If the Covid-19 pandemic taught the financial world anything, it’s that financial criminals and bad actors never let a good crisis go to waste. With the launch of the Paycheck Protection Program (PPP) and the distribution of financial stimulus packages for qualifying American citizens levied to combat the unprecedented economic effects of the virus, fraudulent financial activity and scams skyrocketed, leaving government authorities reeling in their efforts to thwart white-collar crime. While the pandemic now plays a far less significant role on society today, the United States still finds itself in a difficult position economically, impacted by other local and global developments (i.e. the war in Ukraine and historic inflation levels and subsequent rising interest rates). As a result, the national GDP has fallen each of the first two quarters of 2022, leading many to believe that the country could be falling into yet another recession as we approach the new year. Unfortunately for regulatory authorities, this means that more trouble could potentially be on the horizon as, historically speaking, there are striking connections tying economic volatility to increased financial crime.
A recent article published by Fintech Futures discusses various elements that play into an economic recession and alludes to the fact that financial crime via different fraud exploits will likely be on the rise in coming months. An environment conducive to fraud usually depends on three distinct factors: opportunity, motivation, and rationalization. A recession represents a significant downturn in the economy and where there is a shift of this variety, there are generally weak points to attack—thus creating opportunity. When times are difficult financially for the average person, as they generally are during a recession, it also gives plenty of motivation to compel individuals to bend the rules and/or break the law in order to survive. When it comes to rationalization, it is easy to see how those of questionable character would justify committing a fringe crime given their personal hardships. Regardless of the factors playing into this trend, the concept that fraud rises during a pandemic is not simply theory. A survey conducted by the Association of Certified Fraud Examiners (ACFE) on the impact of the 2008 economic recession found that 55.4% of respondents saw a slight or significant increase in the level of fraud during that recession period. Over 49% of respondents said this increased fraud was due to financial pressures on individuals.2 The FBI corroborated the increase of fraud (specifically that of the online variety) in the 2008 recession when complaints of online fraud in particular rose from 200,000 to over 375,000 in a single year—an over 75% increase.1 With the financial sector far more digitalized today than it was in 2008, there are a plethora of new avenues available to fraudsters for exploitation.
The above-mentioned article also expands into several categories of recession-driven fraud that are likely to see (if they have not already) an exponential rise in prevalence in wake of these turbulent economic straits. Rental fraud involves falsifying information to acquire a property (such as lying about income to secure a rental). If not properly vetted, landlords later face issues with tenants that cannot afford to make their monthly rent payments. With income reduced, and both cost of living and inflation levels high – not to mention a national housing market wielding stratospheric purchase prices in many well-populated jurisdictions – this is expected to become more and more prevalent. Loan fraud was already on the rise in 2021 with a nearly 75% increase, and much like rental fraud, this crime involves falsifying personal information and misleading the lender in order to receive a loan (only to later default). The Federal Trade Commission (FTC) has identified student, personal, and auto loans as the most common types of loan fraud.2
Mortgage fraud saw its largest increase during the 2008 economic recession/depression. This type of fraud is generally carried out by mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders and bank and trust account representatives – these parties often tied closely to, if not working directly with, various financial service providers. Analysts expect this to rise again during this economic downswing. Investment fraud also usually sees an increase anytime there are more dire economic circumstances. The most prevalent methods of investment fraud remain notorious Ponzi and pyramid schemes.2
With the growth of account and identity fraud, as well as increasing cybersecurity risks now facing U.S. financial institutions on a daily basis, the system of checks and balances from a regulatory perspective has taken definitive steps forward over the past decade however. The one positive caveat that often accompanies difficult economic times is that they often spur businesses to conduct more detailed reviews of their own operations. While these circumstances often uncover even more instances of internal fraud, they are critical in maintaining their own financial integrity as well as that of their customers. Updating internal controls and risk assessments to better combat fraud tactics that are increasingly difficult to detect, as well as improving employee training regimens to better educate your compliance and general workforce on developments in this realm have each had good results with respect to limiting financial impropriety. For banks, software solution suites backed by artificial-intelligence and machine learning processes, such as those offered by Global RADAR, also allow for improved oversight and decreased risk of becoming a cog in a fraud scheme, generally at a far more efficient and cost-effective level than that of traditional manpower-backed processes.