As our lives become increasingly digital, threat actors gain even more avenues of attack. With the average person spending about 400 minutes online, many scammers enjoy a heyday. Old impersonation scams continue to deceive people every day, as con artists and hackers are armed with advanced technologies and sophisticated social engineering tactics.
According to the Federal Trade Commission, financial fraud increased by over 30% from 2021 to 2022, with total losses surpassing $8.8 billion. This ever-evolving threat will continue to pose a real danger to consumers and companies until security teams can adapt to combat it.
What is financial fraud?
Financial fraud is any crime where someone uses illegal or deceptive practices to steal money or otherwise compromise a person or entity’s financial assets or standing.
Typically, most types of fraud involve a scam where the perpetrator uses stolen credentials, documents or authentication methods to deceive authorities and manipulate technology systems for illicit gain.
9 common types of financial fraud
Here are nine of the most common types of financial fraud in 2023:
1. Identity Theft
Identity theft occurs when a criminal steals someone’s personally identifiable information (PII), such as their Social Security number (SSN), name, address or date of birth. With this sensitive data, thieves can impersonate victims to take over online accounts, secure fraudulent loans and commit bank scams.
2. Tax Fraud
Tax fraud is the illegal practice of evading tax obligations. Companies might underreport their income, falsify expenses or otherwise “cook their books” to lower their taxable income. In November 2022, the stars of the reality TV show “Chrisley Knows Best” were sentenced to federal prison after being convicted of defrauding banks out of $30 million.
3. Credit Card Fraud
Credit card fraud is one of the most common types of financial fraud, as thieves can use stolen card information to create fake cards or make unauthorized transfers or purchases online. By 2023, retailers will lose about $130 billion on card-not-present transactions.
4. Romance Scams
In romance scams, impersonators establish online relationships with victims to steal money or personal information. The fraudsters often convince people to invest in a promising cryptocurrency scheme — but the fraudsters control this fraudulent platform. This scam recently cost a Texas widower $2.7 million.
5. Charity Scams
Charity scams happen when fraudsters persuade people to donate money to a fake cause or when the perpetrators misappropriate funds from a bona fide charity. In April 2023, a Utah man was selling flowers and asking for donations — to help a young girl get an organ transplant. After being arrested, he admitted it was a scam.
6. Check Deposit Scams
In check deposit scams, crooks trick people into cashing fake checks and ask them to send a portion of the money back via gift cards or cryptocurrency. A young graduate thought she landed a remote job as her “new employer” sent her a check for home office supplies. But after returning $4,500 in Bitcoin, the check bounced, and her new employer vanished, leaving her with bank debt.
7. Insurance Fraud
Insurance fraud is when someone makes false statements to obtain payments or benefits from insurance companies. For example, a con artist may stage accidents, fake injuries or inflate the cost of damages to get more money from an insurance provider. A Californian security company was charged with insurance fraud after hiding $1.6 million in employee compensation.
8. Deed Fraud
Also known as home title theft, deed fraud is a rare scam where someone forges a property owner’s signature or steals their identity to transfer ownership of the property. Once the thief has a fraudulent deed, they can drain the home equity or sell the property to an innocent buyer. From 2014 to the present, the New York City Sheriff’s Office received almost 3,500 complaints of deed theft.
9. Investment Fraud
Investment fraud has many variations, but most follow the style of a Ponzi scheme, where operators lure people with promises of a no-risk scheme that offers high returns. As more people invest, the operators line their pockets — until the scheme collapses, leaving victims with nothing. In December 2022, eight men were charged with running a pump-and-dump scheme that stole over $100 million in illicit stock market profits.
Protect against fraud
What security teams can do to combat financial fraud
Consumers place a lot of trust in financial institutions to safeguard their money and personal data. It’s up to security teams and developers to create robust applications that can keep consumers safe.
Here are five steps security teams can take to combat financial fraud.
1. Implement Multi-Factor Authentication (MFA)
As a first-line security measure, MFA requires users to provide multiple forms of identification to access an account or system. By insisting employees provide a second identification factor — like biometric scans or a hardware security key — there’s less chance of hackers infiltrating your network.
Action steps:
- Enable MFA for all user accounts, including employees and customers
- Educate users about the importance of MFA and show them how to set it up
- Regularly review and update MFA settings and protocols to stay ahead of evolving threats.
2. Conduct Regular Security Awareness Training
Cybersecurity teams need to be able to stay ahead of emerging threats. Ongoing training educates employees and users about the latest phishing techniques, potential security risks and best practices to avoid becoming a victim of financial fraud.
Action steps:
- Develop comprehensive training programs to keep everyone up-to-date with emerging fraud trends. It’s essential to nurture a strong culture of security awareness throughout the company — not just in the IT department.
- Conduct regular cybersecurity risk assessments to gauge your organization’s readiness for future attacks and plan clear protocols.
- Run war-gaming exercises to detect vulnerabilities in your security system or application before hackers do. This interactive training prepares your team for real attacks.
3. Improve Real-Time Transaction Monitoring
You can use advanced analytics and automated systems to analyze all activity on your app. By keeping a close eye on financial transactions in real-time, you can identify early warning signs and stop potential fraud before it’s too late.
Action steps:
- Set up alerts to warn security teams about suspicious activities, such as unusually high transactions on a customer’s credit card account. NIST AU-2 guidelines outline common audit events to consider, such as password changes, failed login attempts and administrative privilege usage.
- Deploy robust fraud detection and prevention systems to monitor transactions across multiple channels. As hackers use a multitude of ways to attack bank accounts, a cloud-based solution provides the best coverage.
- Continuously analyze and refine monitoring rules to improve reporting accuracy and reduce any false positives.
4. Focus on Data Protection Measures
The average cost of a data breach was $4.35 million in 2022. It’s crucial for companies to protect sensitive financial and personal data. If hackers sell data on the dark web, it can expose consumers to identity theft and leave companies and government bodies at risk of further attacks.
Action steps:
- Use virtual private networks (VPN) to encrypt sensitive data at all times — especially when sending information online. Getting your remote employees to use VPNs will help prevent hacks on insecure networks.
- Regularly update software and systems to address vulnerabilities. As developers release patches and improve systems, you can reduce the attack surface on your network and applications.
- Implement strict access controls and user permissions to limit data exposure. With these safeguards, it’s easier to protect consumers from hacking threats.
5. Collaborate With Financial Institutions and Law Enforcement
The more companies and security professionals work together with law enforcement and regulatory bodies, the better they will all be able to combat the threat of cyberattacks and financial fraud.
Action steps:
- Join professional networks to share information with other industries and law enforcement agencies. InfraGard is a free-to-join association that connects owners and operators within critical infrastructure industries to the FBI. Through this partnership, companies can provide education and share information on emerging technologies and threats.
- Attend industry conferences to exchange knowledge and best practices. Sending your security team to events like the RSA conference or ACFE Global Fraud Conference gives them the opportunity to build connections with fraud experts from outside of cybersecurity and learn new ways of identifying threats and mitigating fraud.
- Report any suspicious activities, like credit card fraud or tax scams, to the appropriate authorities and collaborate in investigations to learn how best to manage certain types of fraud in the future.
Adopt a hacker mindset to fight financial fraud
Data breaches that leak stolen login user credentials are a significant factor in financial fraud. While human error is hard to account for across millions of users and employees, companies can tighten security controls and improve practices to minimize the risk.
As cyber criminals evolve tactics to seize personal data and compromise financial accounts, security professionals must think like hackers to identify and reduce potential attack vectors. As we develop applications and networks that are secure by design, it becomes easier to thwart attacks and protect users.
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