With the continuous global evolution and rise of the digital world, the percentage of financial and other types of crimes also come into being frequently. Therefore, it is crucial to implement some regulatory principles and analyse financial fraud prevention measures to make your businesses securer. Well, it is no wonder that the internet is one of the weapons for many criminals to commit fraud and remain anonymous. That is why modern technology constantly strives to integrate cybersecurity frameworks for augmented security into your business.
However, according to Forbes, 33% of small corporations have been experiencing critical financial losses due to credit card fraud. This is due to the unrecognised internal issues that may leave your company facing further losses and ultimately reputational damage.
Therefore, it is vital to know about and apply some effective strategies to your business for financial fraud prevention and sustain your trust in your clients.
In this KYC AML Guide, we will take you through the five most effective tips and approaches for detection and financial fraud prevention to power up your business in the market.
Types of Financial Frauds in a Business
Before taking measures towards financial fraud prevention, it is crucial to analyse different types of fraud that are potentially occurring in your business. So, for successful financial fraud detection, look into the following types of fraudulent activities.
i. Identity Theft
Identity theft or identity fraud is one of the most common types of financial fraud that is committed by stealing other people's personal information. The individual steals someone else’s information that includes their name, date of birth, and some financial data such as account number or asset information etc. Other than this, by acquiring this information, the criminal can access and empty your bank account, leave you in new debt using your name, or maximise your credit card limit.
ii. Money Laundering
Money laundering is another type of financial crime. It is the process of concealing funds that are obtained through illegitimate means such as drug trafficking, terrorism, or other criminal activities. This process usually involves the transferring of these funds through multiple bank accounts or several organisations in order to hide their original source and make them appear legal. Money laundering is a serious crime due to which numerous companies implement anti-money laundering regulations to prevent their businesses from further fraudulent attacks.
Corruption and bribery include a wide range of activities that can lead to financial crimes such as getting shares from projects, influencing contracts to provide someone favours, or offering bribes to manipulate a company’s major decisions.
iv. Credit Card Fraud
With the increased trend of the digital world, credit card fraud is becoming more common. This type of financial fraud involves people who use debit or credit cards through illegal means. For instance, financial criminals may obtain credit card numbers through insecure internet connections and use this information for online purchases.
v. Insurance Fraud
Most insurance companies often encounter numerous financial frauds. They offer health insurance or other employees compensation. However, some of them may try to take advantage of these policies by claiming false accidents or fake illnesses. It may result in a higher loss for insurance companies or sometimes their clients.
Five Approaches to Financial Fraud Prevention
Fraud prevention in financial institutions or other sectors is a complicated process. Yet, adopting some modern approaches and strategies can make this complex procedure a simplified and more convenient one. Some of the most efficient strategies for financial fraud prevention are underneath:
i. Screening Customer
For almost every business, it is important to employ a trustworthy and reliable employee. However, banks and other financial companies often encounter numerous consequences in case they onboard a user who is not trusty. As per research by Clari5, 70% of banking frauds occur due to their own employees. This is because several fraudulent criminals seek help from bank employees to commit crimes. Therefore, it is essential to screen customers before onboarding them and investigate everyone working within the institution.
ii. Educating New Client
Hiring unexpectedly suspicious clients is one of the main reasons for successful financial fraud. Unfortunately, a lot of people and companies are unaware of such fraudulent activities and approaches to tackle them. Educating your clients and employees about several schemes and policies by sending them business press releases or through social media is one of the strategies towards financial fraud prevention.
iii. Alerting Customers about Suspicious Activities
In case you recognise any suspicious activity in your customer’s account, it is a good practice to alert him about the occurrence. You can either send an automatically-generated alert or ask them manually to participate in fraud detection in financial services. Since digital frauds have become very common and most likely to have occurred, you can alert your customers every time their card is debited.
iv. Monitoring Transactions
Another way of fraud detection in finance is monitoring ongoing transactions through your customer’s bank account. You can incorporate an automated transaction monitoring solution that can detect every transaction and implement financial fraud prevention for crimes like financing terrorism and money laundering.
v. Scoring Risks
Establishing an effective customer risk score management by pondering a variety of factors that deliver a meaningful scoring is one of the most efficient financial fraud prevention measures. However, make sure to build dynamic risk scoring and keep track of transactional and financial changes to ensure that the customers are being offered the right services as per their requirements and demands.
Financial frauds occur in almost every sector, whether it’s a small or large business, or despite its geographic location. These types of frauds can result in significant financial loss, reputational damage, and ultimately customer loss that can lead to a company's downfall. Hence, adopting appropriate plans and policies and implementing them within the organisation can drastically reduce financial fraud.
In this blog, you learned five different types of fraudulent activities and some approaches to financial fraud prevention. Anyhow, if you’re more concerned about the cost of implementing these strategies, then remember that the cost of preventing these crimes is more affordable than facing huge financial loss.