We always hear about fraud committed by someone else, especially when the fraudster lives in another country; this is third-party fraud. However, we don’t like to think about First-Party fraud, which involves individuals using their identity to commit dishonest acts for financial or personal gain.
First-party fraud can take all forms. For instance, if someone orders a product and claims it never arrived, gets a refund and receives the product for free, known as Goods Lost in Transit Fraud. Or they buy a piece of clothing, wear it, and return it to the store afterwards for a refund; that’s a De-Shopping scheme. Some may falsify their timecard to make it look like they worked longer hours than they did, committing timecard fraud. A more common fraud is a Bust-out fraud when a credit card is maxed out, and the cardholder disappears, never repaying the debt.
Individuals are not the only ones who commit first-party fraud. Unscrupulous businesses and organized crime often position themselves to allow the entity to commit fraud, such as chargeback fraud, government loan fraud, and money laundering.
What’s the cost?
During the pandemic, the Canadian government, like many others, established loans and grants to help individuals and businesses struggling financially through the CERB program. To qualify for the program, the applicant must have met specific requirements. However, upon review of the claims, CRA, which administered the program, discovered many false claims. The total cost of these first-party frauds cost Canadians an estimated $7.96 billion. CRA continues to investigate potential fraud.
Fraud has hit the automotive sector hard this year. As the cost of living increases, there has been an increase in falsified credit applications for car purchases. The buyer claims a higher income to qualify for the car loan or lease. According to Equifax, 60-65% of auto fraud is first-party fraud, where purchasers intentionally misrepresent themselves.
Who pays the price for first-party fraud?
As we recognize first-party fraud as a crime, the same way we view identity theft and third-party fraud, we have to recognize who the victims are. The direct victims are the car dealerships, the government, the stores, and the businesses. The indirect victim is the general public because our costs increase to compensate for the losses the businesses and the government suffer.
As awareness of first-party fraud grows, individuals, businesses, and governments must remain vigilant and implement robust prevention measures. We need to recognize that fraud can come from unexpected sources. Stronger application verification processes and increased awareness of fraud schemes are essential to mitigating risks. Ultimately, if we work together to prevent first-party fraud, we will reduce its impact on society through education and recognition of red flags.
What are your thoughts on First-party fraud? Do you believe the fraudsters should be charged?
Kathleen O’Donoghue, CFE
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