The History and Evolution of Fraud

the history and evolution of fraud

Fraud has been in existence for more than twenty centuries. The world continues to grapple with the devastating effects of financial crimes. In this digital age, financial fraud has become more sophisticated than ever. This article discusses the origins of fraud, how it has evolved, and technological advancements toward fraud prevention and security.

What is fraud?

In simple terms, fraud is deceit with an intent to illegally gain a financial advantage over a person or an entity. It refers to dishonest acts that deprive an individual or entity of money or legal rights. Fraud requires using an intentional misrepresentation of facts to convince a person to hand over money or possessions, unlike outright theft, which requires stealth or force.

For an act to constitute fraud, it must meet two conditions; first, the perpetrator must be aware that the statement or claim is false or altered. And second, there is an intent to deceive for economic benefit.

Many scientists have proposed theories to explain the reasons why fraud persists. According to Donald R. Cressey, a renowned criminologist, a person is most likely to commit fraud when he has enough motivation or pressure; an opportunity presents itself, and there is enough justification for acting.

The first-ever fraud case

Bernard MadoffSholam Weiss, and Charles Ponzi would probably be the first names to cross your mind when you think about fraud. While they are associated with some of the worst fraudulent schemes in history, the first cases of fraud date back to the third century BC.

In 300 BC, two Greek sea merchants, Hegestratos and Zenosthemis, devised a plan to enrich themselves by taking out a bottomry, an insurance policy on their ship and cargo. According to the agreement, they were required to repay loaned money with interest after selling their merchandise. If they failed to repay the loan, the lender would gain possession of the ship and its cargo.

After leaving the dock, both men decided to sink the ship so they could pocket all the loaned money. However, they were caught in the act; Hegestratos lost his life while attempting to escape, and Zenosthemis faced the law’s wrath in the Athenian courts.

Ancient fraud types are still practised today, with even more devastating effects on people’s economic and emotional health. Hegestratos’s insurance scam has set a precedent for many such scams today. We hear or read reports of businesses deliberately being sabotaged to redeem insurance money.

Most common fraud types

Fraud can take different forms- insurance scams like the one Hegestratos tried to pull off is just one of over 41 types of fraud today. For simplicity, we will touch on the most prevalent ones: 

●  Phishing, smishing and vishing

● Credit card and debit card fraud

● Remote banking fraud

Identity theft and identity fraud

● Advance fee fraud

● APP fraud

● Account takeover

● Card not present (CNP) fraud

● Covid 19 fraud

Cyber fraud

● Ponzi schemes or other investment fraud

Phishing, smishing and vishing involve fraudsters assuming a known organisation’s identity. Such scams are designed to coax unsuspecting people into revealing sensitive information that could be used to gain unauthorised access to their bank accounts.

Fraudsters use fake emails, text messages, links, cloned websites, phone calls and pop-up messages that look like they are from a legit institution to defraud people. Phishing websites often look very similar to the organisation they impersonate, tricking the user into revealing their card and personal details.

After a fraudster obtains someone’s credit or debit card information through phishing, they can commit card fraud. This involves using the victim’s card to make purchases, transfer money to another account, or both.

Therefore, when they take over existing accounts, this fraudulent process also results in another type of fraud known as account takeover fraud. This is when the fraudster poses as the genuine account holder and controls their account to make unauthorised transactions

Another common form of fraud is identity theft. It occurs when a fraudster steals someone’s personal details to commit identity fraud. This allows them to open bank accounts, take over existing accounts, and obtain other goods or services illegally in their name. 

Some notorious cases of fraud come from Authorised Push Payment (APP) fraud. It takes place when the fraudster tricks the individual or organisation into transferring funds to them. They are manipulated into willingly making a payment.

The evolution of financial fraud

evolution of financial fraud

Identity fraud, phishing, account takeover and APP fraud are only some of the many ways technology-mitigating fraud has evolved.

Over the years, fraud has continued to evolve, going beyond the first recorded instance of insurance fraud from Greece in 300 BC. But the very first case of financial fraud took place around 500 years later in Rome.

In 193 AD, a special group of soldiers known as the Praetorian Guard assassinated Pertinax, the Roman Emperor at the time. They hatched a plan to sell the empire to the highest bidder for 1 billion pounds in an auction.

The soldiers succeeded in defrauding Julianus, the highest bidder, by selling something that wasn’t theirs. Julianus was never recognised as Emperor and was deposed. A civil war broke out at a time that came to be known as the “Year of the Five Emperors.”

Property fraud burst onto the scene in 1821, this time it wasn’t power on sale but land that never existed. Gregor MacGregor conned investors into believing he invested their money in building houses.

In 1911, Euduardo de Valiferno had the Mona Lisa painting stolen from the Louvre art gallery. He wished to sell not the original but counterfeit copies to underground collectors.

The 1920s saw one of the most significant investment scams ever- the Ponzi scheme. The banking sector was not spared either, as Cheque Fraud and Identity Fraud often hit it. A notable example is Frank William Abagnale Jr, who faked eight identities, including a physician, assistant state attorney, and pilot.

Since the late 1980s, advances in technology have seen fraud evolve into more complex forms- from handing out bad cheques and fake currency to replicating credit cards. The internet has changed the world, and it is now available to anyone with access to a computer. Criminals can access people’s information and have been able to target countless numbers of innocent victims.

The number of fraud cases continues to grow at an unprecedented rate. A report by the US federal trade commission reveals that in 2021, there were over 4.2 million fraud cases reported, 2.8 million were fraud related complaints and 1.4 were identity theft complaints. Although the USA has a population which is almost 5 times greater than the UK, there were 445,357 fraud cases reported in 2021 in the UK.

Top fraudsters in history

While modern fraud exploits loopholes in digital technologies, it has targeted primarily unsuspecting people. In many cases, scammers have wreaked much havoc until their acts caught up with them. It’s impressive when you realise how easily some of the scammers in the past could have swindled millions simply by lying. Below are some of the most notable fraudsters the world has ever seen.

Charles Ponzi

Unsurprisingly, one of the greatest con men of the 1920s has to be at the top of this list. Ponzi was an Italian migrant to the US in the early 1900s. Through sheer hard work, he was able to secure a banking job. The job allowed him to carry out illegal activities like cheque fraud. 

While serving time in jail for his fraudulent activities, he came up with an idea: the famous Ponzi scheme, where he promised to make investors rich quickly. All he had to do was to keep paying old investors with new investors’ money. His plan paid off as he made enough money to fund a lavish lifestyle until he was discovered and deported to Italy, losing everything.

Bernard Madoff

Ponzi’s exploits pale compared to Bernard Lawrence Madoff, who ran the biggest Ponzi scheme ever. The American hedge fund investment manager and former chairman of the NASDAQ stock market will always be remembered for running a scam worth 64 billion dollars spanning over 20 years. 

Madoff attracted wealthy investors by making his investment scheme exclusive and reserved only for the worthy. Following the global economic crisis, the hedge fund inevitably collapsed in 2008 but had left some big banks in France, Spain, and Britain, ruing losses.

Sergei Mavrodi

Before becoming a famous pyramid scheme owner, Mavrodi was a software engineer in the Soviet Union. He was a businessman dealing in imported office equipment. Mavrodi was often critical of the world’s financial systems and sought a way to break free from them. He set up the MMM cooperative in Moscow in 1989, which later turned out to be a well-designed Ponzi scheme.

The scheme collapsed around 1994, but Mavrodi was not done with Ponzi schemes even after facing trial. Mavrodi exported his MMM scheme to other countries, targeting Latin America, South Africa, and Nigeria. In early 2007, the MMM website gained more popularity than Facebook. The scheme collapsed, taking not only people’s money but also some lives with it.

Victor Lustig

America’s greatest con man, Victor Lustig, is infamous for his attempted double sale of the Eiffel tower. In 1925, Lustig learned from a newspaper article about the French government’s challenges with maintaining the Eiffel Tower. He decided to use the information he had gathered to prepare for a scam.

Once ready, he proposed to Andre Poisson, an aspiring businessman who he offered to help secure ownership of the tower for a bribe. However, on receiving the sum of 70000 francs, Lustig fled the country to Austria. Later on, when he discovered that the news never broke out in France, he tried to con another group of businessmen but failed after the police were informed about the scam.

Biggest fraud losses recorded in history

The effects of fraudulent practices are overwhelming. Previously thriving businesses have been hit hard by fraud loss, with many facing bankruptcies. PwC’s 2022 Global Economic Crime and Fraud survey reported a 42 US dollar billion fraud loss, in addition to brand damage, reputation and market share. 

Attempts to measure the true extent of fraud have not been easy. Here are a few examples to show the devastating effects of financial fraud.

The Enron Corporation scandal

One of the largest firms in the United States at the start of the millennium, Enron, was a Wall Street favourite in the early 2000s until it was hit by white-collar theft. Its management was involved in nefarious acts, including profit inflation and debt concealment. 

As a result, the company’s shares plummeted from a peak of 90.75 US dollars to 0.26 cents per share. The effect of the company’s bankruptcy filing was devastating for investors, who lost a total of $74 billion. This would become one of the biggest employee financial fraud cases in history.

The US paycheck protection program (PPP)

The recent Covid-19 pandemic saw the United States government experience one of the largest fraud losses in history. Fraudsters illegally obtained money from pandemic relief benefits and unemployment insurance funds. The PPP has been described as one of the biggest financial losses in history, with over 100 billion US dollars gone missing. Private experts estimate the total loss at 400 billion US dollars.

Much effort has gone into recovering the money, with over 1000 cases filed by the US Justice Department. So far, only a fraction of the stolen money has been recovered.

The beginning of digital fraud

The expansion of the internet has created more opportunities for fraud. Cybercrime has grown to humongous proportions. No business or individual is exempt from the threat of cyber fraud. As more and more innovations continue to be developed using technology, the rate of fraud increases and gets more sophisticated.

The use of technology to perpetrate fraud dates back to the 1980s when the internet started to gain relevance. One of the first scams exploited loopholes in telecommunications policies by trying to con people into making calls to expensive phone numbers. Then fraudsters began to target people using TV ads, in one instance, little kids were targeted using dial-tone signals on TV.

By the early 90s, fraud took on new dimensions when eCommerce platforms became a thing. Fraudsters took advantage of the weaknesses of online credit card use. At the time, credit card verification technology was still in its infancy, so they managed to steal the credit card information of celebrities to purchase expensive items. This was only the beginning of a tactic that would continue to wreak havoc even today.

As more digital transaction channels for credit cards became available, identity theft became rampant. Fraudsters targeted businesses with large volumes of credit card transactions. For example, one of the biggest scams in the fraud history took place from 1995 to 2000, as casinos were hit by fraud by scammers which were known as the Roselli Brothers.

The Roselli Brothers targeted people who had good credit scores and many bank accounts. Using the credit history information, they took out loans from casinos. And because they spent large sums of money on gambling while still maintaining a healthy cash balance on the cards, they received more credit from the casinos. The Roselli Brothers were able to steal approximately 40 million US dollars from casinos.

Furthermore, in the early 2000s, data breaches were used to impersonate individuals or take over their existing accounts for fraudulent purposes. AOL made the news when it was alleged to have stolen the identities of 92 million accounts and traded them with fraudsters. A new trend emerged in 2005 when fraudsters began cloning email addresses and URLs using homographs. 

Over the years, fraudsters have continued to refine and recycle age-old tactics. In an organised attack in 2016, a group of thieves made away with 13 million US dollars in Japan. The fraudsters used 1600 fake credit cards bearing information from South African bank cards on ATMs across Japan.

Since 2017, cryptocurrency exchanges have provided a platform for digital financial transactions. This, too, has created an opportunity for fraud. Cryptocurrency fraud is now a significant cause for concern for regulators. Crypto-based transactions for digital assets such as Bitcoing and Non-Fungible Tokens (NFTs) have also attracted fraudsters as they use their tactics to phish for their victims’ personal information to take over their crypto accounts and wallets to steal their funds and assets, which is why NFT scams are a growing concern around the crypto and blockchain space.

Due to the increase of Decentralised Finance (DeFi) platforms, fraudsters have exploited the anonymity and volatility of crypto-based transactions to perpetrate crypto fraud. There is a record of 14 million US dollars in 2021 lost to crypto fraud.

Large-scale investment scams, including initial coin offering scams, pump and dump schemes, market manipulations, and Ponzi schemes. The OneCoin scam, a crypto-based Ponzi scheme, managed to pull over 4 billion US dollars of unsuspecting investors’ money.

In 2020, fraudsters took advantage of the Covid-19 pandemic by sending phishing emails, making false stimulus claims, and running fake charities using digital technology.

The history of fraud prevention

Since the early days of the financial services sector, there has been a constant war between perpetrators of fraud and those trying to prevent it. From individuals to organised crime gangs, perpetrators of fraud have always exploited the vulnerability of people and financial systems.

Before eCommerce, the internet arrived, transactions would be monitored manually, which was time-consuming. Cheques had to be screened using crude methods that were sometimes inefficient. These crude methods weren’t enough to prevent fraudsters from having their way despite the amount of time and money invested in checking ledgers.

By the late 1990s, basic data matching systems became available. Companies could identify suspicious transactions faster and efficiently. Companies began collaborating using IFP data sheets and block cipher techniques to create cross-sector data-matching solutions. While these systems helped reduce the risk of fraudulent attacks, they became more evident with the introduction of eCommerce platforms and social media.

Hackers went a step ahead, developing new ways to target individuals and institutions. New threats emerged with phishing, malware and basic trojan attacks. Network visualisation tools were developed to enhance the detection of suspicious online activity. Scammers also used automated transfers and HTML manipulation techniques.

By 2012, it became possible to build individual risk profiles using a wide range of data sources. This meant better transaction monitoring, screening measures, tracking, and reduction of false positives.

Today, fraud prevention techniques have undergone significant improvements. Businesses now have several sophisticated tools at their disposal. Investigators use predictive analytics and Artificial Intelligence to anticipate risks and nullify threats.

Still, hackers continue to wage war using more sophisticated methods like device emulation, social engineering, human emulation, and identity fraud. To fight these threats, companies must rely on a combination of tools that involve analysing digital device behaviour, authenticated consumer data, physical biometrics, and user behavioural analysis.

Modern-day fraud prevention

Fraud prevention is a strategy used to predict and stop potential fraud threats from happening. Today, fraud preventionrequires extensive measures to match data points to detect anomalies. As scammers continue to get more innovative, approaches to fraud prevention must continue to evolve.

It’s easy to assume that the most effective way to combat fraud is to adopt mechanisms that will limit opportunities for fraudulent practices. But, as the world becomes more digitised, fraudsters are working harder by teaming up on the Dark Web to develop better ways to exploit people.

Modern-day fraud prevention goes beyond establishing policies and laws to prevent crime. It involves verifying the identity of genuine users and looking at user data, such as verifying their age, or information from transactions and devices. Institutions are using modern fraud detection and prevention technologies to predict basic tricks that fraudsters could use. Machine Learning, a form of artificial intelligence, combined with real-time monitoring and risk profile assessment, are valuable tools to prevent fraud loss

Today’s fraud prevention and detection software include data visualisation, customer relationship management, two-factor authentication, customer database management, and password and access management. 

Fraud investigators use statistical data analysis or Artificial Intelligence techniques to detect and prevent financial fraud. Statistical data analytics involves using time-series analysis, data matching, regression analysis, and probability distribution models, while AI techniques include data mining, neural networks, Machine Learning, and pattern recognition.

Data mining exposes significant patterns, converting big data into useful information that can be worked on using machine learning. The information is then analysed using either supervised or unsupervised algorithms allowing data analysts to act on any potential anomalies to prevent fraud.

Fraud remains a global problem. Everyone remains a target, individuals, and businesses alike. The risk of fraudulent attacks will not go away anytime soon. As fraud continues to increase in frequency and sophistication, individuals and businesses need to take responsibility for protecting themselves against fraud. 

Taking proactive measures against financial fraud using advanced technology is a must to keep a step ahead of fraudsters.

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