Schemes & Scams

The financial rip-off merchants are costing banks and their customers billions. ALISTAIR MCARTHUR reports on how the industry is fighting back.

The last thing any customer wants is the worry that fraudsters are ripping them off. But fraud in financial services is a massive problem in the UK: it costs £3.8bn a year, according to the National Fraud Authority (NFA).

And there’s a wider ripple of damage. The cost to the UK economy as a whole, says the NFA, totals some £30bn a year, £18bn of it perpetrated against the public sector, mostly as tax fraud.

But there seems to be some good news. As the latest figures from Financial Fraud Action UK show, the total fraud losses on UK cards fell by 28% between 2008-09 to £440.3m – a decrease of £170m on the previous year. It‘s the first time that card fraud has decreased since 2006.

Combined industry initiatives – such as Chip-and-PIN, the increasing use of sophisticated fraud detection tools by banks and retailers, and the work of the Dedicated Cheque and Plastic Crime Unit (DCPCU), the banking-sponsored special police unit – have all contributed to this fall.

“We’ve also seen a shift in mortgage fraud against banks and other lenders in the last 12-18 months,” says Richard Cook, Director, Financial Crime of the BBA, “from application fraud by consumers to corrupt professionals abusing the mortgage process.

“Unsurprisingly, there’s been a drop in levels of mortgage fraud by application, which reflects a much stricter economic climate but also strengthened checks on individual mortgage applications.”

The introduction of Chip-and-PIN, developed to tackle point-of-sale fraud, is seen to have been largely successful. But fraudsters have transferred their attentions to Card-not-present fraud, where Chip-and-PIN plays no part in the transaction.

“That’s why the industry has invested in and supports initiatives such as Verified by Visa and Mastercard SecureCode, as well as developing multi-factor authentication,” explains Cook.

Then, in October 2009, the National Fraud Authority launched Action Fraud, the UK’s first national fraud reporting centre for individuals and small businesses to report if they’ve been a victim. It also set up a joint public and private sector task force to combat fraud with more sharing of information and best practices.

“The task force, which has significant financial services representation, identified a wide range of barriers,” reports Bernard Herdan, chief executive of the National Fraud Authority, “and working together has already made significant progress.”

The timing of that detection could also help reduce incidences of fraud. Real-time fraud detection has already been adopted by those striving to keep at the front of fraud detection capabilities, according to FICO, which has developed the most widely-used measures of credit risk and credit scores and provides predictive analytics and advanced decision management technology.

“Real-time drives the lowest profit and loss figures and lowest loss per card which is important in migrating the fraudsters away from your issued cards,” advises Martin Warwick, principal consultant at FICO: “Using real-time in combination with the correct analytic tools – like profiling of targeted cardholders, merchants and ATMs – ensures that banks can make the right decision at the lowest level of customer impact.”

Identifying a fraud attempt is just the first step. Lenders then need to decide how to minimise losses as well as optimising customer loyalty. With suspected payment card fraud, banks usually have a choice of three responses: block the card straight away; confirm with the customer before processing the transaction; or allow the transaction to go through, followed by a call to the customer to confirm its authenticity.

“Understanding individual customers is key to this approach,” explains Warwick. “Someone with a long history of card use and prompt payment may have a transaction allowed through, despite a high fraud risk. The risk of decreasing his profitability by blocking the payment is simply too high.

“On the other hand, a new customer with no profit history may purchase the same item from the same merchant and, due to the risk presented by the merchant or transaction type, find his payment is denied or referred. He may be annoyed but, from the bank’s point of view, the risk of loss by fraud is higher than the risk of loss through a drop in customer profitability in this case.”

Guides to beat the Fraudsters
The BBA has a series of advice fact sheets – one aimed at bank staff, the others providing customers with valuable information on the problems they could face: £18bn

Vulnerable customers
It sets out the national banking protocol that should be used when an elderly customer wants to withdraw cash outside their normal routine, especially when they are accompanied by somebody who is unknown to the bank.

Two case studies show bank staff how the timely submission of a Suspicious Activity Report (SAR) assists law enforcement agencies. And there’s a brief description of some of the more common frauds such as advance and lottery schemes, share sale – or boiler room – fraud and rogue tradesmen.

Common frauds
This lists some of the most common types of financial fraud including telemarketing, West African letter/email, impersonation or identity, letter of credit and prime bank note. Schemes such as matrix/multi-level marketing and pyramid and property investment are covered plus investment-related ‘Ponzi’ and pyramid schemes.

Share-sale fraud
These are when consumers receive a telephone call offering an opportunity to buy shares that are of little or no value. It’s not just novice investors who are caught by this scam.

Identity fraud
This explains how identity fraud works; how consumers can recognise the crime; and what people should do if they believe they have fallen victim.

Online fraud
With online banking and shopping becoming more popular in recent years, this guide explains how fraudsters obtain information that they can use. There are tips about how to avoid being pulled in. Web links give consumers further information.

Payment card fraud
This type involves thieves stealing payment cards or obtaining card or bank account details to steal money or run up credit. The guide lists different types of payment card fraud, how it happens and what to do if the customer becomes a victim.

Cheque fraud
The guide has advice such as pointing out that a banker’s draft is not necessarily safe. It also explains that, if somebody is an innocent victim who’s had a cheque stolen and used fraudulently, it is likely they will be refunded.

Twelve tips
Many of the tips are not run-of-the-mill, but give helpful ideas that consumers might not have considered.

Many people wouldn’t know, for instance, to check the internet browser address for changes from ‘http’ to ‘https’ to indicate a secure connection or, when shopping online, to look for a padlock or an unbroken key symbol before submitting card details.

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