity Fraud has been the fastest-growing type of financial crime involving banks, and one of the hardest to detect, in January 2020.
  • Synthetic Identity Fraud differs from traditional identity theft in the fact that the criminal creates a new identity instead of outright stealing one. The new, or “synthetic” identity is a combination of real (stolen) information and fictional information, which is why it is sometimes referred to as the “Frankenstein ID”.
  • The scheme typically starts with a criminal purchasing or randomly picking a social security number. Then, criminals add fake information, such as a birth date, to the identity, and then they slowly build credit over multiple years. Finally, they take out loans with multiple financial institutions, with no intentions of ever paying them back.
  • The US Federal Reserve conducted a comprehensive study on Synthetic Identify Fraud, and it found that the average charge-off balance per instance of fraud was $15,000. Since one criminal can potentially create thousands of synthetic identities, financial institutions are working hard to develop new identity authentication solutions that can identify synthetic identities.

2. Identity Theft Using Deep Fake Technology

  • Deepfakes are synthetic media in which an image, audio, or video of a person is replaced with the likeness of someone else.
  • Faking content in this way is not new but the actual method has now become very complex. Technologies like machine learning and artificial intelligence are often leveraged to create deepfakes, and they often result in content that is very successful at deceiving people.
  • Deep fake technology that spoofs the human voice is already being used to attack call centers, or in business email compromise scams. Now, banks are closely collaborating with financial technology companies to prevent the use of deepfakes.
  • Financial institutions are addressing deepfake fraud directly and publicly, attempting to alleviate customer concerns. A survey of 2,000 US and UK bank customers shows that deepfake crimes are the biggest worry among clients.

3. P2P Payment Fraud

  • The COVID-19 pandemic has pushed many consumers into using peer-to-peer (P2P) mobile payment apps such as CashApp, Venmo, and Zelle. These P2P apps often lack the same fraud protections as traditional banks and credit cards, and criminals are trying to take advantage of that.
  • While traditional “fake receiver” scams, which are typically targeted toward older people, often appeal to the victim’s sense of obligation to pay a fine or a bill they didn’t know about, P2P scams more frequently appeal to the victim’s own self-interest to have an effortless transaction or to make some easy money.
  • One of the most popular P2P cash apps is Zelle, and more and more traditional banks are implementing Zelle into their systems. Unfortunately, “banks that have launched Zelle — ranging from the very Top 5 US banks to small credit unions — report highly targeted fraud campaigns and an adaptive race with clever cybercrime rings who are quick to respond to new controls. In fact, by now Zelle fraud is the single most growing area of account takeover fraud in the US banking sector.”
  • The rapid growth of Zelle and other P2P payment fraud has prompted some banks to reconsider implementing P2P payment solutions for now. Other institutions are turning to cybersecurity experts to implement in-house fraud protection mechanisms that would be built on top of the P2P payment apps.

4. PPP Loan Fraud

  • Instances of PPP Loan Fraud, and other types of coronavirus-related fraud, have been increasing steadily in 2020.
  • The Small Business Administration’s (SBA’s) inspector general said there were “strong indicators of widespread potential abuse and fraud in the PPP.”
  • According to TransUnion, the percent of suspected fraudulent digital transactions rose 5% from March 11 to April 28 when compared to January 1 to March 10, 2020. In addition to this, more than 100 million risky transactions from March 11 to April 28 were identified.”
  • The US Financial Industry Regulatory Authority (FINRA) has issued a notice warning of the heightened threat of online frauds and scams brought on by COVID-19. FINRA has estimated that coronavirus-related fraud are more likely to directly target consumers and businesses, than financial institutions. For companies, FINRA urges professionals to monitor for red flags, which may include requests for payments or other activity coming in at unusual times, requests for changes to accounts accepting funds, or unusual language in messages, while also advising businesses to check via phone conversations to confirm any changes or requests are valid.

Financial Services Fraud Examples

Two of the biggest fraud cases involving financial services companies are the Wirecard Scandal and the Wells Fargo account fraud scandal.

1. Wirecard Scandal

  • Wirecard is a financial services provider and payment processor headquartered in Germany.
  • Wirecard operates internationally and has operations in countries such as Australia, New Zealand, South Africa, and Turkey. They also had a presence in the United States through their unit, Wirecard North America Inc.
  • The company had received allegations regarding its accounting and business practices years before the scandal was finally uncovered.
  • In 2019, Financial Times had published documents that had casted doubt on Wirecard’s business practices. The documents they have released contains internal company spreadsheets along with “related correspondence between senior members of Wirecard’s finance team.” The documents seemingly indicated that there was a “concerted effort to fraudulently inflate sales and profits at Wirecard businesses in Dubai and Ireland,” in an attempt to mislead Wirecard’s tier-one auditor, EY.
  • On June 2020, Wirecard announced that “€1.9bn of its cash is missing.” Wirecard had filed for insolvency on June 25th, 2020. Shares in Wirecard had crashed more than 60% when the news of the missing cash became public.
Crash
  • Following the announcement of the missing cash, Wirecard’s auditor, EY, said that there were clear indications of “an elaborate and sophisticated fraud involving multiple parties around the world.”
  • In June 2020, Markus Braun, the former CEO of Wirecard, was arrested on suspicion of market manipulation and accounting fraud.
  • According to the prosecutors’ office, Braun was detained on suspicion of inflating Wirecard’s balance sheet and revenues to portray it in a more positive light to make it appear stronger and more attractive for customers as well as investors. Three other managers of the firm were also investigated.
  • The fall of Wirecard has exposed the “lax regulation by financial services authorities in Germany.” In the short-term, “the Wirecard scandal is likely to accelerate the need for new regulations in the fintech sector in Europe.”
  • According to Agustin Carstens, the general manager of the Bank for International Settlements (BIS), as soon as new details transpire regarding the scandal, they will be able to make a decision on whether “further supervisory or regulatory action is needed.”

2. Wells Fargo Account Fraud Scandal

  • Over the last few years, Wells Fargo had been mired in a number of scandals, a number of them revolving around their sales practices.
  • Their public woes kicked off in September 2016, when they were imposed a $185 million fine by “the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the City and County of Los Angeles for the creation of 1.5 million fake deposit accounts and more than 500,000 fake credit cards, all in customers’ names and without their permission.” Wells Fargo then fired around 5,300 low-level employees “for creating these accounts under extreme sales pressure. “
  • Following the Wells Fargo fallout, New York governor, Andrew Cuomo, proposed new regulations on bank incentives. The state’s Department of Financial Services (DFS) has directed all state-regulated banks “to ensure any employee incentive arrangements do not encourage inappropriate corporate practices.” Under the new DFS guidance, “state-regulated banks can’t offer incentive compensation tied to employee performance without effective risk management, oversight, and control.”
  • In a class-action suit, Wells Fargo had “agreed to pay $142 million to the affected parties, which included millions of customers.”
  • A year later in 2017, a new estimate of 3.5 million fake accounts, a figure which is 1.4 million higher than the initial estimates when the scandal first became public, emerged.
  • In 2018, Attorney General Josh Shapiro announced that Wells Fargo will pay $575 million for “opening unauthorized accounts and charging consumers for unnecessary auto insurance and mortgage fees.”
  • Wells Fargo had agreed to pay a total of three billion dollars to settle the case over fraudulent customer accounts in 2020. They will pay the financial penalty both to the SEC and the DOJ. According to Inspector General Jay N. Lerner of the Federal Deposit Insurance Corporation, the multi-billion dollar penalty imposed on Wells Fargo will hold them accountable for their unlawful sales practices and pressure tactics which deceived millions of clients.

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