Application fraud is when a party (individual, business or an authorised agent) submits an application for an account (credit or non-credit) to a financial institution and some or all elements of the application are false. Reasons to submit fraudulent applications vary, from credit fraud and financial advantage to personal gain, to money laundering.
Some of the common fraud types within Credit Application Fraud include Broker and Dealer Fraud, False Documents, Stages Wages, False Employment, Identity Takeover and Valuation Fraud to name a few. Within Non-Credit Fraud, Money Laundering and Money Muling, as well as Identity Takeover are the most common fraud types.
Application fraud is largely broken into first-party and third-party fraud. First-party application fraud is perpetrated by the applicant themselves and is usually for their personal financial gain. Third-party application fraud is usually perpetrated by an authorised agent, such as a finance broker, dealer or agent, for their financial gain, such a bonus or commission payment. The applicant may or may not be aware of the fraudulent information being submitted to the financial institution on their behalf.
In case of money laundering, the applicant may be an active participant within the financial crime or be unaware of it, usually when their identity is stolen and is used without their knowledge or consent.
Application fraud, committed for both fraud and money laundering purposes can be a one-off event perpetrated by a single individual or a highly sophisticated organised crime with various parties playing their roles in the operation.
The detection of application fraud requires sophisticated fraud and financial crime detection prevention software within the application path, for both the digital and more traditional onboarding.
The importance of eradicating application fraud
Application fraud represents two types of risk for financial institutions – credit and compliance.
From a credit risk perspective, financial institutions that do not detect and prevent application fraud, run a risk of financial losses, increased operational costs and bad debt levels above the industry average. This can result in higher capital requirements, increased cost of funding, increased insurance premiums and poor reputation.
From a compliance perspective, financial institutions may face regulator fines and loss of operating licence, as well as, customer dissatisfaction, poor reputation and social impact scores.
The real-world impact of application fraud
Application fraud is a crime that costs individuals, businesses, and governments billions of dollars each year. It contributes to the everyday functioning of many illegal industries including human trafficking, drug dealing, and arms dealing.
The fraud side of application fraud is well publicised, when offenders are caught, and sentences are handed out. From relatively small first-party fraud1 to slightly more sophisticated identity takeover fraud2 to organised syndicate fraud3
Large scale money laundering operations are often enabled through application fraud and can go unnoticed for a lot longer, having significant impact on our society4&5
AUSTRAC and ACCC in Australia, along with other agencies around the globe, report annual cost to society from money laundering in billions of dollars. Ultimately, most of the money laundering operations start with an application for an account through which dirty money will pass through one or more times during either placement, layering or integration of the funds.
How can fraud prevention software reduce the rates of application fraud?
Application fraud software can detect all types of fraud and financial crime described herein, across both credit and non-credit financial products, digital and traditional channels and for institutions of any size.
GBG’s Application Fraud Management solution, Instinct Hub, has four core components that manage application fraud:
To read our free report about the Future of Fraud Management in South East Asia, click here.
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