Preventing Fraud Without Curbing Commerce

Bob Beckett


October 1, 2012

When asked why he robbed banks, legendary outlaw Willie Sutton reportedly offered only a simple reply: “Because that’s where the money is.” Today’s criminals are targeting the data of companies of all sorts because, in this day and age, that is where the money is. The result has been increasing commercial fraud that is now estimated to cost U.S. businesses more than $11 billion per year.

One of the latest trends is the use of online registration systems and databases to falsify information and fraudulently obtain credit. Some criminals establish phony companies and even create a false appearance of prosperous stability by hiring professional receptionists and renting virtual office space that comes with a business address.

Other criminals simply steal the identities of existing businesses by using the mailing address of a legitimate company or going online to falsify business registration records. This enables them to use the good name, established history and credit of the legitimate company to secure credit and purchase goods for fraudulent gain.

After establishing credit through identity theft or other means, the criminal company uses its credit to make purchases and vanishes without paying. These frauds damage the credit histories of legitimate businesses while creating six-figure bad debts for the institutions that extended credit.

Most large businesses have the means to identify potential scams and track suspicious customers, but many are reluctant to implement systematic fraud risk management methodologies. They worry that overly strict or cumbersome controls will drive away legitimate customers, who will take their business to companies whose fraud mitigation steps are less onerous. Sales staff, worried about losing an order or wanting to be more “customer-focused,” may ignore fraud-prevention procedures they consider too restrictive. Or, even worse, some have taught customers how to circumvent their own company’s fraud controls to promote convenience.

Facing such barriers to success, how can companies control fraud without jeopardizing sales? There is no sure-fire way, but the strongest solutions are guided by the following four guidelines.

  • Swift and decisive alerts of potential fraud at the initial application or point of sale.

  • Reliable authentication of the businesses and people conducting a transaction to ensure that they are who they say they are.

  • A culture of fraud prevention in which leaders treat fraud prevention as a priority; understand and measure fraud separately from other bad debt; provide training and education to employees; and instill an “all-are-responsible” ethic for identifying and reporting fraud.

  • Information sharing about fraud among related businesses and government entities to strengthen their fraud prevention capabilities, both individually and collectively, and catch and prosecute these criminals.

The muscle behind these guidelines are new digital technologies for evaluating transactions. For example, extensive referential databases of business information (which contain addresses, personal data and other relevant information) make it possible for businesses to automatically conduct needed checks at the point of sale. Computer programs can quickly sift through multiple data sets to instantly calculate fraud risk scores to help companies determine whether to continue a transaction. Such scores can be customized not only for an industry but even for a particular company’s culture and tolerance for risk. This can be further granulated by tweaking parameters for differing channels within a company’s business. The cost-benefit of these tools is clear, as they are easy and flexible to implement and operate.

Businesses are being targeted for fraud because many criminals find it easy—too easy—to obtain credit for the sole purpose of stealing money and property. Fraudsters cleverly use new ways to hide their identities, perpetrate their scams and disappear undetected into the shadows. But by infusing the four principles of fraud prevention with data, analytics and other modern tools, any organization can seize an advantage against even the most sophisticated fraudsters.
Bob Beckett is a fraud expert at Dun & Bradstreet with more than 25 years of experience mitigating fraud with public and private entities.