While more and more cases of Ponzi-type investment schemes make headlines, another type of fraud is also on the rise.
In its latest survey, Actimize, a financial crime solution company operating in the Americas, Europe and the Asia/Pacific region, says first-party fraud is increasing.
First-party fraud differs from other frauds because there is no personal victim. The fraud is committed by an individual on their own account and for their own benefit.
“The customer actually perpetrates the fraud,” said Jas Anand, senior product and risk strategy manager at Actimize.” It’s different from third-party fraud where there is a personal victim. If I steal your credit card and use it, you are the victim of that crime that I’ve perpetrated.”
First-party fraud, on the other hand, involves such things as lying on a credit application, using false identification, knowingly depositing worthless cheques or empty envelopes in an automatic banking machine, attempting to exceed the amount of money available through such things as a line of credit or overdraft protection, and generally extracting more money than you are allowed from a lending organization.
“First-party fraud is part of a larger bucket of collections debt,” Anand said. “Collection losses in general have increased with the recent economic downturn, and as they increase, so will first-party fraud.”
According to Actimize, ATM debit card losses at North American banks increased in 2007 and 2008, and 80 per cent of those surveyed expect losses to increase in 2009. Collection losses can be as much as 10 times higher than third-party fraud because they are often unrecognized and unreported.
There are some common types of first-party fraud.
A “bust out” is a fraud committed when a client, who has been a good customer for a period of time, uses their good behaviour to gain access to a large amount of money which they then use with no intention of repaying it. Bust outs are frequently committed when a person is leaving a country.
According to Actimize, the British Bankers Association estimates that about 10 to 15 per cent of bad debt losses incurred by the banking sector in Britain are from first-party fraud. Losses in Canada are similar, although not as large.
“The U.K environment is exposed to a larger extent because they have more transient people in the country — students, short-term workers and a lot of bust out behaviour from these types of people,” said Anand. “We don’t have as much of that activity in Canada, but I still think it would be around 10 per cent.”
“Defalcation” is a first-party fraud committed when an employee uses their position within the company to commit any type of fraud.
“Kiting” is another type of first-party fraud committed when a client deliberately moves funds between two or more accounts at the same or different branches or financial institutions to disguise a lack of funds.
“Counterfeit” is either a first- or third-party fraud committed when an individual creates a phoney item and passes it off as legitimate, and a “worthless deposit” fraud is committed when a client deposits an item or items such as NSF or counterfeit cheques for the purpose of withdrawing money against funds in the account.
Anand said banks in North America and internationally are taking some steps to try and reduce potential losses from first-party fraud.
“What we’ve seen banks do is use broad-scale measures to reduce risk — credit card and overdraft limits are going down,” said Anand. “In essence, they are reducing the overall credit available to you. I think this is a harsh measure that can be toned down a little to allow good customers to take advantage of credit while still minimizing liability on the select few, higher risk accounts.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be reached at boggsyourmoney@rogers.com.