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Reducing Risk & Fraud

Financial Crimes Predictions for 2021

Rene Perez
Feb 11, 2021

The time has come to close the year we will never forget and look forward to what 2021 will bring us.

But before we turn the page, I’d like to say as I look back at 2020, I will not only remember the bad times, like the pandemic but will also look at the bright side, like the family time I was able to spend with the ones I love. Human nature is such that we tend to concentrate on the bad and dismiss the positives as if good times are supposed to be constants

Looking back on what the fraud world delivered in 2020 we will no doubt concentrate on how high card fraud was; how unemployment fraud was the largest systematic fraud in the US; or how scams rocked your customers.

Yet the real headline was how the financial crimes world pulled up their sleeves and went to work in a world that was literally transformed overnight. Fraudsters and money launderers prey on 3 things: fear, desperation, and opportunity.

Navigating the Perfect Storm

Last year was the perfect storm for fraudsters. There was fear of the virus, fear of the future, and fear for our individual and collective well-being. There was desperation for many people as they lost their jobs, businesses, and even loved ones. Then, there was the opportunity for fraudsters to exploit all of that!

When the pandemic hit, months and years of modeling went out the window in a week, and how we spent our money as consumers all changed overnight. Fraud changed too and it was an unsurmountable task to immediately change with it.

In a matter of 30 days, most of the financial crimes teams had to fundamentally change too. Many were putting 50-70 hours a week into transforming their programs to make them efficient and effective in this new world. Not only did these people put in the time, they homeschooled, adjusted to working from home, worked on also keeping their families moving forward and some even got sick or cared for sick loved ones.

No Time to Go Crazy

It’s a surprise that many of us didn’t go crazy during this time. If you were like me, you didn’t have time to go crazy. It was one thing after the next and you kept checking things off your lists and trying to just get to the next day. That’s the headline we should be celebrating for 2020.

Therefore, I tip my hat to all the financial crimes teams out there fighting fraud and money laundering. Thank you, thank you, thank you for your time and efforts in this crazy year. Some people will only concentrate on the negative numbers and not how the hard work of so many kept those numbers from being even worse!

Now that I’ve gushed about the job everyone did last year, let’s get to my predictions for this year.

First, I want to lay down a few factors that will affect these predictions. If there are no other stimulus packages passed after this second wave, several provisions in the packages will expire. The one that will affect fraud the most is the “evictions stay” in the current package. If people have a roof over their family and their heads, people, in general, will not turn to fraud.

However, if that provision goes away and we start seeing some of the mass evictions that some people are predicting, we’ll see fraud rise even more in 2021. These evictions will start a recession in our country. How bad and how long only time will tell. What we do know from the perspective of a financial crime is that in every recession fraud has grown exponentially due to desperation.

So that being said, let’s talk about some financial crimes predictions, in no particular order.

1)    Insider fraud will continue to grow

What we did in the last year was move most people into a remote environment. In doing that, we removed some of the human checks and balances. The ability to keep someone “honest” because of people looking “over your shoulder” is no longer there. You couple that reduced oversight with some of the external pressures (finances, exhaustion, sickness, etc.) and employees become vulnerable to being recruited for or engaging in fraud themselves.

Also, the higher the position in the company, the greater potential for larger fraud losses. We’re already seeing some of those come to light. For example, a COO in a New York firm embezzled $4.5M. Another example is an Iowa City woman that was the only board member of her HOA who proceeded to misappropriate funds to the tune of $74,249.32 out of an HOA account! No company or organization is immune to internal fraud and with this massive, rapid switch to a remote workforce we’re primed for this fraud to continue to grow.

We never thought of all the checks and balances that needed to be in place for a remote workforce because we had to move to remote so quickly. As we start figuring out these internal checks and balances, we’ll start uncovering more insider fraud in the coming year.

2)    P2P fraud will increase

One thing this last year did was speed up the adoption of P2P. Early in the pandemic, we didn’t fully understand how COVID spread, and WHO and CDC officials mentioned limiting cash transactions. Businesses then started to ban cash and many people stopped using cash altogether. So much so, we had a circulation problem with coins. Companies that were still taking cash couldn’t find simple change anywhere.

People still need to pay other people and therefore we’re seeing the adoption rates skyrocket for products like Zelle, PayPal, Venmo, and the Cash App. Unlike cash where you physically must steal it from someone, the ability to steal virtually makes it easier for fraudsters. With faster payments comes faster fraud, and we’re already seeing an increase in account takeovers in the P2P channel. Both Venmo and Cash App reported increases in fraud during the pandemic.

With the expected P2P total volume to increase to almost $500B in 2021, we can expect to see greater fraud volumes. Something to really understand is these account takeovers aren’t always “the man behind the curtain” fraudsters. Many of them are people we know and sometimes even our own family.

3)    ID fraud – Traditional and Synthetic

How many of us heard “digital, digital, digital” in 2020? I know I did, and I know it’s something we talk about a lot at Jack Henry. However, digital is only a platform and institutions need to make sure they have the right policies and procedures around it. We’re becoming a more digital industry with the ability to service anyone anywhere. That’s an awesome thing! But this will also expose institutions to additional ID fraud losses if not managed correctly. When opening accounts was more a face-to-face practice, that alone was enough to deter a lot of fraudsters. It’s harder for people to keep their cool when they’re looking someone straight in the eye as they attempt to defraud them.

As we go more digital, ID fraudsters now hide behind computer screens and firewalls instead of coming into the branch. This is also perpetuated by all the data breaches we’ve seen over the last several years. These fraudsters have been collecting data, cross-referencing this data and putting it together in order to sell or use this data for their own profits. They’re identifying institutions that have lax processes and are exploiting them. The thing is these institutions probably don’t know it yet. ID Fraud usually takes time to identify (pun intended). This is why many of the fraudulent accounts will come to light in 2021 and even in 2022. Some institutions have better processes in place, both to validate identifications and confirm the person opening the checking, savings or loan accounts are actually who they say they are. These are the ones that will come out of this better than the other institutions that did not.

4)   PPP Loans

We’re already seeing elaborate stories coming out of how people defrauded the SBA loans. There was a case in South Florida where a person made up a business and used the loan money to purchase luxury cars. Another example is the Hawaiian CEO that took $12.8M in PPP loans and used $2M of that for personal gain. The PPP loans are essential, however with anything done that fast with little oversight, it’s a fraudsters playground.

The US government just approved an additional $285B in available loans. The first round of PPP loans has fraud estimates of up to 25% of the funds. Only time will tell how accurate that number really is. Now let’s say we took the lumps the first time and worked on preventing some of those same fraud schemes in this next round. We possibly could reduce that potential fraud number down to 15%. Simple math says that we could expect an estimated $42B in fraud in 2021.

5)    Scams

This is the most prevalent financial crime, but it falls in so many different categories that the true value is unknown. For an example, if I deposit a counterfeit check, it gets lumped into check fraud numbers. If it’s something that I pay using P2P and I don’t receive goods, it gets lumped into P2P fraud. If I pay for an item on a website using my debit card and never get the item, it’s lumped into debit card fraud.

In the U.S. it is reported that more than 10% of the population is scammed every year. That’s 32M people EVERY YEAR! It’s also the hardest to prevent from a financial institution’s perspective as the scam is against your customer/member and not directly against your institution. However, we’re starting to see governments convincing institutions to voluntarily reimburse customers that were victimized. The UK for instance is applying this pressure to its institutions. This is where different types of technologies emerged to help prevent some of these. For example, ever wonder when you pay a new person in Venmo why it asks for the last 4 digits of the phone number? That is a validation step Venmo put in to help with the scam pandemic we see around the world. It wants you to validate that you know the person you’re paying by adding an additional layer of security. I expect these technologies will continue to evolve and to be used around the world, including within US institutions adopting technologies to help their customers not become victims of external scams. This eventually might affect the bottom line of the institution in the future! I see this trend of scam reimbursement will continue to gain momentum around the world, including the US.

Above are some of the fraud trends I expect to see in 2021. Some “honorable mentions” that didn’t make my list above are:

  • Authentication becomes a bigger part of the fraud fight. We will see additional expenditures to step up authentication.
  • Merchant and Acquiring Fraud will gain momentum.
  • The Dark Web will become an even bigger player in fraud. Not only cards, usernames and passwords, but we’re starting to see an uptick in actual checking/savings information.
  • Card Fraud is settling into a happy medium between card present and card not present fraud.

I hope you work within your institution to think through and try to mitigate some of these risks. These are my predictions, and as always, and in a world of financial crimes, things can change in an instant.

When we’re in a world of future unknowns, the hardest thing to do is try to predict those unknowns. I’ll end with a quote from Karl Schroeder: “Foresight is not about predicting the future; it's about minimizing surprise.”

Good luck to all the financial crime fighters out there minimizing the surprise. Here’s to hoping that 2021 will be a better year for us all!

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