International fraud: scale, prevalence, and significance as a policy concern

International Finance

The Scale of International Fraud

The definition of fraud

The headlines of online news sources, television news shows and print sources cry foul daily about an infinite number of scams perpetrated on the citizens of countries around the world. When it seems there could not possibly be another way to bamboozle a person someone in a foreign country or even on our own soil finds a way to demonstrate that the lengths to which a human soul will go to cheat and trick another person has not reached its limit.

Let us begin a discussion on international fraud by offering clarification on specific and important legal and academic points. In its simplest form fraud is defined as an intentional deception made for personal gain or to damage another individual. However, the reader will discover as this essay unfolds that nothing related to fraud, international or otherwise, is actually simple.

However, the word fraud actually has multiple legal meanings depending on its application in a specific case tried in court. Let us agree that although legal interpretations vary by jurisdiction fraud is a definite and serious crime as well as a civil law violation.

The types of fraud and statistics

There are numerous avenues through which one can commit fraudulent acts. Fraudsters utilize the mail, phone, wire and internet to ambush unsuspecting individuals and the types of fraud are so broad at first glance it's surprising that every individual in the country has not been victimized. While the types of fraud are nearly too numerous to list examples include such things as counterfeiting, money laundering, forgery, identity theft, shell games, investment frauds, embezzlement, child pornography and false advertising.

There's even adoption, medical, academic mail-order bride and electoral fraud -- fraud in all its forms has insinuated itself into all aspects of living and commerce and a commentary on its social meanings must keep for another time.

National and international fraud statistics are equally illusive because the types of fraud here and across the globe are so copious and the reporting agencies so varied. Other researchers echoed this sentiment as evidenced by the following statement from the first task -- to consult the official crime figures for an assessment of the incidence and prevalence of the problem and the efficiency of the authorities through arrest and prosecution rates, followed by a critical analysis of the strengths and weaknesses of the various agencies as evidenced by their success in reducing the incidence and prevalence of said crimes. However, a cursory examination revealed that as a quantitative measure of the size of the problem and as a longitudinal measure of the effectiveness of the various regimes and initiatives, the data was almost worthless. All indications were that the data was more a measure of policy and attitudes.

While not wishing to present information in a redundant and perhaps boring format, the use of double block quotes at this point is meant to demonstrate a connection between the material contained in each. The message from one validates the message of the other and vice versa. The point being made is that statistics on international crime are sketchy at best but be guaranteed that whatever figure an organization places on one of the many types of fraud -- it will be too low to be sure and exact numbers are simply impossible to determine.

Yet another researcher echoes this same sentiment

One might think that multinational data collection initiatives would be the most useful where available because they could provide relevant data on many countries. One such report entitled the International Crime Statistics is published by Interpol which would seem to be an authoritative resource at first glance. However, the data is lacking common measurement and controls in the measurement of the various crimes which causes the statistics to be considered less than trustworthy by most and virtually unusable. This Finally, on the subject of statistics perhaps now is the time to share the most dismal discovery from my research. First, there is "a large difference between the recorded number of crimes and the undiscovered or unreported number and this figure is referred to as the 'dark figure of crime' (Coleman & Moynihan, 1996).

An example

Let us examine numbers provided by a source in the United States that has only recently come into existence to address the singular issue of internet crime. The data they provide may help the reader get an inkling of the magnitude of the problem of international fraud.

Another statistical resource is the Internet Crime Center Complaint. In collaboration with the National White Collar Crime Agency and the Federal Bureau of Investigation they have compiled statistics on the number of internet crimes and their estimated costs for the past four years. Last year they logged a shade less than half a million complaints that cost a half a billion dollars.

Now, remember, this data is only for U.S. citizens so to better visualize fraud statistics multiply it by perhaps 30 different kinds of rampant fraudulent acts and again by another 100 or so nations in the international community and then the annual figures of fraud start to crystallize.

Despite this lengthy conversation on statistics let us end this section with the following statement. Finally, most commentators will agree that the actual fraud statistics are undoubtedly many times higher than those recorded by policing agencies across the globe and any estimate of a realistic figure would simply be a 'guestimate'.

Policing agencies

The advent of the internet has caused an explosion in the number of incidences of international fraud. As well, policing agencies from local departments to governmental organizations have begun marshalling their resources in earnest to combat the problem.

In fact, just as the types of fraud are prolific, so too are the names and numbers of groups who exist to ferret out and eliminate fraudulent acts and because new international fraud fighting agencies pop up each day it is not possible to review them all so instead let us consider some of the more renowned national and international fraud fighting organizations.

Although Interpol was mentioned in a less than stellar light when it comes to statistics, it is the largest policing agency in the world. There are over 188 member countries that facilitate cross border police cooperation and support and assist all organizations, authorities and services whose mission is to prevent or combat international crime.

Certainly one of the most appealing aspects of Interpol is that it aims to facilitate international police cooperation even when diplomatic relations are not in existence between two countries embroiled in an international fraud investigation. When this happens then action is taken within the limits of existing laws in the different countries as well as the Universal Declaration of Human Rights. They are prohibited from military or political, religious or racial interventions and activities.

The United States federal government has developed a number of cyberspace sights from which an individual may log on and file a report of fraud. One site named 'Consumer Fraud Reporting' provides online forms with specific instructions on the types of information to include and links to local Federal Bureau of Investigation offices conveniently located for average citizens. I

n addition, the site allows one to report scams that have originated in a number of other countries across the globe. This comprehensive resource explains the dozens of types of fraudulent acts being perpetrated on innocent victims and guides the reader to the appropriate federal agency that handles each specific kind of fraud. Finally, visitors to the site are also directed to their state attorney's office websites as well. For those who have in anyway been swindled this website is a first good step towards finding justice.

Another example of a group that battles international fraud is the IAIFA or International Association of Insurance Fraud Agencies. This multiagency organization aims to maintain accurate and accessible data on insurance related fraud and actively works to break down the jurisdictional barriers between international organizations. Their goal is to coordinate the efforts, training and education of law enforcement agencies, governmental bodies and the insurance industry to move more effectively and combat insurance fraud worldwide.

Finally, examples of other international agencies charged with fighting fraud include such groups as the Financial Services Authority (FSA), the European Anti-Fraud Office (OLAF), the National Criminal Intelligence Service (NCIS) and the Metropolitan Police Fraud Squad (MPFS). As the numbers and types of fraud continue to grow, one can expect that so, too, will the numbers and types of agencies designed to address it follow suit.

Present day preventive strategies -- their strengths

Each organization will claim that the best preventive strategy to avoid being defrauded is to be vigilant against scam artists and become educated in the latest methods being used by scammers. However, realistically and in practice this strategy alone will not preclude one from 'getting taken' -- in light of the fact that major corporations with huge security budgets have been swindled there seems to be little hope for 'the little guy'.

Businesses and other establishments have now turned to fraud detection as a way to address their fraud issues. "In contrast fraud detection involves identifying fraud as quickly as possible once it has been perpetrated. In practice it must be used continuously as one does not always realize when fraud protection has failed." For instance, if credit card information has been stolen the best response is early detection so that the card can be cancelled.

"Fraud detection is a continuously evolving discipline. When it becomes known that one detection method is in place, criminals will adapt their strategy and try others." Detection tools do not lose their effectiveness, however, because new criminals are constantly entering the field unaware of prevention methods used to date by an organization attempting to protect itself against fraud. Growth in the field of fraud detection has skyrocketed as company after company has sprung up to meet the growing demand for fraud detection services.

Fraud detection tools

Fraud detection tools fall into two categories. They may be either supervised or unsupervised. When referring to supervised detection tools one is speaking of using a database of known fraudulent or legitimate cases from which they would construct a model that would then yield a suspicious score for new cases. These require traditional statistical classification methods that have proved to be very effective and powerful tools for detection in a variety of applications.

Link analysis relates known fraudsters to other persons through the use of linking personal records and social networking methods (Wasserman and Faust, 1994). An example of this is that security agents responsible for monitoring for fraud have found that fraudsters seldom work individually and often turn to others on telecommunications networks such as Facebook to maintain contact with their nefarious organization.

For instance, once a fraudster has received illegal information about a person through a website or telephone they often retry that data even after it's been disconnected. In this way, when security agents are lurking online they can capture the ip address of the scammer and work from there to apprehend them.

Unsupervised methods are those in which there have been no observations whatsoever. Under these circumstances the policing agency would then develop a profile of the suspect or use of detection methods. This can also be done statistically.

What is searched for in data is examples of information that varies from the norm. Legitimate users of a site, credit card, etc. often develop patterns of behavior that are 'numerized' in data. The explanation of this is quite simple.

When someone is logged on and their behavior is markedly different -- such as making a large purchase with a credit card that has not been known for this type of behavior -- there is an automatic computer response -- and in this case the card might be rejected and the customer notified.

Present day preventive strategies -- their weaknesses

When fraud detection presents itself as the most widely utilized strategy to deal with illegal acts, its use is also severely limited because new fraud detection ideas are severely limited by the exchange of ideas and this just makes common sense.

There is no good reason to describe fraud detection techniques in the public domain because then criminal has access to the information needed to evade detection. What possible purpose would it serve to provide detection and intervention information to the criminal?

A second problem with fraud detection is that it involves massive amounts of information. For example, over 350 million credit card transactions were made in a single year by one international banking system and the Royal Bank of Scotland registered a billion transactions over the same time period.

Processing this data for fraud detection is herculean and the fraud value of one tenth of one percent of these transactions runs in the millions of dollars for corporations and their customers. The statistical tools capable of analyzing this type of information are complex and costly.

Countries successful in combating and preventing international fraud - how it's done

Initially, this section of the essay was intended to be uplifting and give the reader hope that there are countries across the globe that have come up with successful ways to prevent fraud altogether or at the very least decrease the number of incidences in any of the dozens of types of fraudulent activities. Unfortunately, this is not the case.

Scholarly article after scholarly article reveals that municipalities and commerce realize the magnitude of the problem. All discuss the need for prevention and most offer advice on a scale of moderate to advanced on how to protect oneself from become a victim of fraud.

But none spoke of successfully beating back the number of incidences in any one type of fraud and many ceded the real possibility that they would probably need to face the realization that at some point they were actually scammed and cheated.