Fighting First-Party Fraud by Monitoring Customer Risk

Fighting First-Party Fraud by Monitoring Customer Risk

First-party fraud is when individuals—for their own purposes or on behalf of others—using a real or synthetic identity enter an exchange of some sort for goods or services without intending to follow through on the future payment(s). This can include but is not limited to fraudulently applying for a loan, account overdrafts and credit card fraud. With first-party fraud, individuals choose to be fraudulent and commit the fraud themselves versus third-party fraud which is usually in the form of identity theft and involves an individual’s identity being stolen and used by a separate party for fraudulent intent.

In 2020, “57 percent of businesses experienced rising year-on-year fraud losses, despite claiming to be able to identify their customers.” – Experian


The Challenges of First-Party Fraud

The increase in online use and the demand by consumers for more services to be digitally available, including digital banking, has meant that banks and FIs need to ensure they are using the right technology and strategies for countering fraud. This is especially the case as banks, fintechs and other financial institutions are longtime targets of fraud and criminal exploitations. According to Aite, banking-related fraud during the pandemic “seemed to be concentrated around identity fraud such as application fraud and the downstream manifestations of it, including mule activity, synthetic identity fraud, and first-party fraud.”

Identities used as part of first-party fraud include:

  1. Real Identity: the person themselves uses their own identity to commit fraud for personal gain.
  2. Synthetic Identity: a fraudster uses a synthetic identity to help cover their tracks. A synthetic identity is the combined use of real and fabricated personally identifiable information (PII) and identity documents that can be difficult to detect as fraudulent.
  3. Money Mules: whether willingly or unwittingly, money mules are individuals that use their own PII to open a bank account etc. but do it on behalf of others, usually a criminal money laundering ring.

According to the FTC, in 2020 there were over 600k reports relating to bank, credit card and loan fraud combined. When it comes to first-party fraud, the challenge for banks and FIs can be to properly identify the source of the fraud and thus the subsequent losses. In cases of identity theft, it is clear who the victims of the fraud are, which makes it easier to identify where the losses are coming from.

On the other hand, banks and FIs tend to have difficulty identifying first-party fraud as the source of their institution’s losses because people are using their own PII during the fraudulent behavior. In the case of money mules specifically, Aite explains that “Measuring mule activity remains a sensitive topic for many FIs” and many have difficulty estimating “the severity of mule activity at their institution.”

Mitigating First-Party Fraud

As part of their fraud prevention strategy, banks and FIs should use technology that verifies identities and simultaneously monitors customer risk. Fraud does not take place only during the initial customer onboarding process, but rather throughout the entire customer lifecycle. This makes ongoing monitoring critical. Because a customer’s risk profile is always changing, utilizing an AML program that has transaction monitoring, sanctions and PEP screening and ongoing risk screening will enable banks and FIs to reduce risk and take proper action.

In order to effectively detect fraud and expose suspicious activity, the right technology will establish trust using machine learning and advanced algorithms for dynamic customer risk assessment, fraud profiles and extensive identity validation as part of customer due diligence (CDD).

Learn more about how Acuant Compliance can help banks and FIs mitigate fraud.


* 2020 Global Identity and Fraud Report, Experian
* Mule Activity: Find the Mules and Stop the Fraud, Aite
* Consumer Sentinel Network Data Book 2020, FTC


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