First, what is financial fraud? Financial fraud is the deliberate act of deception carried out to secure unlawful financial gain, often at the expense of individuals, businesses, or financial institutions. It falls under the broader category of financial fraud crime, which includes a range of illegal activities designed to manipulate, steal, or exploit financial systems. Common forms of financial fraud crimes include identity theft, where criminals steal personal information to access accounts or obtain credit, and other schemes such as phishing, false investment opportunities, and loan scams. The statistics in the modern world are not good, with both financial fraud and identity theft. They are affecting millions of people as well as companies across the globe. Such crimes do not only affect your finances; in some cases, they can also affect the reputation and trust you have built over the years. So, it is essential to know what drives these crimes to ensure such crimes do not happen to you. 

In this article, we will also analyze the risk factors or common triggers of financial fraud and identity theft. It enables you to know the measures to adopt to protect your personal data, business and personal finances.

Primary Cause of Online Financial Fraud and Identity Theft 

Online financial fraud or financial theft is the various fraudulent or deceptive activities conducted on the Internet to unlawfully obtain money, sensitive information, or financial assets. These fraudulent activities target individuals, businesses, or financial institutions often leading to loss of money. 

Below are the common types of online financial fraud:

Common Causes of Online Financial Fraud 

1. Phishing Attacks

Various types of emails are termed phishing scams, one of them being phishing emails impersonating banks and agencies. Unfortunately, they redirect users to fake sites with the purpose of stealing personal information. For example, in 2020, individuals posing as the Internal Revenue Service (IRS) were able to get personal details like social security numbers and bank accounts. Every year the Federal Trade Commission (FTC) receives millions of reports concerning phishing pursuits.

Further Reading on Fraud Detection: Its Importance and How to Choose the Right Solution 

2. Data Breaches

Colleges and organizations such as banks often become victims of attackers who want to steal very sensitive details like credit card numbers, bank account numbers, and social security numbers. One of the most damaging breaches remains that of Equifax in 2017 where 147 million people’s data was compromised. Sadly, these breaches are on the uptick. Over 1,800 breaches were documented during the first six months of the year 2021 alone.

3. Insider Threats

Not every threat is external. Certain employees or outside agents who may be privy to sensitive information may leak it whether willfully or by accident.  For instance, a Tesla employee was charged with transgressing by collecting sensitive information from the firm. This epitomizes the fact that most 60% of breaches are derived from insider threats.

4. Weak Password Practices

A study by Verizon found that compromised passwords are behind 85% of data breaches. Using weak or reused passwords is one of the easiest ways to invite hackers.

You might also want to read: The Latest Fraud Prevention Techniques in Fintech Industry  

Other Common Causes of Financial Fraud

1. Card Skimming:

Criminals place gadgets on ATMs or gas stations that capture the code on a magnetic strip. In 2019, law enforcement officials in Los Angeles uncovered an elaborate skimming operation. The scammer’s activity had cost the operation millions in fake transactions.

2. Account Re-appropriation:

 This includes using the available log details to sign into an account to make payment without the owner’s consent.

3. Fictional Charities:

Scammers set up false charities, especially in emergencies. They exploit the goodwill of various groups within the society to get these people's hard-earned money as well as their data.

During the pandemic, the FBI's AUCC (Potential Charity Fraud Associated with the COVID-19 Pandemic) reported multiple fraudulent organizations posing as charities to exploit the COVID-19 situation.

4. Advancement in Business Email Compromise (BEC): 

Escapists pretend to be high-profile company officials and persuade low-level workers to wire funds.
 

Reportedly by the end of 2019, the figure for losses generated by Business Email Compromise (BEC) schemes was above $1.7 billion, according to the records kept by the FBI.

5. Mobile Payments Fraud:

An alteration in an app usage creates a different scenario that is exploited by criminals to enable undesirable buying transactions.

Common Causes of Identity Theft

Bellow are the common causes of identity theft:

1. Social Engineering

Rather than attempting to gain access to systems through hacking and other technical means, scammers actively appeal to people’s emotions. For example, they pretend to be the IT support staff or people that the victim trusts. Such poses enable the criminals to convince their targets to release personal details.
 

According to the FBI's Internet Crime Complaint Center (IC3), social engineering attacks caused over $2.1 billion in losses in 2020. This makes it a leading cause of identity theft.

2. The Threat of Malware and Ransomware

Overall, even in the digital age, these malware and ransomware types pose a threat to individuals and organizations. Malware is software used to assist in hacking by stealing passwords, recording keyboards, and retrieving files. Ransomware encrypts files and threatens the user to pay a fee to return their access.
 

According to the Cybersecurity & Infrastructure Security Agency (CISA), ransomware attacks shot up by 62% in 2021. This has adversely affected people in a really bad way, economically.
 

3. Unsecured Devices and Networks

Attacking devices and networks without protective measures such as firewalls and encryption is often straightforward for the attackers.

4. Exploitation Of Public Wi-Fi Hotspots

Public wireless local area networks (WLAN) are typically unsecured. This unfixed flaw is open to being exploited. All your communication, including usernames and sensitive financial information, can be captured over a public wireless connection.

5. Dumpster Diving

Identity thieves will rummage trash bins in an attempt to obtain sensitive information that can be misused for fraudulent activities. Such thieves will look for used bank statements, credit card applications, and other papers that contain a person’s name and other identifying information. They can use such information to commit identity theft.

6. Shoulder Surfing

Shoulder surfing involves peering at someone’s hand or gazing in the general direction of where the person enters his/her sensitive details such as PINs or passwords. Fraudsters carry out these acts to steal from their victims.

They may either look at or use devices such as cameras to capture the actions in crowded places such as cafes and airports or even ATMs and card machines.

7. Mail Theft

In many instances of identity theft, valuable identification-related items are removed from the victim’s residence or mailbox. To obtain bank accounts, credit card solicitations, tax records, and other personal papers, scammers remove the contents of the mailbox.

8. SIM Swapping

The fraudsters deceive the wireless/mobile carrier into porting the victim's phone number into a new SIM. It is then used to gain access to victims' accounts. They take ownership of the cell phone number, and then they can defeat any form of two-factor authentication to get to accounts. SIM swapping has grown to become a nightmare, as victims have reportedly suffered huge financial losses.
 

9. Skimming Devices

These are small gadgets that are attached to an ATM or the point-of-sale system to capture card information while undertaking transactions. They read the magnetic stripe on cards and capture the PINs pushed on the keypad. Skimming has been reported at several places: gas stations and ATMs among them.

10. Synthetic Identity Theft

They use both actual and fake information combined to come up with a new identity; for example, an actual Social Security number with a fictitious name attached. Then, with that synthetic identity, they will create bank accounts, apply for credit, and perpetrate fraud. The thing with this type of fraud is that it's very hard to find, and it may go on for many years.

Identity Theft and Fraud Protection: How to Protect Yourself from Identity Theft and Financial Fraud

Here tips on identity theft prevention:
 

1. Good Password Practice

Use strong and unique passwords for all your accounts, mixing letters with numbers and special characters, avoiding everything that can be easily guessed-like birthdays. Anyway, you can take advantage of password managers that create and store intricate passwords.

2. Multi-Factor Authentication (MFA)

 MFA has an extra layer of security, usually with several variants of verification. For example, common methods used in MFA include SMS, authentication apps, and biometric verification. In other words, it will be very hard for unauthorized users to get into your account, even with your password.
 

According to Microsoft, using MFA can block 99.9% of automated cyberattacks.
 

Related: 10 Ways to Detect Online Transaction Fraud Detection 

3. Ongoing Oversight and Notifications

Regularly review your bank statements and credit reports. Additionally, establish alerts for any substantial or unusual transactions. Detecting suspicious activity promptly can prevent you from incurring considerable financial losses.

4. Cybersecurity Education

Follow common threats and best practices. Distribute your knowledge to others. Training on phishing, password management, and how to use the internet more safely should be provided. The more knowledgeable one is, the less vulnerable he or she will be regarding cyberattacks.

5. Encryption in Use

Encryption ensures that even when data is intercepted, it remains unreadable and useless to an attacker. Sensitive data requires encryption of sensitive files, emails sent, and other means of data transmission. Companies and institutions that move to use encryption can significantly reduce the cost of data breaches.

6. Secure Electronic Transactions

Make your online transactions on secure websites; ensure "https" with a padlock icon in the browser. Do not make financial transactions via public Wi-Fi. Use secure modes of making payments. This will be a protection for your financial information against cybercrime. 

7. Regular Software Updates 

Make sure the operating system and applications are kept up to date to avoid vulnerabilities. Turn on automatic updates; regularly check for patches and improvements. The National Cyber Security Centre (NCSC) said outdated software is a common way through which cyberattacks happen.

INTREASTING READ: AI for Financial Crime Risk Detection: A Practical Guide
 

Conclusion

Having known the causes of financial fraud and identity theft, a person should be conscious and make positive steps to avoid financial fraud or identity theft. It would include strong passwords, enabling multi-factor authentication, and being careful when perceived threats are present. 

You could consider advanced security through Youverify identity verification services: Youverify deploys Artificial Intelligence to secure personal and financial information with better security.

Visit Youverify today to book a demo that will raise the bar in security and compliance and ultimately gain trust.