This article offers insights concerning seven ways that financial crime is evolving and posing new threats to businesses. By tracking the statistics of economic crime, one can reveal the evolving trends that define fraud – an awareness that empowers businesses to understand the threats they face and take the steps necessary to mitigate them.
1.) Lower Incidence Rates of Financial Crime
According to PwC’s Global Economic Crime and Fraud Surveys, the incidence rate of economic crime has declined three percentage points over the last six years – compared to 49% in 2018, 46% of respondents experienced an incident of economic crime in the last 24 months. This is progress and a sign that fraud prevention measures are working. However, while the incidence rate has decreased, the total losses from economic crime have increased.
2.) Higher Losses from Financial Crime
Despite the decreasing number of incidents, the total losses from financial crime have been increasing. In South Africa between 2018 and 2020, total losses increased by 4%, totalling more than $1.7 billion (more than 25 billion South African Rand). 7% of South African incidents reported losses of between $50 million and $100 million, while 4% reported losses of more than $100 million.
Notably, losses from financial crime and difficult to quantify. In reality, the real losses from financial crime incurred by a business go far beyond the immediate loss of capital and instead include factors such as missed business opportunities, reputational damage, loss of market position, rife distrust, and negative impact on morale and productivity.1
Although these factors are incredibly important and have a real-world impact, they are difficult to quantify and are therefore often overlooked when considering the losses suffered by victims of financial crime.
3.) Changing Perpetrators of Fraud
A crucial development is the shifting of risk from internal to external perpetrators of economic crime. In 2018, internal perpetrators were responsible for 40% of all economic crimes experienced by businesses.
In 2020, 36% of economic crimes were committed by external perpetrators, 41% by internal perpetrators, and 21% by collaboration between internal and external perpetrators. In total, 57% of economic crimes involved an external perpetrator. In 2022, of the most serious/disruptive incidents of fraud experienced by the surveyed companies, 43% are external perpetrators (2% increase compared to 2020), 31% are internal perpetrators (7% decrease compared to 2020), and 26% is collusion between internal and external perpetrators (5% increase compared to 2020). In total, 69% of all the fraud experienced involved an external perpetrator.
4.) Drastic Rise in Customer Fraud
PwC only introduced customer fraud as a category of economic crime in 2018. Yet in 2020, it became the most prominent type of economic crime listed in PwC’s report – 47% of South African respondents had experienced it in the last 24 months, compared to 34% of global respondents.
Furthermore, respondents to PwC’s survey predicted that customer fraud would be the 3rd most disruptive economic crime for the next two years. Although daunting, the issue of customer fraud is one that can be addressed. While other types of economic crime such as bribery and corruption are far harder to tackle, customer fraud is one where “dedicated resources, robust processes and technology have proven effective in prevention”.2 KYC tools for identity verification and data validation hold the key to safer, more trusting relationships between businesses and their customers.
5.) Growing Threat of Business Partner Fraud
Although the threat of fraud committed by business partners has remained relatively consistent over recent years, the schemes have grown increasingly complex and difficult to protect against. PwC’s survey has changed since 2018, with questions in 2020 and 2022 asking businesses the perpetrator of their most disruptive incident of economic crime. In 2018, the report noted that “68% of external actors committing the fraud are ‘frenemies’ of the organisation – agents, vendors, shared service providers and customers.”
In 2020, respondents were asked to identify the external perpetrator responsible for the most disruptive economic crime incident they suffered in the last two years. 18% of respondents cited vendor/supplier, 15% cited joint venture/alliance partner, and 13% cited consultant/advisor. Combined, these three groups – all categorized as business partners of some form – were responsible for 46% of the most disruptive economic crimes against the responding businesses.
Fraud committed by a business partner poses a serious threat to businesses and risks destroying the trust which allows economies to operate smoothly. As this trust is being shaken, verified identities and proven strategies for risk assessment and risk mitigation are increasingly becoming the only way for businesses to ensure transactional security and protect themselves against the threat of economic crime.
6.) Slow Decline in Losses from Occupational Fraud
Occupational fraud – defined as “fraud committed by individuals against the organizations that employ them” – is one of the costliest forms of financial crime in existence. The Association of Certified Fraud Examiners (ACFE) estimates that today, organizations lose roughly 5% of their revenue to occupational fraud – a percentage that equates to annual global losses of over $4.7 trillion.
Nevertheless, the threat of occupational fraud is declining. Reflecting on trends from 2012 to 2022, the ACFE notes a 16% decline in median losses from occupational fraud and a 33% decrease in the median duration of fraud schemes. However, occupational fraud remains a significant threat to is evolving like all other types of financial crime. The percentage of cases involving corruption has increased from 33% in 2012 to 50% in 2022.
Comprehensive KYC protocols that include credit checks for new employees remain a crucial way for businesses to pick up on clear behavioural red flags of occupational fraud, such as living beyond means – the number one most common behavioural red flag since 2008.
7.) Continued Sky-High Growth of Social Engineering Fraud
When analysing trends of economic crime over the last eight years, no category of fraud comes close to matching the growth of social engineering fraud – a concept that encompasses phishing, smishing, vishing and spoofing.
The FBI’s Internet Crime Report details the immense growth of social engineering fraud. In 2017, the FBI recorded 25,344 incidents of social engineering fraud. By 2021, this number had grown to 323,972 – a shocking 1,178% increase in only five years. Furthermore, of the 847,376 total complaints of cybercrimes made to the FBI in 2021, 32.8% of them referenced a form of social engineering.
Social engineering is a broad concept that encompasses many different types of fraud – BEC scams, smishing, vishing and spoofing all fall under the category of social engineering fraud. To read more about the evolution of social engineering fraud, click here.
The Utility of Identity Verification, Due Diligence ad Risk Assessment Tools
Today, businesses are having to adapt to rapidly evolving threats that present new and complex challenges to be overcome. The threat of devastating losses from economic crime increasingly necessitates the use of tools for risk mitigation. By adopting and integrating tools for identity verification and data validation, businesses empower themselves to gather information and conduct world-class risk assessment and risk mitigation to protect themselves from the threat of economic crime.
Furthermore, new laws and regulatory compliance obligations compel businesses to meet adopt certain practices regarding identity verification, data validation and risk assessment and mitigation. Although these good practices are necessary to secure our economies against fraud, the growing portfolio of regulatory compliance obligations may present a challenge for SMEs that lack the knowledge and resources of larger companies. In such cases, partnering with a company that will ensure your business meets its regulatory compliance obligations as efficiently and cost-effectively as possible is paramount.
Due Diligence, Risk Assessment and Identity Verification Services in South Africa
As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience how our full suite of KYC, advanced due diligence services, risk assessment and data validation services can help your business adapt to a rapidly evolving threat landscape, book a demonstration by contacting our team here.
Citations
- PwC. Global Economic Crime and Fraud Survey. 2020.
- PwC. Global Economic Crime and Fraud Survey. 2020.
