Ted Datta, Senior Director at Moody’s Head of Financial Crime Compliance Industry Practice, Europe, Africa, and Americas, discusses the rise of fraud in the UK and what companies and the government can do to turn the tide
As the landscape of financial crime continues to shift, the UK finds itself at the forefront of the battle against fraud. Recent data reveals that fraud now accounts for 38% of all crime in England and Wales, with the nation losing an estimated £2.46bn to this criminal activity in the 2021/22 financial year alone.
With instances of fraud in the UK on the rise and fraudsters constantly adapting their tactics to exploit vulnerabilities in the financial system, what can companies and the government do to turn the tide?
Despite myriad policy attempts to crack down on fraud in the UK, such as the recently launched UK Fraud Strategy, which aims to reduce fraud activity by 10% by the end of 2024, it is becoming increasingly clear that governments and companies may need to turn to data and technology to solve this conundrum.
Use of technology by fraudsters, as well as ever-evolving schemes, make it increasingly difficult to detect and prevent fraud. A recent report from Santander UK highlights the alarming trend of scammers impersonating banks, with instances doubling in recent months.
According to UK Government data there has also been a significant increase in authorised scams, as improved banking security makes unauthorised fraud harder. Bad actors have adapted, focusing more on schemes that rely on manipulating individuals into authorising fraudulent transactions, presenting a huge challenge for the government and the financial sector to overcome.
The £44.5bn fraud problem
A recent House of Commons Select Committee report estimated that the UK Government loses up to £28.5bn every year to undetermined ‘fraud and error,’ in addition to the £16bn lost to tax and benefit fraud. The report called for the government to prioritise fraud prevention as a strategic imperative and an ongoing risk that requires continuous attention and investment.
Authorised fraud, such as romance scams, where individuals knowingly approve payments to fraudsters, now accounts for the majority of cases in the UK. Over the past four years, there has been a marked decline in unauthorised fraud, such as unapproved withdrawals from bank accounts and credit cards, as criminals are forced to adapt due to the increasing sophistication of banking technology. This new reality presents complex challenges for governments in raising awareness of evolving criminal methodologies and improving enforcement, as well as for businesses in assessing risk and protecting their operations and customers.
One regulatory measure being taken to address the growing impact of fraud in the UK is a proposed 72-hour cooling-off period for suspicious transactions, during which banks can investigate and potentially block payments. This would be part of a wider mandatory reimbursement scheme to be introduced by the Payment Systems Regulator, set to take effect in October 2024.
However, the successful implementation of this measure relies heavily on the government’s ability to provide clear guidelines, support, and oversight. Government agencies will need to work closely with financial institutions to establish best practices for advanced fraud detection, customer communication, and staff training.
While the proposed extension to the time banks have to investigate potentially fraudulent payments is a positive step, it is not the only solution. Financial institutions must also have the right tools to proactively combat fraud. By employing continuous due diligence, monitoring red flags and risk-related data, and using advanced analytics to identify suspicious patterns of behaviour, businesses can more fully protect themselves and their customers against the growing threat of fraud.
The shell company conundrum
One such threat that is on the rise is the use of shell companies by bad actors to conceal their identities and facilitate financial crime. While there are legitimate reasons for establishing shell companies, they can be exploited to mask the true owners of a business and enable a range of illegal activities, from fraud and tax evasion to money laundering. The UK, in particular, has been identified by Moody’s Shell Company Indicator as having a high number of shell company red flags within its vast data sets, highlighting the need for increased vigilance and scrutiny in this area.
To address this issue, the UK Government has introduced measures aimed at increasing transparency and cracking down on the misuse of shell companies. The Economic Crime and Corporate Transparency Act, which became law in October 2023, introduces new requirements for companies to disclose their beneficial owners and imposes stricter penalties for those who fail to comply. Additionally, the Act grants Companies House, the UK’s registrar of companies, greater powers to investigate and remove false or inaccurate information from the corporate register.
To build on these efforts, immediate action can be taken against fraud by implementing data-driven strategies on a large scale. By leveraging data analytics to unravel complex structures like shell companies that can obscure financial crime, agencies can create a more transparent business environment, ultimately reducing the risk of fraud.
The power of data and innovation
To effectively combat the growing threat of fraud in the UK, financial institutions are beginning to invest in advanced automation solutions that provide real-time risk information, enabling agile decision-making and protecting their customers from falling victim to scams. Building comprehensive profiles of bad actors and sharing this information among agencies and peers will be crucial in the fight against fraud. The concept of perpetual KYC (pKYC) and Strategic Customer Insights (SCI) will become increasingly topical as organisations strive to stay one step ahead. The UK’s approach to tackling fraud, with its emphasis on collaboration and innovation, may serve as a model for other nations as they grapple with the growing threat.
Adapting to the evolving threat and combating fraud in the UK
As the UK continues its fight against financial crime, it is clear that a proactive, technology-enabled, and collaborative approach to risk identification and management will be essential in staying ahead of the ever-evolving tactics employed by fraudsters. By investing in cutting-edge technology, such as AI-driven fraud detection systems and real-time risk assessment tools, and remaining vigilant to communicate and acting swiftly in the face of new threats, the UK can serve as a beacon of best practices in the global battle against fraud.
The challenges posed by shell companies and the adaptive nature of fraudsters underscore the need for a comprehensive, multi-faceted approach. As other nations look to the UK for inspiration, policymakers and stakeholders across the financial ecosystem must continue to work together to create a more resilient, secure, and transparent financial system for all.
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