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The rise of technology has brought many benefits and advantages for businesses—ease of conducting business, communication, more accessible payment methods, and operational efficiency with AI and robotics. However, these don’t come without a cost. As much as businesses have leveraged technology to improve business operations, some individuals and organizations have used technology to steal, deceive, and sabotage businesses.
According to a 2022 report by the Association of Certified Fraud Examiners (ACFE), U.S. businesses lose an average of 5% of their gross revenues to financial fraud. Without proper security plans in place, businesses will continue to be highly susceptible to many financial fraud schemes.
What is financial fraud?
According to the Bureau of Justice Statistics, financial fraud refers to the ‘intentional and knowing act’ of deceiving a victim, be it an individual or an organization, by misrepresenting, concealing, or omitting facts about promised goods, services, or other benefits and consequences that are nonexistent, unnecessary and deliberately distorted for monetary gain.
Simply put, financial fraud is committed when a person or a group of people deliberately deceives businesses by any means to extort and cheat them of money, profit, or income.
How does financial fraud affect your business?
Small businesses, or those with 100 or fewer employees, are the most susceptible to financial fraud. Three of ten small businesses tend to lose more to financial fraud than larger businesses, which can be attributed to small businesses operating mainly through family and friendly connections, establishing a business, and operating by trust without proper internal controls.
Depending on the type of financial fraud, small businesses lose up to $150,000 on average, mainly due to asset misappropriation, invoicing fraud, expense reimbursement, record falsifications, and malware attacks.
According to Anthony Martin, Founder and CEO of Choice Mutual, “Financial fraud is not only caused by external individuals—employees and management of organizations are also some of the main culprits that commit financial fraud within businesses.”
Some of the most significant impacts of financial fraud on businesses include, but are not limited to:
- Loss of potential revenue
- Diminishing of company stock value
- Lose of trust and interest in the business
- Lose of employee trust
- Negative public branding
Sturgeon Christie, CEO of Second Skin Audio, says, “While business financials are the most affected aspect, your reputation, branding, employee trust, and overall corporate value also take a significant hit when your business becomes a victim of financial fraud.”
Types of financial fraud in the digital age
There is no limit to what robotics, AI, and technology can do in the future. Today, as much as technology greatly benefits businesses, it has also helped many criminals and fraudsters commit financial fraud more easily in the digital age.
Many types of financial fraud currently threaten businesses today, but there are also countermeasures you can take to avoid becoming willing victims of these types of crimes.
Account Takeover Fraud
Account Takeover (ATO) fraud is one of the most common and prevalent types of financial fraud that fraudsters use to steal and receive monetary gain from businesses. In an account takeover fraud, fraudsters take your business login credentials for your business bank accounts, email accounts, online payment accounts, or even social media accounts without the business owner’s approval and control.
With many businesses transitioning to online and cloud services, the threat of being victims of account takeover fraud is higher now than ever. According to a report from the Federal Trade Commission, $2.6 billion in losses were reported from imposter or account takeover fraud in 2022, up from $2.24 billion in 2021, making it the number one cause of fraud in 2022.
Pierce Hogan, Owner of Varied Lands, says, “Fraudsters taking over of a business account is one of the simplest but most effective ways to commit financial fraud, especially in an age where businesses are already transitioning to online and electronic payments.” He adds, “The challenge for business owners is to ensure that their accounts remain uncompromised because FinTech is here to stay.”
The threat:
Businesses become susceptible to account takeover fraud by fraudsters' unauthorized access to business accounts acquired through phishing, mobile banking trojans, social engineering, credential stuffing, or malware and keylogging techniques.
Countermeasures:
To prevent ATO fraud, businesses should make sure that:
- Passwords are regularly updated
- Use of strong and unique passwords
- Use of multi-factor authentication techniques
- Check for compromised credentials
- Set notifications for any account changes
- Set a limit on account login attempts
Malware attacks
Malware is malicious software that aims to disrupt business operations by stealing confidential data, damaging business software, or gaining unauthorized access to any digital program to extort money from a business.
Business software can be easily susceptible to malware through fishy email attachments, infected websites, or removable media like USBs, external hard drives, SD cards, etc.
The most common malware fraudsters use to commit digital fraud is ransomware. Ransomware is a type of malware fraudsters use to hold important company data or accounts as ‘hostage’ until a ‘ransom’ or a specific amount of money is paid. According to Statista, 72.7% of businesses worldwide were affected by ransomware in 2023.
Phil Strazzulla, Founder of SelectSoftware Reviews, says, “Some malware attacks are designed to disrupt your operations, indicating some political or competitive issues at hand. Most malware, like ransomware, aim to only extort money by encrypting files unless a payment is made and are generally harmless to the system itself until the criminal makes an action.”
The threat:
Malware attacks can cause loss of access to critical and confidential business data, interrupt business operations, and cause significant business losses to fraudsters who may ask for compensation in return for giving back access to illegally obtained business accounts.
Countermeasures:
Businesses should make sure that:
- There are firewalls and protective antivirus software in place
- Antivirus software is up to date
- Employees and management are educated about prevalent cyber threats that may cause ransomware.
- Emails and their attachments are thoroughly verified and examined before opening or downloading.
ACH Fraud
ACH fraud, or Automatic Clearing House fraud, is a type of financial fraud that makes a business or its employees make unauthorized transfers to another account through the Automated Clearing House Network.
In the United States, ACH is the central hub that facilitates clearing for all electronic fund transfers for financial institutions, like direct deposit for payroll transfers or for PayPal and Venmo payments.
The threat:
A fraudster only needs two pieces of information to commit ACH fraud—your business checking account number and bank routing number. With this information, a fraudster can make unauthorized transfers from your business account to a fraudster’s account—like transferring payroll money or setting customer or supplier recipient as the fraudster’s bank account.
Countermeasures:
Businesses should make sure that:
- Access to devices used to perform ACH transfers is restricted
- Implementation of multi-factor authentications is in place
- Compile a list of allowed regular transactions
- Implement ACH filters to make sure that ACH transfers aren’t made to unregistered accounts
- Encrypt sensitive data, especially banking credentials
Invoicing fraud
In an invoice fraud, a fraudster (can be an external or internal individual):
- Can pose as one of your vendors to change banking information on payments.
- Can pose as a vendor to generate a fake invoice
- May be a legitimate vendor sending duplicate invoices to ask for another payment
- Can also be employees creating fake invoices for items that were never bought or acting with external fraudsters to create fake invoices.
According to Ian Sells, CEO of Million Dollar Sellers, “The challenge with invoice fraud is that the threats can come from external and internal parties who are highly knowledgeable of your accounting processes and internal management lapses, making it difficult to track down the actual perpetrators or prevent them from doing such crimes.”
As a type of payment fraud, fraudsters take advantage of compromised payment details for monetary gain. According to a Forbes report, the average loss from invoice fraud among businesses is $280,000 per year.
The threat:
Businesses without proper internal and accounting systems are susceptible to cyberattacks that can make payments to illegitimate vendors look legitimate. An AP staff member may not know the difference between a fake invoice and an already-paid legitimate invoice.
Countermeasures
:Businesses should make sure to:
- Put proper accounting systems in place to monitor vendor data and vendor payments
- Verify email asking to change banking details
- Examine payment requests from unfamiliar vendors
- Cross-check invoices with purchase orders and trace relevant data based on the purchase order to avoid duplicate payments
- Make use of machine learning to identify anomalies in invoice data
Be smarter than a fraudster in the digital age
As technology becomes smarter, so do fraudsters. In the digital age, fraudsters have discovered numerous effective ways to steal businesses from their hard-earned money through ATO, malware attacks, ACH fraud, invoicing fraud, and asset misappropriation.
Financial fraud can significantly impact business operations, but it is not impossible to mitigate and avoid it with the proper countermeasures. That is why organizations and businesses must ensure that they have the right and properly working accounting, security, and internal control systems to mitigate the chances of being victims of financial fraud.
Protect your business from digital crimes and fraud, especially in an era where fraudsters can commit cybercrimes even from halfway across the globe. Get on a call with us today to find out how our services can protect you from financial fraud.
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