Mitigating the threats of (the increasingly prevalent) first-party fraud

Mitigating the threats of (the increasingly prevalent) first-party fraud

first party fraudA recent study published in 2023 showed that the number of first-party fraud cases is increasing. First-party fraud is similar to the more well-known ‘third-party fraud’, but instead of using another person’s identity, it uses a person’s own identity to manipulate financial details such as payslips and bank account balances and to falsify important documents for one’s benefit.

The main reason for this increasing trend in first-party fraud is the difficulty of its detection by banks, insurance companies, healthcare providers, and educational institutions. Using one’s own identity makes this practice more convincing than third-party fraud. Hence, first-party fraud is also known as “true name fraud”.

How first-party fraud can potentially cost your business

In the financial sector, up to 70% of all credit card fraud is attributed to first-party accounts. This costs the industry over US$132 billion annually.

Anti-fraud expert Frank McKenna, in a webinar called “The Rise of First-Party Fraud and Other 2023 Trends to Watch”, explained that first-party fraud is often one of the many underlying reasons for the business loss of credit companies. Applicants use fabricated documents which include altered bank account balances, transaction amounts, and other financial details. Approximately 50% of Small and Medium-Sized Business loan documents were found to have signs of first-party fraud.

First-party fraud is widespread due to the increasing number of fake document templates available online. Moreover, social media facilitates fraudsters in selling these templates and sharing counterfeiting techniques.

Infiltration into merchant systems

First-party fraud also targets business clusters, including e-commerce. This type of fraud costs merchants up to $50 billion annually, according to data.

The modus operandi involves exploiting loopholes in a company’s policies, which is also known as refund fraud. For example, a fraudster orders a laptop online. After it has been delivered, he contacts the merchant’s call center, claiming to have never received it. Even large-scale merchants can fall for this scam and process an unbefitting refund.

It is difficult to assume the intentions of these fraudsters since this type of fraud is committed by seemingly real customers using their own identities.

Mitigating fraud with due diligence

There are several mitigation measures that businesses can take to minimize the risk of fraud, as follows:

  • Invest in technology. Use the latest technology that supports the Know Your Customer (KYC), due diligence, and underwriting processes, to verify the authenticity of documents submitted by individuals such as ID cards, passports, and financial records.
  • Train employees and raise their awareness. Educate your employees to recognize any signs of potential first-party fraud and encourage them to report suspicious activity through whistleblowing channels.
  • Collaborate with other related parties. This is crucial, particularly for merchants to work with credit card issuers and leverage available data for enhanced defense.

The rise of first-party fraud emphasizes due diligence on prospective or actual customers, especially when large transaction values and high-risk factors are involved.

In general, due diligence covers the following two key elements:

  • Identity verification. Ensuring that the identity of a prospective customer matches the official documents provided, such as ID cards or company documents, can minimize the risk of fraud and ensure that transactions are conducted with legitimate parties.
  • Credit scoring. Examining a prospective customer’s credit record includes assessing credit history, credit score, and repayment ability, to ensure the customer’s trustworthiness for business.

Aside from the two elements above, several others can be taken into account to uncover a customer’s identity so that debtors or merchants can conduct business safely.

To carry out due diligence, businesses can work with experienced third parties who have in-depth examination methods. Integrity Asia provides comprehensive due diligence prepared by local experts and supported by the latest technology.


Image by Freepik

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