Economic recession. An impossible living crisis. Unprecedented inflation.
Not just alarming media headlines, these forecasts carry severe consequences for the most vulnerable in society. More extreme economic conditions lead to more extreme behaviours, and so as the situation deteriorates, anti-financial crime teams are likely to see an uptick in criminal activity. Through analysing current trends and near-term predictions, financial institutions (FIs) can strategically prepare their compliance teams as the world gears up for an economic winter.
History repeating itself
Small-scale financial crimes appear to thrive during a downturn. Historically mortgage fraud, identity theft, and employee-related schemes have all increased during economic recessions, including the 2008 Great Recession, as have other smaller-scale frauds and scams. In the UK, the fraud prevention service Cifas has already noted the higher risk of criminals targeting loan products and deferred credit services, motivated by the economic downturn.
More recently, the economic decline at the start of the pandemic witnessed enormous amounts of fraud from robocalls, text and email phishing and smishing. It also saw huge volumes of online fraud, with a plethora of get-rich-quick schemes from cryptocurrency investment scams, non-fungible token (NFT) rug pulls, and multi-level marketing schemes (MLMs) abounding. Stuck at home, people turned to the internet in droves and became susceptible to too-good-to-be-true schemes to make money online. As the economic situation deteriorates, we can expect similar types of fraud to come to the fore again.
Consequences of economic hardship
Looking towards the end of 2022 offers a grim picture, with inflation skyrocketing across the globe. Impacted by the Russia-Ukraine war and the hangover from the COVID pandemic, inflation recently reached 10.1% in the UK and around 8.9% in the eurozone. The increased cost of living means people have more difficulty making ends meet.
The consequences of economic hardship have two angles. On the one hand, individuals are more likely to fall victim to illegal lending services or other fraudulent schemes. On the other hand, they may be more drawn to commit financial crimes themselves to stay afloat, such as fraud or money muling. One way of understanding this is by using criminologist Donald R. Cressey’s fraud triangle which showcases the three components that lead to fraud. In times of recession, financial hardship provides the motivation pushing previously law-abiding people towards crime.
With that context, here are three financial crime predictions for the upcoming economic storm:
1. More fraud
Unsurprisingly, economically stretched individuals are more likely to turn to fast ways to make cash. Individuals looking for side hustles to supplement their income may be duped by scammers operating on popular freelancing platforms like Upwork or Freelancer.com, coaxing people to go off the platform and use peer-to-peer cash transfer apps instead. Another type of fraud likely to see an uptick is advance or loan fee fraud, where customers are instructed to pay a fee in order to access credit they will never receive.
Money mule schemes disguised as legitimate jobs are also likely to spread through internet job sites, unregulated online forums, and Facebook groups. While reports posit that money mules victims are more likely to be under the age of 35, including children under 18, there has also been an increase in middle-aged mules, shifting assumptions about who will participate in these types of crimes. FIs should remain diligent in detecting money muling activity and be aware of changes to the demographics of potential mules.
2. More loan sharks
As individuals are pushed to their financial limits, illegal lenders that target the poorest and most vulnerable will increase their operations. These unlicensed lenders, which are illegal in the UK, charge extremely high-interest rates and use intimidation and other tactics to retrieve payments. Perpetrators can take many forms, from individuals to community-based lenders. On average, loan shark victims take nearly three years to come forward after borrowing, meaning it will take time to understand the impacts of the latest recession. However, a recent March 2022 study warned that one million people are estimated to be using illegal loan sharks in England.
Since the financially excluded are more susceptible, FIs should assess how their policies impact financial exclusion. They should also ensure they have channels available for people who are struggling to repay loans or credit cards, so that they can receive appropriate support rather than turning to illegal lenders.
Financial exclusion affects countless individuals worldwide, with an estimated 2 billion persons being unbanked globally. As anti-financial crime professionals, how do we carefully consider our controls and understand how they impact those who vitally need access to the financial sector?
As anti-financial crime professionals, we must do more to proactively support financial inclusion and ensure the controls that we design do not inadvertently disadvantage those who need access to services the most.
To check out the FinCrime Principles of Inclusion, click here.
3. Possible increase in human trafficking
Drastic economic conditions can make people desperate, liable to take greater risks. The most recent global human trafficking report by the United Nations Office on Drugs and Crime posits that an economic downturn will increase the number of potential human trafficking victims as vulnerable people are targeted by criminals. A similar trend was observed during the last recession in 2009. From forced labour schemes to sex trafficking, FIs should be on alert for typologies related to human trafficking.
How to plan ahead
Winter is coming, and so is an economic downturn. Economic decline stokes uncertainty, fear, and desperation — all of which criminals prey on. Sadly financial crime itself is recession-proof, and is likely to thrive in the near future. Since declining economic conditions in the UK are predicted to worsen at the end of the year, coinciding with holiday seasons that already put a financial strain on most households — factors contributing to fraud and other types of financial crime will become even more aggravated.
Here are some actions for FIs to plan ahead for the economic winter:
Be aware of changing risk profiles and fortify your firm’s controls accordingly, particularly regarding money muling and fraud, and identifying and supporting vulnerable customers.
Plan ahead for additional compliance or anti-money laundering capacity during traditionally busy year periods. Interim support can help you efficiently respond to spikes or intense periods of activity.
Review your customer monitoring and assess if the evolving economic conditions require changes. Now is a good time to do some targeted assurance on your systems and rules.
At FINTRAIL, we’re here to support you in planning for the changing conditions of the upcoming economic winter. We combine deep financial crime risk management with industry expertise to help you organise flexible capacity and provide interim support; conduct systems testing and targeted assurance or health checks; and provide context-based training to your teams.
Get in touch to find out how we can help you weather the financial crime impacts of the economic downturn.