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Will Economic Downturn lead to Increased Fraud?

Not all fraud increases in an economic downturn

Red Bank, March 2 - There have been a number of recent articles outlining how the economic downturn will result in increased fraud, which I believe have inaccurately portrayed the real fraud risks in an economic downturn. I am currently compiling a definitive article on the topic for broader release (internal fraud, friendly fraud, first and third party fraud, organized fraud) but would offer some counter arguments for feedback to some of the assumptions and predictions that are being presented in the press today.
 
In a recent article from The Wall Street Journal entitled "Small Businesses Face More Fraud in Downturn" the author makes the case that in an economic downturn there is a higher incidence of employee fraud. This actually is not entirely true, while there may be more attempts, the number of successful fraud cases decreases. In terms of underwriting risk, employee or internal fraud is more likely in times of boom than in bust. Why? Because employers aren't typically paying as close attention to the books and as long as cash flow is good the focus is on closing business.
 
What we are seeing in the press is how these fraud cases tend to be more exposed in bust times. Consider the recent investment ponzi scams that have come to light with Madoff and Stanford, these are not fraud scams that were perpetrated in a bust economy, they happened in the boom, and came to light in the bust. In times of economic downturns businesses are sharpening their pencils and digging into costs, expenses and cash flow and this tends to uncover internal fraud that may have been overlooked.
 
In another article found on Security Watch and written by Fortify Software the author theorizes that online fraud will increase by 33% in 2009 because fraudsters are being impacted by the ongoing economic credit crunch and will be selling card data for less money.  In short their premise is that the fraudsters in the card reselling segment are experiencing higher competition for card data and are having to push more inventory to get the same financial yield. They cite the economic recession for the reduction in average cost for a stolen identity(card, cvv and expriration date). These identities  have dropped from $15.00 18 months ago to $2.00 last October. While I can understand making a correlation to increased fraud due to increased and cheaper supplies of card data, I don't really buy the idea that this correlates to the economic rescission. The card data reselling market has become competitive, and the availability of compromised data is high, which means there is higher supply than demand today. I am not an economist, but I would be more inclined to believe that price points on compromised cards are falling due to simple supply and demand over the idea that the downturn in the economy is hurting the sales of card resellers.

About The Fraud Practice

The Fraud Practice is a privately held  US LLC based in Red Bank New Jersey. The Fraud Practice provides consulting services on eCommerce payments, fraud prevention and credit granting. Businesses throughout the world rely on The Fraud Practice to help them build and manage their fraud and risk prevention strategies. Utilizing best practices and leveraging key partnerships, our team of industry and technical experts offer customers a single source for learning how to design, deploy, review  and integrate fraud prevention practices in their business processes and solutions.

Mr. Montague is the founder and President of The Fraud Practice and has spent the last fourteen years working in the eCommerce space, and is well respected for his business knowledge and thought leadership.  His background includes an in-depth application of innovative solutions for preventing business to business and business to consumer e-commerce fraud.  Prior to founding The Fraud Practice he held positions as the Director of Risk Solutions at CyberSource Inc. and National Principal at IBM Global Services. 

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