March 10, 2021
By Greg Woolf
While the massive financial cost of digital fraud is broadly understood – AFCE estimates that 5% of revenue across industries is lost to fraud – there’s less awareness regarding how this theft funds criminal activity worldwide.
The Digital Fraud and Organized Crime Connection
The fact that only 5-15% of synthetic loan applications are caught by legacy verification systems speaks to the involvement of organized crime. This level of success requires an AI-enabled system to analyze approved and denied loan applications, providing valuable input to the machine learning models that generate increasingly convincing identities. It’s a degree of sophistication that suggests links to well-financed criminal organizations vs. individual fraudsters. As the Federal Reserve confirms in Synthetic Identity Fraud in the U.S. Payments System, this type of theft has been linked to global crime rings, including those that fund terrorism.
These sophisticated technologies also automate much of the process behind fraudulent initiatives, allowing criminals to operate at scale. A single organization can operate tens of thousands of fake accounts and then funnel the proceeds to human trafficking and other profitable crimes.
High Profits Attract Bad Actors
The U.S. Financial Crimes Enforcement Network Anti-Money Laundering and Countering the Financing of Terrorism National Priorities cited fraud as a “threat to national security,” in part due to the significant proceeds it generates. The report went on to note the rise of internet-enabled fraud used in romance scams, synthetic identity fraud, and other forms of identity theft.
Worryingly, it’s not just criminal enterprises that are attracted to digital fraud. Rogue nations have partnered with criminal organizations to execute parts of complex theft and money laundering schemes.
One such initiative, later known as FASTCash, provided yakuza associates in Japan with fraudulent credit cards to withdraw cash from ATMs. The low-level criminals involved were unaware that the ringleader was based in China and funneled the proceeds to the North Korean government. (A recent U.N. report also alleges that North Korea generated $2 billion from cyberattacks, which it used to fund weapon programs.)
What about more traditional forms of digital fraud? Up to 50% of all third-party identity fraud, which includes criminals using PII to hijack accounts or take out loans in their name, can be traced back to organized crime syndicates.
It’s Time For The Financial Industry To Take Responsibility
Although some of the world’s leading financial institutions are under considerable regulatory and public scrutiny for accusations of money laundering, more must be done to prevent organized crime from leveraging increasingly lucrative digital fraud. In fact, our industry has a moral obligation to improve its defenses against cyber crime that funds harmful activities.
While concerns regarding privacy requirements and competitive advantage have limited sharing intelligence across banks, it’s proven to be among the most effective ways to fight digital fraud. A number of banks and fintech platforms are also partnering with nonprofits like Solaris and The Knoble, which analyze financial transactions for signs of human trafficking and pass their findings on to law enforcement.
With a range of new technologies and partners available in the fight against fraud, now is the time for financial institutions to take action.