5 ways COVID-19 is accelerating fraud risk for financial institutions
Mark Reilly, SVP, Professional Lines, Ironshore
Tom Pickhardt, Industry Director, Financial Institutions
From phony financial products and hacking to overbilling, fraud continues to challenge financial institutions. Increased economic hardship and quick adoption of new technologies triggered by the COVID-19 pandemic are helping fuel fraud risk.
According to the Association of Certified Fraud Examiners’ (ACFE) latest COVID-19 benchmarking report, 77 percent of members say they’ve seen an increase in fraud since August 2020, with one-third noting that the rise has been significant. Findings also strongly suggest this uptick will continue, as 92 percent of those polled expect a rise in fraud over the next 12 months – and nearly half believe that increase will be substantial.
92% of fraud experts expect a rise in fraud over the next 12 months – and nearly half believe that increase will be substantial.
What’s more, when it comes to preventing, detecting, and investigating fraud in the wake of COVID-19, risk managers overwhelmingly say that all three of these key activities are more difficult to handle now than they were previously.
In October, a new study by Lexis-Nexis Risk Solutions highlighted fraud experiences in the financial services and lending industries since the pandemic began. Larger banks and lenders saw the most significant increases in successful attacks, compared to pre-COVID trends. And mid-to-larger digital firms that conduct transactions through online or mobile channels also experienced higher-than-average monthly attack volumes than before.
But while fraudsters are getting smarter and new technologies make it easier for them to evade risk control measures, there are several other issues brought about by the pandemic that may make business fraud an even bigger risk today. According to the ACFE, the Lexis-Nexis report, and a recent advisory by Deloitte, five specific situations stand out:
Working with new vendors and other affiliates is common due to operational changes like temporary closures or supplier cutbacks. The risks of quickly onboarding third parties that aren’t fully vetted could foster fraudulent dealings.
Dramatic business challenges posed by the pandemic may leave top management more focused on day-to-day operations rather than fraud prevention and risk mitigation. Ongoing investigations may be postponed or halted due to a lack of resources or staff being assigned to other priorities.
In the current situation, nearly every business is searching for savings, and one immediate measure is to cut jobs or reduce payments to employees, Deloitte notes. An unfortunate outcome: for some employees, this may create an incentive to commit fraud, through theft of money or even sensitive data.
The pandemic hastened the shift of transactions to online and mobile channels. Some firms may have made this move before fully investing in the necessary remote risk mitigation solutions, and instead, continued to rely on traditional and less-secure means that focus on physical-identity attributes to validate transactions, Lexis-Nexis explains. The increased reliance on digital is here to stay; businesses should fully assess their operations for security risks and make sure they have safeguards in place.
Fraud experts polled by the ACFE say physical restrictions in many business locations and the remote work environment have hindered efforts to fight fraud. When asked about their most prominent challenges, respondents pointed to the inability to travel, issues with conducting remote interviews, and lack of access to evidence as top hurdles.
Fraud can happen in any organization regardless of size or industry, but the COVID-19 pandemic has intensified many of these risk challenges, especially for financial institutions.
The good news is that there is light at the end of the tunnel now that vaccines are becoming available. However, the rollout is going slower than planned and it will take some time for businesses and the economy to recover.
And while some of the above drivers may become infrequent as operations normalize, others — like remote work and moving to digital channels — are likely here to stay.
To help protect against these exposures, risk managers should work with their internal teams, including compliance, legal, and IT, to:
From banks and insurance companies to private equity firms and asset managers, our teams of underwriting, risk control, and claims specialists understand the risk-management challenges that financial institutions face. We’ll partner with you to provide expertise and tailored risk-management solutions to help protect your bottom line and reputation. Learn more about our specialized coverages for financial institutions here.
This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.