Wiki

Fraud

Fraud is an endemic problem and leaves many victims – from individuals to businesses and even governments. To protect yourself and your business from scammers, it’s important to recognise the different types of fraud, and what can be done to prevent them.

What is fraud?

Fraud occurs when someone wrongfully or criminally deceives an individual or company for financial or personal gain.

How is fraud punished?

In the UK, the punishment for fraudulent activity is determined by the Sentencing Guidelines Council, a government body that developed definitive sentence guidelines. The legal punishment depends on the extent of the crime and takes into account a number of factors, such as: the nature of the fraud, whether it was part of a professional operation, its duration, the value of the money or property involved, its impact on the victim and whether the victim was vulnerable.

A fraudster’s sentence can typically range from community service to up to ten years in prison, with additional ancillary, compensation, disqualification or confiscation orders.

What are the different types of fraud?

There are numerous different types of fraud, ranging from confidence fraud through to tax fraud and even election fraud. Here are the most common:

Banking, insurance and credit fraud involves fraudsters enacting payment card fraud, false insurance claims or obtaining a mortgage through false information. However, it can also occur on a much smaller scale, and comprise just a single fraudulent transaction.

Benefit fraud involves individuals submitting fraudulent information to receive more benefits than they are entitled to. It can also involve sophisticated criminal rings carrying out high-value benefit fraud. 

Confidence fraud is where the perpetrator wins the confidence of the victim and deceives them in order to gain money or property. This can include befriending someone who is vulnerable and then extracting money from him or her. It can also include scams such as foreign lottery scams or bogus charity scams.

Article fraud is when fraudsters possess, make or supply articles for use in fraud, such as false fronts for cash machines, lists of potential confidence fraud victims and lists of bank account details. It can also include machinery to manipulate or create credit cards.

Revenue fraud includes VAT and missing trader fraud, where organised crime gangs exploit the way VAT is processed in multi-jurisdictional trading to steal VAT due to the government.

Why are businesses particularly susceptible to fraud?

Businesses are often targeted in corporate fraud because they have significant amounts of money, numerous customers and operate on a large scale. As companies that sell goods or services also extend trade credit, this offers an opportunity for fraudsters to receive these goods or services without paying for them. 

What are the main types of corporate fraud?

Businesses can fall victim to a wide range of corporate fraud, but some areas of fraud are particularly common, listed below.

Corporate identity hi-jacking is where unlawful activity is carried out using a false corporate identity or another company’s identity details. This could take the form of fraudsters using a company’s good payment record and reputation to steal goods and services from unwitting suppliers. Or criminals may use a company’s business identity to extract personal information from customers or suppliers in order to defraud them. Common examples of this include phishing scams, false invoicing and cloned websites.

Falsified credit applications are another common area of fraud and involve misleading companies into extending a line of trade credit. This is typically done through setting up a false company and listing it on Companies House, to deceive suppliers. It is often carried out towards a company’s year-end, when fraudsters know that key finance staff will be distracted by the seasonal peak in their workloads, and so due diligence standards may slip.

Website cloning is used to carry out corporate fraud by imitating part or all of an existing company’s website in order to steal personal information or payments from customers.  Even the Financial Conduct Authority, which regulates financial firms and advisers in the UK, has encountered cloned versions of its website.

Phishing scams or email spoofing takes place when an email is sent from a seemingly legitimate organisation that the potential victim already deals with, asking them to update their password and other security information. As the email is fraudulent, the victim’s password or information is then stolen and used to access their accounts.

False invoicing is another common type of corporate fraud and occurs when the target receives an invoice from an established supplier seeming to be for goods and services rendered. However, the invoice may be for fabricated services or goods, or contain inflated or duplicated charges. This type of fraud can be carried out by external fraudsters, or committed by an employee at the supplier company.

How can I protect my business against fraud?

The most important way to protect your business against fraud is to implement robust fraud prevention processes and policies, and to ensure your employees receive regular training to prevent fraud.

It’s also crucial to conduct thorough due diligence, keep virus and fraud prevention software up to date, and find alternative ways to verify customers or suppliers if you have any doubt about their identity.

You can also appoint a reputable credit reference agency to undertake regular checks on your customers and suppliers, so you can spot unexpected changes or anomalies in their information. And check your own details on Companies House regularly, to ensure they have not been falsified.

Both in the UK and internationally, insider fraud is the most common type of corporate fraud. It’s important to always check employees’ references thoroughly, have a robust whistleblowing policy and ensure that no employee is indispensible, with solo knowledge of a particular system or practice.

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