The UK and European Union economies are headed for recession due to rising energy prices and a cost-of-living crisis leading to some fears that there’ll be an increase in financial crime due to recession.
But Russia is in meltdown already as a result of sanctions. An outward sign of this is the dramatic rise in financial pyramid schemes, many centered around crypto and illegal trades in foreign exchange. The Bank of Russia recently reported it had identified 954 such fraudulent schemes in the first half of 2022, a seven-fold rise on the same period last year.
This seems to tell us two things: that economic turmoil leads to an increase in financial fraud, and that criminals pivot quickly to exploit a changing situation. Having been shut out of global financial markets, Russian investors are desperate to divert funds to crypto and Forex instruments. Prime areas for financial criminals to take advantage.
Russia is facing serious economic dislocation, and this is thankfully not the case for the rest of Europe. Nevertheless, there is no doubt that the cost-of-living crisis is causing real problems for households and taking businesses to the brink.
For many people, the inhibition to commit fraud is lowered when they face bankruptcy or personal hardship, and this is why we tend to see a rise in fraudulent activity in periods of recession.
So, can we make certain predictions about the extent and nature of financial crimes over the coming months (or years, if the Bank of England is to be believed)?
Are financial crime patterns and economic downturns correlated?
There is no proven direct link between the state of the economy and levels of crime. In the aftermath of the 2007-2008 financial crisis, violent crime in the US dropped to a 40-year low, despite a struggling economy and high unemployment.
Criminological research into these relationships tends to be much more interested in street crime than white-collar fraud – and there are indications that recessions do consistently lead to a rise in elements of financial crime, particularly fraud. Rates of fraud increased by 24% during the 2008 recession. However, during the Great Recession all other crime rates appeared to decline in the US and other developed nations. And research suggests that crime and economic conditions have started to decouple since the turn of the century.
In April 2020, during the first wave of the Covid lockdowns, a study of the 1980, 1990 and 2008 recessions in the UK showed that falls in GDP went hand in hand with sharp rises in fraud offences. This was not proof of correlation, much less a statistical tool to predict likely levels of fraud as a result of Covid, or for any given contraction of economic activity.
The incidence of financial crime did rise during the pandemic, as fraudsters exploited gaps in security opened by remote working. The insurance sector seemed to have been particularly exposed. Asked if they had noticed an increase in overall fraudulent activity during the first two months of the 2020 lockdown, 42% of insurers said yes. More specifically, 47% of firms reported an increase in account takeover (ATO) attacks.
Two important factors muddy the statistical waters. First of all, the digitalization of financial systems created many more opportunities for fraudsters who are always the first to leverage new technologies. It is easy to forget how much and how quickly our financial lives have changed since the last recession, in 2008-9, before the disruptions of the fintech revolution. The modus operandi of financial fraudsters has also been transformed by innovation, making even figures from the relatively recent past difficult to interpret.
What does this mean for compliance teams?
Typologies, the ways in which criminals behave, always need to be closely monitored. Shifting economic conditions mean that criminals will look to more lucrative means of making money than what has worked before. Meaning that compliance functionality is more important than ever.
One of the most effective ways to respond to financial crime patterns shifting is to have a deep understanding of how transactions are changing. For that you need a strong transaction monitoring solution. Not only to detect suspicious transactions that could indicate fraudulent behavior but because as economic conditions suffer, criminals are likely to implement new types of money laundering activity.
The statistics overlook one key factor: that recessions tempt financial firms into cutting corners on compliance and fraud detection. For smaller firms, this might mean that projects to automate transaction monitoring workflows are shelved; larger financial institutions might scale back training or put off planned investments for upgrades.
This is fatal of course. Financial institutions combat financial crime for ethical and regulatory reasons, but also in their own self-interest to enhance reputations, and avoid fines. Compliance should never be regarded as a soft target when the economy is on its knees because a soft target is just what fraudsters like and rely on.
While previous crises can’t help us predict what will happen to financial fraud in the current recession, one thing is certain: criminals will exploit the situation in any way they can, and at breakneck speed.
The war in Ukraine is a frightening example of this. Since the invasion in February, an average of 315 new domains containing the word “Ukraine” have been created every day, with over three-quarters (77%) found to be suspicious.
The war “inspired” a new scam whereby criminals impersonate legitimate organizations such as the Red Cross to direct users to send cryptocurrency payments via a fraudulent QR code.
Why you need to be as agile as financial criminals
In transaction monitoring, change is the only constant. It is likely that the recession will bring certain types of fraud to the fore or that threat actors will increasingly target certain sectors. If you have implemented a transaction monitoring tool powered by machine learning you will identify these shifting patterns of behavior.
Fraudsters move quickly to avoid detection so your transaction monitoring workflows must be built for speed. As criminals rip up the rule book and find new ways to commit financial crimes you need the ability to edit and deploy business quickly and intuitively. This will enable your transaction monitoring to be sensitive to emerging financial crime behaviors and typologies.
The cost-of-living crisis – one of the major causes behind the imminent recession in the UK and European Union, will make some people more likely to commit fraud because they are under pressure. However, the real and permanent threat to financial institutions is the class of criminals that will perpetrate financial crimes no matter what. The recession will change what they do in ways we cannot foresee – and that is why we need transaction monitoring.
Economic crises create uncertainty, both for people and institutions. Compliance has a real role to play in reassuring customers and markets that your business is a safe place for their money, because you detect and prevent criminal activity at a time when any loss resulting from financial crimes could have the gravest repercussions.