How to Fight Economic Crime with Enhanced Due Diligence and KYC

April 4, 2022 by Sam Strand

Sub 5-minute read

The Rise in Economic Crime and the Decay of Trust

Trust – understood as “our willingness to be vulnerable to the actions of others because we believe they have good intentions and will behave well towards us” – is the fabric that binds societies and economies together and ensures they can function well. The Covid-19 pandemic demanded more societal trust that ever before as peopleand businesses came together to overcome mutual challenges.

However, this demand for trust between individuals, business, and project stakeholders was often betrayed as criminals exploited people’s vulnerabilities for personal gain. Economic crime exploded during the pandemic and types of social engineering fraud reached record levels. This sharp rise of economic crime during the pandemic holds key lessons for combatting such crimes in the future. If we want to foster a stronger, more trusting post pandemic economy, learning from Covid-19 is not an option; it is a necessity.

Identity Fraud, Phishing Scams, and the Abuse of Vulnerability

The speed, unpredictability and consequences of the pandemic profoundly shook many people’s sense of safety and economic security. As noted by SABRIC’s 2020 report on cybercrime, “social vulnerabilities resulting from fear and confusion caused by the pandemic and adjusting to lockdowns were exploited by criminals”.

Phishing scams – a form of social engineering that tricks people into handing over sensitive information by exploiting the trust people place in authority – spiked to record levels during the pandemic. As cybersecurity systems become uncrackable, this exploitation of trust is becoming more profitable – social engineering has become the primary method employed by criminals when targeting victims across digital channels.1

SIM swap fraud, which is nearly always committed by phishing scams, increased by 91.35% in 2020 compared to 2019. In addition, over 92% of all mobile banking fraud was committed using SIM swapping, representing losses of over R42 million. Due diligence services that can detect incidents of SIM card swapping, such as ThisIsMe’s SimSwap service, are central to curbing this threat.

Shockingly, Business Email Compromise (BEC) scams saw a 30% increase in the first 100 days of the pandemic.2 The chaos created by the near-instantaneous shift to online communications at the start of the pandemic – combined with the lack of verified identities online – made it easy for fraudsters to exploit the disarray and phish for information using (BEC) scams. When conducting BEC scams, fraudsters impersonate trusted authority or business partners and send fraudulent emails that are designed to trick employees into giving away sensitive information or sending the criminals money. In the US alone during 2020, the FBI reported adjusted losses from BEC in excess of $1.8 billion.3

Social engineering fraud is only possible in the absence of verified identities; consequentially, verified identitiesare also the solution to such fraud. To find out how ThisIsMe can help you rebuild trust with verified identities, contact our team here.

Business Partner Fraud – Vendor Due Diligence and Supply Chain Risk Management

As the world battled Covid-19, criminals exploited the immense demand for PPE and other medical supplies. Mirroring global trends, the United States reported that non-delivery fraud, price gouging, securities fraud, misbranded products and identity fraud were alarmingly common at the height of the pandemic.4

In South Africa, investigations revealed how, during the height of the pandemic, fraudulent buyers fooled insufficient due diligence checks and scammed PPE suppliers out of millions of Rands of stock.

These examples of business partner fraud are not isolated. PwC conducted a survey of 245 South Africanbusiness respondents (174 of which were C-Suite). Respondents were asked to identify the external perpetrator responsible for the most disruptive economic crime incident 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.

Shockingly, however, 24% of respondents to PwC’s report had no third-party due diligence or risk monitoring program whatsoever, even though 20% of respondents cited vendors/suppliers as the perpetrator of their most disruptive financial crime incident. If businesses want to operate in an environment free from crippling distrust, this discrepancy must be addressed, and comprehensive vendor due diligence procedures adopted.

Fraud Risk Management with Enhanced Due Diligence

Fraud committed by a business partner is a devastating event. Of all South African respondents to PwC’s survey, 1/3 cited distrust as being the most significant emotional impact of such incidents. Of those organizations that had reported experiencing economic crime, nearly one in five South African respondents cited that they had also been accused of committing an economic crime. When assessing the likelihood of who would point the finger, 44% were competitors, 43% were employees, and 31% were customers. Only in a quarter of incidents did a regulator make the accusation.6 This growing culture of finger pointing highlights the damaging effects that distrust (caused by economic crime) has on an economy.

The years following the pandemic will be characterized by economies rebuilding and recouping the losses suffered during the pandemic. However, by undermining the faith we place in our transactions, pervasive fraud sows distrust and makes us shy away from investment – a pattern that has been proven to slow economic development.7 Restoring this trust is therefore crucial if we want to foster a strong economy in which people feel empowered to transact without suspicion or the fear of debilitating losses from economic crime.

To manage the risks of fraud, enhanced due diligence procedures must verify the identities of business partners to validate company registration details and the identities of the company directors.

Restoring Trust with Identity Verification Services

Trust, which is so fundamental to the well-being of societies, economies and nations, has been in decline for years. We are more suspicious of businesses, government and each other than ever before.8 The share of the global population that felt like most people could be trusted has fallen by 20% over the last 15 years.9

“Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time” – Kenneth Arrow, Nobel Laureate for Economics.

By undermining the faith we place in our transactions, pervasive fraud sows distrust and makes us shy away from investment – a pattern that has been proven to slow economic development. Restoring this trust is therefore crucial if we want to foster a strong economy in which people feel empowered to transact without suspicion or the fear of debilitating losses from economic crime.

Although it is essential to start rebuilding this trust, it is naïve to simply ask people to trust one another. The risk of loss is too high. Trust must be rebuilt on verifiable identities that can offer peace of mind by affirming the integrity of those we do business with.

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 our full suite of advanced due diligence services, book a demonstration by contacting our team here.


Citations

  1. SABRIC Annual Crime Statistics 2020. 
  2. Mimecast. The State of Email Security 2020.
  3. Federal Bureau of Investigation. Internet Crime Report 2020. 
  4. Congressional Research Service. “Covid-19 and Emerging Global Patterns of Financial Crime”. 2020. 
  5. PwC’s 2020 Global Economic Crime and Fraud Survey.
  6. PwC’s 2020 Global Economic Crime and Fraud Survey.
  7. Conal Smith. “Trust and Total Factor Productivity: What Do We Know About Effect Size and Causal Pathways?”. 2020.
  8. Edelman Trust Barometer 2021.
  9. Deloitte. The link between trust and economic prosperity. 2022.