Financial fraud is all around us. People routinely con banks or simply default on large loans or credit card bills. There are others who take large insurance policies and submit wrong claims. I have had the good fortune of meeting many risk officers and underwriters, and have heard sordid tales of financial crime. The ingenuity of fraudsters never ceases to amaze me. Risk officers and underwriters are forever playing catch-up. Every time they adjust their systems and processes, a new type of fraud emerges!
I have realised that relying on a simple credit score isn’t enough. Neither is just checking one’s address. We have to go back to basics – establish some fundamental facts about the person who is about to take a loan, a credit card, or an insurance policy. It is important to know who the person is and uncover relevant information about their background.
Striking the right balance
Yet such an approach to risk mitigation cannot come at a huge cost, relative to the amount of loan or the sum assured. For example, asking customers to furnish a lot of information about their background can be quite cumbersome for customers. Some of them might just be put off by the process and run to a different provider. Besides, delays in loan or credit card disbursement or insurance approval (due to a prolonged vetting process) will have a financial impact to you. Thus, the cost of implementing risk mitigation strategies will have to be weighed against the benefits of implementing them (that is, catching more financial fraud). Naturally, as the amount of loan or sum assured increases, risk mitigation processes become more and more lucrative, or even indispensable.
Basic Rules to consider
I find it easier to think of risk by imagining a fictitious offender – let’s call him ‘Pharun’. Pharun has an extensive history of past crimes and knows all the tricks of the trade. He is also tech-savvy. In a social gathering he comes across as just another guy, and it’s impossible for anyone to tell that he is a criminal.
Rule 1: Ascertain the identity of the customer, beyond reasonable doubt
Pharun decides to apply for a credit card, posing as his neighbour Arun, a bona fide marketing executive at a large F.M.C.G. Pharun has been able to pick up a photocopy of Arun’s Voter I.D. card from the neighbourhood photocopying shop and decides to use it to his advantage. Sure enough, the bank checks Arun’s document and finds it is legitimate. They even conduct a check of his address, and find that he does indeed stay there – Pharun had received the call from the agent assigned to check his address, and met him downstairs at the lobby. When the card arrived, Pharun simply picked up Arun’s post and started using his card.
Trouble is, no one tried to verify if the applicant was indeed Pharun!
Rule 2: Check non-financial aspects of a person’s history
Pharun decides to go for an insurance policy, this time in his own name. The insurance company checks his credit history and his address, and finds nothing wrong with either. They decide to approve his policy. In a couple of months, Pharun files a false claim and manages to win a significant amount of money.
Trouble is, Pharun actually has a pretty clean credit history! Had the insurance company checked his court records, they may have found a few civil and criminal cases either filed by or against him. Litigation records provide an interesting and relevant angle to a person, and should such records be found, it is important to probe deeper and find out more about the individual.
Rule 3: Double-check income details from source of income
Pharun decides to apply for a loan. He picks up his salary slip and simply changes some of the details on Photoshop! His loan is approved!
Again, the bank checked his I.D., and both, his home and office address, but never bothered to confirm his salary!
So there you go – the trouble is that all these separate pieces of the puzzle are never put together. What one needs is order to comprehensively tackle financial fraud is a comprehensive set of solutions – identity, court record, address, and employer / employment checks, all need to come together to mitigate the risk of financial fraud – and that’s exactly what we at IDfy offer!