Fraud is increasingly part of everyday life. Most businesses, regardless of size, have to deal with fraudulent activity at some time or another. Developments in technology over recent years, like the rapidly growing use of the internet for banking and shopping, have created new opportunities for criminals to commit fraud.
The UK's fraud prevention service, CIFAS, estimates that almost every type of fraud is increasing. In 2004-05, fraud based on false identity increased by 16 per cent, false applications increased by 13 per cent, fraud by impersonation grew by 11 per cent, and aiding and abetting fraudulent activity increased by 74 per cent. Although other types of fraud, such as insurance fraud, declined by 39 per cent in this period, overall fraud grew by 3 per cent.
Fraud is expensive. Norwich Union has estimated that fraud in the UK cost £16 billion in 2004. The Association for Payment Clearing Services recently published data showing plastic card fraud in 2004 reached £505 million – or £1.4 million a day – an increase of 20 per cent on 2003. The introduction of ‘chip and pin’ technology, which became compulsory in most retail outlets last month, shows the industry's determination to remedy the problem. The new technology seems to be having the desired effect, and in the first half of 2005 plastic card fraud declined. However, figures from the British Bankers Association (BBA) show that fraud may simply be migrating. In 2003, non-plastic fraud increased by 11 per cent, at a cost of £108 million.
Combating fraud
So what is the industry doing to combat this growing and expensive problem? Part of the Financial Services Authority’s (FSA) remit is to reduce financial crime, and it recently published a report, ‘Firms’ high-level management of fraud risk’. The report examined the steps financial firms were taking to tackle fraud. It found increasing awareness among senior managers that fraud needs to be handled in a more integrated and effective way, and that many firms are taking to a more centralised approach to fraud management. This can deliver significant benefits, including information sharing, promotion of best practice and quality control. The report highlighted instances where banks and building societies had taken a new look at their vulnerability to fraud, and were raising its profile within the organisation by making it a standing agenda item at committee meetings or through 'steering groups' of senior managers.
The financial crime sector leader at the FSA, Philip Robinson, said that the report also found ‘increased co-operation within the industry, and firms see this as critical to the success of anti-fraud measurers. There was particular support for initiatives such as information-sharing’.
However, the report also highlighted areas in which the financial sector needs to improve in order to tackle financial crime. While larger financial firms have ‘woken up’ to fraud, smaller firms or those that have not been victims of fraud have not developed a robust strategy to combat it. Robinson said: “Firms need to continue to invest in systems and controls and manage their responses to fraud in order to avoid being targeted as the weakest link. Firms that under-invested in anti-fraud measurers tended to suffer relatively high-levels losses.”
Conclusions
As the industry tightens its procedures and introduces new measures to combat fraud, criminals are working just as hard on new techniques to beat the system. In a recent speech, the FSA’s financial crime sector manager, Edna Young, said that the industry had ‘more work to do to frustrate the activity of criminals, who are becoming more innovative. In short, we all need to run faster to catch up, let alone get ahead’. But the industry is making big strides in the right direction. The FSA’s report found encouraging signs that high-level management are indeed pushing the issue of fraud up the corporate agenda and giving a higher priority to procedures for sharing information, the promotion of good practice and quality control. In turning the spotlight on senior management, the new guidance from Joint Money Laundering Steering Group (JMLSG) aims to encourage them to take a more risk-based approach to tackling money laundering and the funding of terrorism. Looking ahead, the introduction of identity cards may prove to be a valuable tool for the financial sector as it seeks to contain and detect fraud. However, the Identity Cards Bill remains controversial and is currently caught in a game of Parliamentary ping-pong, with the House of Lords trying to make changes and the House of Commons rejecting them.
There’s no doubt that the financial sector will have to continue to invest in fraud prevention systems to keep one step ahead of the criminals.
Christopher Dean is press officer at the CML
