Fraud is a major cause of revenue loss for many organisations, particularly those in the financial services, retail banking and telecommunications sectors. Despite the attention of regulators and companies' investment in controls, it remains one of the most problematic issues worldwide. In the current climate, with revenues under pressure and cost management a focus, effectively and efficiently tackling fraud is a real priority for organisations across the globe.
We at Experian detect five emerging fraud trends that we believe pose threats to businesses in Asia Pacific: rising first-party fraud, mortgages as focus of applications fraud, increasing insurance claims fraud, targeting of mass consumers for fraud, and surging insider fraud.
The following are the five emerging fraud trends and an explanation of the threat they represent to businesses in Asia Pacific.
- First-party fraud levels will rise: Fuelled by financial stress from challenging economic times, more consumers are manipulating their own details to obtain financial services.
In the commentary on its Global Economic Crime Survey 2009, the PricewaterhouseCoopers (PwC) leadership team maintains that fraudsters need an incentive or pressure to engage in misconduct and an opportunity to commit fraud. The impact of the economic downturn and ongoing financial climate across the region has put a lot of pressure on job security, with people often feeling pressured about their financial security. Reorganisation, job cuts, stricter cost management and more stringent targets are all having an impact.
In this climate, ethical judgment can be easily compromised. Interestingly, two thirds of respondents to the PwC Global Economic Crime Survey felt that increasingly difficult targets were the most likely reasons for greater fraud risk. In these circumstances, first party fraud (including insurance fraud) and pressures on staff to collude in fraudulent activity is likely to rise.
- Mortgages have become a focus for applications fraud: With the collapse of the sub-prime lending market, mortgage fraud rates in the mainstream mortgage market will rise in 2010.
Asia has some of the world’s hottest housing markets. The top four positions in the global index for the first quarter of this year compiled by London-based broker Knight Frank LLP are held by Asia-Pacific countries. China overtook Hong Kong as the world’s hottest housing market, with prices rising at more than double the rate of anywhere else.
Values soared by 68% in China’s main cities in the first quarter from a year earlier. Property values rose almost 31% from a year earlier in Hong Kong, and by 24% and 20%, respectively, in Singapore and Australia. The rise in property values in Hong Kong, India, Singapore, Australia, Malaysia and Indonesia helped to lift average prices in the Asia-Pacific region by almost 18%.
Increased mortgage and property-related fraud almost inevitably accompanies these sorts of growth rates. The risks are exacerbated by wider market conditions such as the fear of a property bubble in markets like China and Hong Kong, restrictions on loans, and larger down payment requirements. Some legislators and commentators have cast doubts over the cancellation of sales at Henderson Land's 39 Conduit Road development in Hong Kong. They allege that the developer tried to prop up property prices with fake deals. This type of ‘flipping’ and developer collusion has been a feature of the U.S. mortgage market prior to the crash and is something we at Experian have seen more recently in India.
- Insurers will see an increase in claims fraud: Consumers increasingly make insurance claims to acquire goods they can no longer afford to replace using their own resources.
Fraud has been at the top of the general insurance industry’s agenda for the last two years. As with other forms of first-party fraud, instances of insurance fraud rise in difficult economic times as financially stressed consumers look at other ways to generate money or obtain goods they cannot afford. The Korean Financial Supervisory Service has already seen the number of insurance fraud cases rise in line with the overall trend for financial crime. Experts estimate that losses from insurance fraud across the region can amount to as much as 10% of the claims paid.
There is also the risk of third-party threat in the insurance sector. As banks increase the sophistication of their fraud prevention systems, fraudsters will turn their attention to other institutions that they consider to be more vulnerable. Although insurers have taken steps to help them spot organised fraud rings and there are insurers that are incredibly sophisticated in how they detect and prevent fraud, the industry as a whole is still considered an easy target.
- Organised criminals are moving from targeting the wealthy to the masses: Fraudsters are casting their nets far and wide across the population to maximise their gain.
The bulk of identity fraud today is carried out by a few hundred sophisticated criminal gangs running identity fraud rings involving a complex network of middlemen, techies, hackers and runners, often recruited and managed via the Internet. Evidence of the growth in organised fraud across the Asia Pacific region can be seen in the numerous articles in the region’s media about the latest phishing scam, data breach or skimming operation.
Malaysian-born Gooi Kok Seng, aka Delpiero, a prominent member of a credit card fraud gang, which had been operating in the U.S. for the past three years, was arrested in Thailand in January 2010, in connection with credit card fraud amounting to US$150 million. In another case, police in 12 countries, including Australia, arrested 178 people accused of involvement in an international credit card cloning ring that was believed to have netted the criminals around €20 million. In India organised crime syndicates are typically smaller. They have created a sophisticated infrastructure to support the use of fraudulent identities to apply for a whole range of secured and unsecured credit, and account for a growing proportion of fraud.
- Insider fraud is expected to surge: From organised criminals through to an individual lying on a CV, insider fraud is expected to surge.
Whether from organised criminals, opportunists or simply candidates lying in a CV to get a job, Experian expects to see an unprecedented surge in fraud attempts over the next couple of years, as fraudsters seek to obtain assets or battle for jobs in a competitive market.
Insider fraud can originate in a number of areas from within an organisation and from a range of different types of people, such as individual opportunists. Improvements in anti-fraud measures designed to protect organisations from external threats have pushed an organised criminal element to new approaches. These include infiltrating the organisation themselves or coercing existing employees to act on their behalf.
The outlook for the future is that information and identity-related fraud will increasingly dominate the landscape as opposed to instrument-related fraud (e.g. specific card or cheque related fraud). This trend is being driven by increasingly sophisticated international fraudsters as well as by external features of the Asia-Pacific market. This trend is also a direct response to the increased security of payment instruments. Increasingly, organised criminal gangs are targeting consumers in the form of identity related fraud or financial service organisations in the form of targeting or compromising employees or deploying their own people inside those organisations.
The dynamics of the financial services markets across Asia provide an attractive environment for new players, providing a lucrative yet highly competitive marketplace in which organisations often have priorities other than fraud and risk management. Particularly in the more developed credit markets in the region or those with particular infrastructural challenges, the pace of development of new and innovative hybrid product offerings as well as a focus on cross-sell and up-sell opportunities provide more convenience for the consumer, yet significantly more risk to the banks.
Geographic migrationis another threat. Just as the adoption of the EMV (EuroPay, MasterCard, Visa) standard across the UK and EMEA was accompanied by the migration of skimming to the Asia-Pacific region, Experian expect to see other previously successful fraud typologies displaced to markets in the Asia Pacific region as they are successfully combated elsewhere.
Increased consumer expectations for real-time decisioning and real-time payments and the increased use of ‘immediate always-on’ channels like the Internet and mobile devices provide particular challenges. With higher levels of customer satisfaction, but also bigger challenges for effective fraud risk management, potential fraud losses can have a significant impact on your bottom line.
About the Author
Paul Smith is based in Hong Kong and leads Experian’s Fraud and Identity Solutions business in Asia Pacific. Experian provides a range of products and services that help clients know who they are doing business with and provide a sophisticated screening process at the point of application to allow them to assess fraud risk as part of the overall decision process.