A company’s bear market is a fraudster’s bull market. Make sure your business is prepared for the rise in fraud during a recession.

If you have been reading the news lately, it looks like we are headed for some intense economic pressure and even higher inflation as we come out of one pandemic-induced reset and into another. 

While the economy can affect most aspects of conducting business, such as the cost of goods and services, profits, and overhead, companies face another issue: the rapid rise of fraud and financial crime during uncertain times. 

As fraudsters take advantage of anxieties, vulnerabilities, and weaker controls in work-from-home environments, businesses need to strengthen their risk management posture to combat the rapid rise in fraud attempts.

What Happens to Businesses During a Recession? 

In 2008, the financial crisis led to one of the worst economic downfalls this country has seen in decades. As the economy declined and companies fell in value, many were forced to lay off hundreds of thousands of employees. As companies struggled with new revenue challenges, decreasing profit margins, and reduced staff to barebones levels, they became more vulnerable to fraud. 

The more recent COVID-19 recession was not as catastrophic from a financial point of view, with governments around the world flooding their citizens with cash to help them get through the ‘black swan’ pandemic event. The unemployment rate, however, more than tripled, from 3.6 percent to 13.0 percent, affecting 21 million Americans and triggering massive disruptions across the entire supply chain. The war in Ukraine, aggressive worldwide inflation, and significantly increased political division made the situation more volatile. 

Recessions greatly impact economies and the businesses that drive growth. These impacts typically include the following: 

  1. Stock Market Declines: Anticipating an economic slowdown, the stock market tanks and values head south, causing people to lose money and gain stress and anxiety. As capital markets decline, stock options, and pensions also decrease in value, and workers and their families feel less financially secure. 
  2. Inflation: Prices go up, personal incomes can’t keep pace, and people and businesses cut back on purchases. That also means companies have a tough time maintaining their sales and profit margins.
  3. Higher Interest Rates: The Federal Reserve typically raises interest rates to combat inflation. This makes it more expensive for businesses to borrow money, leading to slower growth and less spending.
  4. Unemployment Rises: With consumer spending in decline, businesses cut costs, and workers lose their jobs and income, further reducing consumer spending, and the cycle continues.
  5. Significant Economic Slowdown: The economy slows down, typically for at least 2 or more consecutive quarters. Consumers spend less, businesses produce less, and the GDP shrinks. 

Additionally, big reductions in personnel and changes in business fundamentals often leave gaps in well-established controls and processes. These rapid adaptations lead to many opportunities for fraudsters to exploit as businesses and consumers scramble to make ends meet and survive the economic downturn.

A Company’s Bear Market is a Fraudster’s Bull Market 

As money gets stretched and businesses try to grow despite fewer resources, the ease and opportunity to defraud organizations increases exponentially. 

Historically, for every 1 percent drop in GDP, there is roughly a 10 percent increase in financial fraud. This jump in fraud during a recession is so significant that a Forbes survey revealed that most executives see cybercrime as a larger risk to their companies than the effects of recession or inflation. This makes sense, as sophisticated fraudsters are incredibly patient, have spent years building up their business plans, and often have multiple attacks warehoused, just waiting for the right time to strike. 

Even regular people without a history of financial crime more frequently consider turning to fraud because of economic anxieties. Staff reductions mean increasingly lax controls, increasing fraud attempts against companies known to be reducing staff. Furthermore, supply chain disruptions cause companies to add many new third-party suppliers, creating opportunities for vendor, invoice, and supply chain fraud.

Companies Need Modern, Unified, Realtime Risk Solutions 

With fraudsters targeting businesses and consumers every second, organizations need a real-time risk management solution that covers all major financial events, from new account application screening, transaction monitoring, ongoing account management, and continuous entity monitoring to detect fraud and maintain compliance with financial crime authorities. 

Solutions targeting a single fraud type or only one aspect of the customer and vendor journey (point solutions) are insufficient. To compete in today’s dynamic and cutthroat environment, organizations need comprehensive, orchestrated, and rapid risk management tools to neutralize would-be fraudsters, and you may not find them in-house.

Fraud.net Can Help You Fight Fraud During a Recession

Fraud.net’s modular, customizable fraud platform helps companies combat over 600 types of fraud and risks. Our platform quickly and accurately risk scores transactions, applications, vendors, and other counterparties to reduce your exposure and review time, lightening the load on your fraud management teams.

Fraud.net’s Application AI replaces tedious manual application reviews with agile, accurate, and automated verification and risk scoring, helping minimize application fraud and achieving compliance with Know-Your-Customer, sanctions, and anti-money laundering standards. And this process can be improved with automation, verifying counterparty bank accounts, vetting applications, and automatically conducting enhanced step-up verifications for high-risk entities.

You can expect productivity improvements within the first 60 days, including faster, more accurate, and more automated decisions by your customer onboarding, fraud, and compliance teams. And you’ll increase profits by stemming fraud losses (averaging 5% of your revenues, according to the AFCE) and reducing risks throughout your organization. Furthermore, you’ll increase sales as your time will be freed to focus on thrilling your existing customers and de-risking your expansion into new products, channels, demographics, and geographies.

Want to learn more about how your business can prevent fraud resulting from inflation, recession, and war? Download our free eBook: How Do Recessions, Inflation, And War Impact Fraud. Or, request a demo with one of our solutions consultants today to learn how AI can help you stop fraudsters in their tracks.