The cost of living crisis has created a financial crime wave. So what is being done about it?
Struggling to make ends meet during a period of high inflation, people are being preyed on by fraudsters seeking to take advantage of their predicament. Andrew Pimlott outlines the threats and how payment service providers, regulators, and the government are responding.
Fraud, money laundering, and other financial crimes are on the rise. There are several reasons for this upward trend, but one of them is clearly the cost of living crisis. The soaring price of energy, other commodities, manufactured goods, and services is placing an intolerable burden on household budgets. Inflation is running at 9.9% and is expected to remain above 10% for a few months before starting to come down, according to the Bank of England. Salaries are failing to keep up in most cases.
Under financial pressure, people are more likely to succumb to scams that falsely promise to earn them, or save them, money. Some might even be tempted to engage in criminality, by becoming "money mules" to launder criminals' ill-gotten gains, or by committing acts of fraud themselves.
What is being done to stem this rising tide? The answer is that private and public sector organizations, which have always worked in concert to tackle financial crime, are working harder to come up with new solutions. Banks, online retailers, shops, and other companies are approaching the problem in two ways: they are educating customers on steps they should take to avoid being defrauded, and they are improving their security systems and procedures.
Meanwhile, government departments, financial regulators, and law enforcers are taking similar steps to warn the public of the risks. In addition, they are monitoring and advising payment service providers to ensure their anti-financial crime measures are up to scratch. They are also doubling down on their own efforts to deter, detect, apprehend, prosecute and convict the perpetrators.
In this article, I first describe the scale and nature of the rise in financial crime and then explain what is being done to combat it. Although I cover only the UK, the problem afflicts other European and North American countries and their responses are similar.
The scale and nature of the problem
"Fraud cases set to soar amidst cost of living crisis as criminals bet on economic uncertainty", was the headline on a press release from CIFAS, the UK fraud prevention service, this summer. The warning came on the announcement of the publication of CIFAS's annual Fraudscape report, which showed that 200,000 cases of fraudulent conduct were filed to the organization's National Fraud Database in the first six months this year, up 11% on the same period last year.
A large part of that rise was due to "soaring levels of identity fraud", with over 136,600 cases recorded in the first half of 2022, up a third on last year. Although the main sectors targeted were plastic cards and bank accounts, there was a significant rise in telecom products being affected.
"The rise in the cost of living is providing criminals with new opportunities to steal personal and financial information," said CIFAS. There has been a rise in consumers being targeted by phishing emails pretending to be from utility companies claiming to provide savings on energy bills, as well as offering fuel vouchers, fake jobs, and money-making opportunities. These emails are becoming increasingly sophisticated and are designed to harvest personal and financial information.
Another consequence of the struggling economy is that more businesses are offering "Buy Now Pay Later" payment services, which is giving fraudsters new ways to exploit vulnerabilities in their processes. "Everyone is at risk of being targeted by fraudsters, but the current economic crisis is making consumers even more vulnerable to fraud," warned CIFAS Chief Executive Mike Haley.
"Hard-up" paid to launder money
His warning is echoed by Liz Ziegler, Retail Fraud and Financial Crime Director at Lloyds Banking Group. "Right now, the current cost of living crisis has presented scammers with a chance to opportunistically prey on those in financial hardship," she writes on the bank's website. "It's this demographic who are most likely to be targeted by criminals as potential money mules."
A money mule, also known as a smurfer, is a person who is paid to transfer illegally acquired money – physical cash or electronic money – on behalf of criminals. Some mules know that this is illegal, but many do not. As Ziegler points out, if a mule is found out and convicted, their bank account would be closed, their credit score would plummet and they "could even face up to 14 years in prison."
Typically, this sort of crime is committed by people under 24, usually recruited through social media apps like Instagram. However, the last 12 months have seen a surge in cases in older groups – a 26% rise in those aged 31 to 39, and a 29% rise in the over forties, according to Lloyds Bank research. So why the jump in age? "Well, as I say, the current cost of living crisis could be a factor," says Ziegler.
The prospect of quick cash can be particularly appealing to people in financial distress, no matter their age or social position, but younger people are still the most main targets – 9% of those aged 18-24 surveyed by Lloyds Bank said they would be prepared to transfer money through their bank accounts for criminals for a fee.
Fast loan scams target those in financial trouble
Earlier this year Lloyds Bank issued a warning that desperate people are being tricked into fast loan scams, also known as advance loan fee scams. This type of fraud increased 90% in the first five months of this year compared with the same period last year.
Fraudsters set up online adverts for fast and easy loans. Those who apply have their loans approved quickly, regardless of their credit history, but are told they must pay an advance fee by bank transfer before they get their money. When they pay the fee they do not get a loan and never hear from the "lender" again.
"As living costs rise, fraudsters are increasingly turning to advance fee schemes," said Ziegler. They know that people in financial trouble need money and often find it difficult to get loans, so they jump at the opportunities offered by fraudsters. The average victim loses £231 says the bank.
Fast loan frauds are just one type of "authorized push payment" (APP) fraud. APP is where a customer is tricked into authorizing a payment to an account controlled by a criminal. It was on the increase before the current economic problems started, according to UK Finance, the leading trade association for financial firms, whose members reported 195,996 APP incidents in 2021, with gross losses of £583m, up 39% on the £421m lost in 2020. "Unauthorized Payment" fraud, on the other hand, is where a payment is initiated by a fraudster from a customer's card, online, or other accounts without the customer knowing at the time, and only finding out later when checking their account balance or being told by their financial provider that a suspected fraud has taken place.
Another type of fraud on the increase because of soaring gas and electricity prices is the energy bill rebate scam. As Powys County Council warned this month, fraudsters claiming to be from Ofgem (the energy regulator) or the government, are sending emails and text messages to residents inviting them to apply for rebates or discounts. The links provided lead to malicious websites designed to steal personal and financial information which can then be used for illegal purposes. Councilor Matthew Dorrance, the council's Deputy Leader, said "it's really sad to see scammers trying to cash in on the cost-of-living crisis with these messages."
Ghost broking – where a fraudster poses as an insurance broker – is a scam aimed at those finding it increasingly difficult to pay for car insurance. The fake brokers buy policies from legitimate insurance companies using false information, and then doctor and sell them to customers, or they create false policy documents which look like they have been issued by legitimate insurance companies and sell them to customers.
Combatting financial crime
Banks and other organizations take a two-fold approach to deal with the problem: they educate customers on how to be more vigilant, and they improve their own systems and procedures.
A high-profile example is the Take Five to Stop Fraud campaign coordinated by UK Finance, the financial services trade association. The campaign, supported by nearly 40 financial institutions, offers advice to consumers and businesses on how to detect and hopefully avoid email, phone, and online fraud, particularly where criminals impersonate well-known organizations. The campaign website describes the main types of fraud and advises people to "take five" minutes to think carefully about the legitimacy of anyone they do not know approaching them about financial matters.
Audaciously, fraudsters have even impersonated Take Five staff in attempts to deceive people. The campaign has had to resort to displaying a scam warning at the top of every website page which states that "criminals may purport to be from Take Five, using our official branding on websites, social media posts, literature, on the phone or by text [but Take Five] would never call or text anyone."
UK Finance's latest Annual Fraud Report, published in June, while focusing on the scale of the threat, also outlines how its members are responding. "The banking and finance industry is working hard to protect customers from fraud and scams while partnering with government, law enforcement, and the private sector to catch and prosecute the criminal gangs responsible," it says.
It lists 11 industry responses. They include:
- Investing in advanced security systems, including real-time transaction analysis. Such methods helped prevent £1.4bn of unauthorized fraud in 2021, 65.3% of all attempts.
- Working with government and law enforcement "to establish clear strategic priorities" through the Economic Crime Strategic Board chaired by the Home Secretary and Chancellor.
- Sharing intelligence on emerging threats with police, government departments, and regulators through the National Economic Crime Center.
- Sharing intelligence on emerging threats among financial institutions through UK Finance's Intelligence and Information Unit.
- Training staff to spot and stop suspicious transactions.
- Working with text message providers and law enforcement to block scam text messages.
Special attention is being devoted to combatting authorized push payment (APP) fraud. "In 2021 communications regulator Ofcom found that eight out of ten people that were surveyed had been targeted with scam texts or phone calls, intended to convince them that they were from trusted organizations such as banks, the NHS, or government departments," writes Katy Worobec, who heads up UK Finance's Economic Crime division.
Banks and other payment services providers (PSPs) signed up for a voluntary APP code in 2019 which has reimbursed hundreds of millions of pounds to thousands of fraud victims. However, there are currently only 10 signatories to the code. The government has therefore said it will legislate to make it a mandatory code, allowing the Payment Systems Regulator (PSR) to require PSPs to reimburse victims of APP scams. The PSR is now consulting on specific proposals to put that mandatory reimbursement in place for all online and mobile payments. The consultation closes on November 25.
I have only touched the surface of what financial services firms should be doing to detect and prevent fraud. A useful publication in this respect is the Financial Conduct Authority's "Financial Crime Guide: A firm's guide to countering financial crime risks", updated this October, which runs to 118 pages.
Even so, it does not cover everything, only "practical assistance, and information." It warns that the guide "does not form part of the [FCA] Handbook." It "is not a standalone document" and "it does not attempt to set out all applicable requirements and should be read in conjunction with existing laws, rules, and guidance on financial crime".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.