Exploring the Different Types of Financial Fraud and How to Safeguard Against Them?

Fraudsters use a variety of tactics to steal money, credit card information, and other assets. Understanding the different types of financial fraud and how to safeguard against them is essential for businesses and individuals.

Stay safe by never giving your personal or payment information to unsolicited salespeople over the phone or by email. Also, be cautious of funding trades with prepaid cards or digital currencies.

1. First-Party Fraud

First-party fraud refers to any scheme in which a legitimate account holder or customer uses their credentials for fraud. It’s often referred to as friendly fraud or ‘gambler’s regret’, and it can be very difficult to anticipate. The good news is that merchants can use a few tactics to protect against this type of fraud.

This type of fraud can occur in several ways, including fronting (when a higher-risk driver adds their parents to a car insurance policy to lower the premium) and de-shopping (when a consumer buys an expensive product to return it for a refund). 

Other forms of first-party fraud include bust-out fraud, where a fraudster combines stolen information from data breaches, call center attacks, or intercepted mail, and synthetic identity fraud, where they create a Frankenstein profile by using a mix of different people’s information.

The best way to prevent this type of fraud is to have a comprehensive strategy. Holistic financial fraud prevention platforms can detect and identify suspicious transactions before making them and send real-time fraud alerts to issuers, acquirers, and merchants. 

This helps reduce transaction confusion and disputes, ultimately lowering chargeback costs. To learn more about how holistic fraud detection can help protect your business against first-party fraud, book a demo today.


2. Second-Party Fraud

Second-party fraud is a type of financial scam that involves an individual giving another person their personal information for illegal activity. This can be done to make a fraudulent transaction look legitimate, or it may be used as part of a money laundering scheme. This type of fraud is harder to detect because the usual indicators aren’t present, making it more difficult for businesses to recognize.

Often, second-party fraud is committed by people close to the victim, like a family member or a friend. This is why it’s also referred to as “friendly fraud.” The person giving their information to the fraudster may be unaware that they are involved in a scam, but they know and trust the person to whom they are handing over their details.

In addition, some individuals receptive to second-party fraud may be vulnerable due to an illness, a loss of employment, or prolonged isolation. This is often seen in the case of elderly widows who are swindled out of their inheritance. 

Fraudsters use a combination of tactics to target these victims, including phishing, account takeover, and loan stacking, where a fraudster will steal someone’s PII through a breach or phishing and then apply for several loans simultaneously. These fraudulent activities are a growing problem, especially for current accounts, cards, and loans.


3. Bank Fraud

Bank fraud is a broad category of crimes involving illegal means to steal money or assets held by financial institutions. Criminals have moved beyond the days of robbing banks at gunpoint and now use various digital tools to commit bank fraud

For example, a criminal can hack into a banking account and change wire instructions to redirect funds to another account. Another common bank fraud method involves convincing a victim to send them money by posing as an employee of a financial institution. 

Criminals can also apply for credit cards at scale to different financial institutions using fake information and max out the card before being caught. These crimes are commonly prosecuted under 18 U.S.C. 1344, but it is important to have an attorney who understands the law and has experience handling cases related to this statute.

The most common type of bank fraud is account takeover fraud, which involves stealing account credentials or identity information to open a new account. This can be done by phishing, social engineering, or brute force attacks such as credential stuffing. 

To protect against this type of fraud, all financial institutions should ensure that their private data is stored on secure networks and never leaves the premises.

4. Investment Fraud

The loss of hard-earned investment funds can be devastating. Whether you are saving for retirement, building a college fund, or hoping to leave a legacy for your family, fraudsters can steal your future from underneath you. You can protect against this fraud by researching before investing in any new opportunity. 

Don’t rely on unvented emails, message board postings, or company news releases. Instead, create a financial plan and evaluate investment opportunities based on your goals and risk tolerance.

A common form of investment fraud is a Ponzi scheme, in which the criminal uses money from new investors to pay high rates of return to earlier victims. These schemes are typically unsolicited and advertised through internet postings, email, social media, job boards, or telephone.

Another type of investment fraud is affinity fraud, which targets people in a certain social circle, religious group, or ethnic background. These schemes often rely on the fear of missing out to lure in potential victims.

To avoid these types of scams, never give out personal information over the phone unless you’re sure that it’s safe to do so. Also, always insist on receiving written documentation before making a purchase. This is one of the best ways to protect yourself from fraud.