As the economic outlook around the world steadily worsens, the one area that is guaranteed to see growth in 2023 is fraud. So, this paper focuses on the ever-present threat of frauds and scams from criminal elements who use deception in its many forms to dishonestly make personal gain at the expense of their victims.
Fraud is not a possibility; it is a reality so financial institutions (FI) must become proficient on how to deal with several suspicious incidents on a permanent basis. Senior management must establish systems and controls to prevent or detect fraud, errors, and weaknesses of internal controls. In addition, a strong and efficient internal audit department would be critical to catch any risk exposure to error or fraud in time to prevent damage to reputation.
The control environment should be adjusted to fit with the degree of fraud risk exposure, therefore, the resource cost of reviewing and verifying efficiency of systems and controls can be significant but important enough and well worth investing in.
Fraud Trend for 2023
Here are some of the fraud trends anticipated for 2023:
AML Technology:
Due to the changes in the global landscape following covid, criminals have found ways to master the transfer of their illegal funds from one place to another using technology in the financial ecosystem. A particular focus area is cryptocurrency. Financial sectors continue to reel from the collapse of FTX in the United States in November 2022. Many people are saying that the demise of the world’s second largest cryptocurrency exchange came as a result of dishonesty rather than mismanagement, despite protestations to the contrary by former CEO Sam Bankman-Fried.
It is time for FIs to explore how the rising popularity of cryptocurrency, advancements in digital identification technology, and regulatory rumblings regarding scams and fraud will affect consumers in the coming months and should be on the lookout for consumers who look to them for guidance on crypto investing as the digital currency continues to gain momentum with consumers.
FIs must also be prepared to educate consumers on the basics of crypto and scam threats. Wider acceptance of digital identities and mobile IDs is also on the horizon. Consumers are more likely to accept digital advancements as many daily tasks and activities have become digital-centric, but privacy concerns and the idea of an additional attack surface for cybercriminals may introduce some roadblocks. It should be noted that concerns over spiralling fraud and scams in the P2P arena have regulators doubling down on financial loss liability, creating a significant need for clarification in responsibility between FIs and consumers.
Identity fraud:
Identity fraud continues to rise, so any forward momentum in technology, currency, and regulations from financial institutions, financial services technology providers, and government entities must bear in mind that fraud is still a serious issue affecting millions of consumers and needs to be immediately addressed as we head into 2023.
A couple of examples of identity fraud includes front business owners where a company presents a “front” owner — someone who looks clean — and “hides” the true UBO of the company and account takeover via duplicate card request and additional signor’s to accounts. It is worth bearing in mind the sanctions breach risk particularly where oligarchs are looking to hide their assets by using front people.
Insider fraud:
Due to increase in cost of living, employees or staff of companies and businesses may see an increase in internal fraud which can take many forms such as payment fraud, procurement fraud, payroll fraud, false invoicing etc. Internal audit departments should be on the look out for fraud trends in this area.
First party fraud:
Cases of fraudulent conduct by first-parties is likely to increase in 2023 again due to the cost of living crisis. Most of these cases involve the misuse of bank accounts, but also includes false applications for finance, selling a financed asset and submitting a false insurance claim.
Counterfeiting:
Trade finance operators beware! Counterfeiting is set to see an increase in 2023. It is one of the examples of fraud incidents or fraud types that may result in significant and extreme financial consequences for firms. The use of emerging and modern technology by fraudsters enables them to counterfeit and produce realistic-looking materials and packaging to fool legitimate traders including wholesalers and retailers.
Final Thoughts
Fraud can have a devastating effect on firms. A word of warning for FIs to look out for emerging trends in 2023 whilst ensuring that consistent robust and sustainable systems and controls are in place to prevent fraud. We at Kharis & Knoble are Risk and Compliance Consultants and specialise in providing support for financial and non-financial services companies and regulators in the UK, EU, Middle East and Africa to leverage an effective and sustainable AML, Fraud and Anti Bribery and Corruption environment as a competitive advantage and driver of business growth. Please contact us for further information.
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