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What is First Party Fraud

Thursday, December 11, 2014

How to ensure you’re protecting your business

Fraud is an ugly word for small business owners. As a company, being a victim of fraud can be costly; fraud losses can wipe out your profit. Therefore, you’ll want to do your best to combat fraud before it happens. Part of doing this means educating yourself and your employees about the different types of fraud that can occur. You’ll also want to make sure you have a fraud management system in place. One specific type of fraud is known as first party fraud. This type of fraud is pretty unassuming and it’s important to try to mitigate it before it happens.

So in this article, we’ll look at what it is, including the different types of first party fraud. Let’s start by defining first party fraud.

What is first party fraud?

When it comes to fraud, you may know about identity theft, which is one form of fraud. But, you may not be aware of first party fraud. First party fraud is a type of identity fraud when a person or group falsely identifies themselves or provides incorrect information. Often, first party fraud happens when the person is applying for a loan or credit card and when the person seeks to get a better rate.

First-party fraudsters may exaggerate their income, claim they’re fully employed even though they aren’t, or do anything else that may misrepresent their financial circumstances. Some have also used first party fraud to falsify insurance claims.

Organized crime rings also sometimes use money mules for first-party fraud. These money mules are consumers who use their own information to open new accounts, obtain credit or buy merchandise on behalf of a fraud ring. The fraud ring then may use the money mules for money laundering.

Let’s quickly contrast first party fraud with third party fraud. In third party fraud, also known as identity theft or account takeover theft, a fraudster steals an existing identity and then uses it fraudulently to make purchases. In this theft, the fraudster could access bank accounts, credit card information and authentication, and other personally identifiable information like social security numbers. In this type of fraud, sometimes executed by an organized fraud ring, the victims are innocent individuals. These victims often spend countless hours trying to resolve the fraudulent charges and get their identities back. Sometimes, third party fraud can also involve a crime ring using synthetic identities to set up fictitious accounts and credit lines. In contrast, first party fraud targets the financial institution as the primary victim.

Now that you know more about first party fraud, let’s move to some of the common types of first party fraud.

What are some common types of first party fraud?

When it comes to first party fraud, fraudsters employ some tricks to help them try to outsmart the financial institutions. Here are a few of the most common types of first party fraud. Knowing these fraud types can help you prevent fraud and mitigate fraud losses.

Fronting – A common first-party fraud type, fronting is setting up a service in someone else’s name to help save money. A clear example of fronting is in the auto industry. Commonly, this happens when a teen’s parent claims to be the main policyholder of the auto insurance agreement. Then, they’ll add their child as a named driver. By fronting the agreement, they are changing the rates and their payments. That’s because teenage drivers typically cost more to insure since they don’t have the same experience on the road.

Address fronting – Very similar to fronting is address fronting. In this technique, a person uses a different address for an application than where they’re living in order to reduce the cost. An example of this is registering a vehicle at a lake house instead of the primary residential address. Someone may do this because the cost to insure the vehicle while at the lake house is significantly cheaper than the rate they can get at their primary residence.

Chargeback fraud – A cardholder willfully tries to defraud a merchant in this type of fraud. The fraudster will make a purchase on a credit card and then dispute the transaction with the issuing bank. Friendly fraud also falls under this category, as it’s the idea of the customer going around the merchant and going straight to their bank to get a charge refunded. Maybe it’s because a child got ahold of the parents’ credit card and made some purchases, or the customer doesn’t recognize the merchant name on the transaction.

Bust-out fraud – This type of fraud takes longer to perpetrate and is mostly carried out by organized crime rings. Here’s how it works: an individual or organized group applies for multiple credit cards, credit lines or bank accounts with real or assumed identities from financial services providers like banks or lenders. Then, they behave in a way that mimics normal financial services users’ behavior – making purchases and paying them off on time to build a good credit history and lower suspicion of any defaults. Because they act like a normal consumer would, they don’t raise suspicions. However, at some point, they decide to max out the credit cards with no intention to pay them back, racking up significant purchases and leaving the card companies to deal with the repercussions.

De-shopping – Another type of first party fraud is de-shopping. In this type of fraud, a person makes a purchase (usually clothes or the like) with the intention of wearing or using the product in question before returning it and seeking a full refund.

Goods Lost in Transit Fraud (GLIT) – In this type of first party fraud, the customer makes false claims. They’ll order a good or service online, and then falsely claim that they never got the merchandise, it was damaged, or the package was empty when they received it.

Why is first party fraud hard to detect?

As you can see, first-party fraud involves the individual acting maliciously. In contrast, third-party fraud is all about impersonation. Therefore, when there’s a stolen credit card or identity, it’s much easier to see. That’s because unknown charges appear on statements or a debt collection agency tries to collect money that the victim doesn’t owe.

Since a company can’t work with a victim like in third-party fraud, it’s much harder to detect. It’s not as simple as working with the person who was defrauded to confirm that stolen identity or credit card information. Instead, your company has to work to implement a monitoring system to help make determinations about suspected fraud.

As you can see, first party fraud can be difficult to detect and even harder to prevent. While fraud used to be easy to spot, fraudsters are becoming smarter than ever before. That means you need to know about fraud and stay alert at your business. If you encounter issues with fraud, it’s important to report them to the necessary authorities and take steps to protect your business. Proactively reviewing transactions to notice patterns and discrepancies can help you stay on top of all kinds of fraud. And if you’re not up for it, consider outsourcing fraud protection and security services to a third party partner.

Ready to work with a payment processor who can help you prevent fraud?

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