Ancient scams to modern threats: How financial fraud costs us $3.7tn annually


In a recent post by Moody’s Analytics, the company offered a long-term perspective on the scourge of financial fraud and how much it costs us today.

Financial fraud has roots tracing back to ancient times. The FBI defines it as “The intentional perversion of the truth for the purpose of inducing another person or other entity in reliance upon it to part with something of value or to surrender a legal right.

Fraudulent conversion and obtaining of money or property by false pretenses.” Simply put, financial fraud involves deceiving someone to gain something valuable. One of the earliest documented cases dates back to 300 B.C. where a Greek merchant named Hegestratos tried to commit insurance fraud.

The impact of financial fraud is staggering, costing the global economy an estimated $3.7tn each year. Recognising its significance, the UK government has elevated financial fraud to the level of “threat to national security,” equating it with terrorism.

A key challenge in combatting financial fraud lies in its varied and ever-evolving nature. Moody’s Analytics Grid database reported over 16,000 new fraud risk alerts in July 2023 alone. Criminals exploit everything from public funds set up for Covid-19 relief to unsuspecting individuals through romance scams.

As fraud types multiply, so does the complexity of managing this form of financial crime. However, better fraud intelligence presents an effective countermeasure, particularly at the onboarding stage for new customers or businesses. Steps such as know your customer (KYC) or know your business (KYB) processes can thwart fraudsters’ attempts to infiltrate financial systems. These processes may include various checks such as identity & verification (ID&V), address verification, and negative news screening.

Ongoing control and mitigation are essential in a comprehensive fraud risk management programme. Companies like Moody’s Analytics offer digital solutions that help organisations establish robust reporting and investigation mechanisms, allowing for a swift response to emerging fraud threats.

To truly combat fraud, organisations need to adopt a dynamic, risk-based approach. Relying on static controls will only widen the gap between fraud risks and controls, leaving organisations and society vulnerable to evolving threats. By integrating rich data sources and staying adaptive, organisations can narrow this gap and contribute to a more secure financial landscape.

Read the full post here.

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