Fraud Risk Management: Your Complete GuideFollowing updates to the Economic Crime and Corporate Transparency Bill, businesses of all shapes and sizes have a fraud risk problem, and many of them don’t even realise.

Right now, it’s business as usual for most UK organisations who continue to focus on operational resilience following a tough few years. The pandemic and cost of living crisis has caused a massive change to millions of people’s personal circumstances, which in turn has made it difficult to assess their fraud risk. This fragmentation of data and customer profiling is the new normal, and it makes for very shaky ground when onboarding new clients.

But that’s not the only concern. According to 2024 statistics^[1], around 70% of medium businesses and 74% of large businesses have experienced some form of cyber security breach or attack in the last 12 months alone. That’s a lot of stolen data to be in the hands of fraudsters, and thereby increasing the risk of fraud even higher.

Pair this with the recent Economic Crime and Corporate Transparency Bill^[2] updates and we’ve suddenly got a perfect storm of businesses thinking they’ve undertaken regulatory risk requirements through identity and authentication checks alone, but they’ve actually not.

With money laundering estimated to cost the UK economy more than £100 billion^[3] each year, this gap in assessment could be exposing business owners to significant financial losses and reputational damage, as well as regulatory penalties or even jail time.

However, we can help ensure you and your business are covered. In this guide we’ll take you through:

• How to better assess if you’re at risk of fraudulent activity
• Understanding the enhanced regulatory requirements
• Ensuring your business is equipped to handle fraud

Why you have a fraud risk problem and don’t realise it

If things in your business appear to be running smoothly and you’re acquiring new customers or making money as normal, you may think your exposure to fraud risk is low.

Perhaps your company is still making manual data reconciliations which are prone to human error. Or maybe you just have a feeling that something’s not quite right with the customer data you’re seeing, but it’s challenging to get the wider business to recognise that risk threat. After all, who’s going to invest in risk prevention capabilities when the losses aren’t obvious, easy to justify, or tangible (perhaps they’re more reputational than monetary, for example)?

Fraud isn’t always immediately obvious, particularly if it’s wrapped up in a complex fraud scheme. But if you’re not looking in the right places for it, it’s easy for the risk to get out of hand.

We believe the solution to both is an organisational mindset change. This can feel a little daunting, but it’s important to note that the entire insurance industry went through something similar not too long ago.

Lessons to be learned from insurance fraud

Around a decade ago, insurance companies were losing money to a trend of crash-for-cash scams which resulted in fraudulent insurance claims.

1. Fraudsters would take out car insurance policies using stolen data
2. They’d then purposefully get into a crash in order to make a claim
3. They’d successfully acquire an insurance payout
4. With no trace back to them (thanks to the stolen data) they could repeat the cycle

Insurance employees realised that by undertaking tighter onboarding checks and really scrutinising customer data, they could uncover that it was in fact stolen. By denying insurance cover and turning the fraudsters away, they could successfully prevent scam from taking place.

However, turning away large volumes of customers seemed counterintuitive and was met with resistance from elsewhere in these companies. With no tangible way to prove they’d mitigated against fraud and financial loss, turning down customers was seen as hard to justify.

What was needed here was a mindset change:

As long as data backed the decision, losing out on the customer’s insurance fee was more cost-effective than having to pay for a fraudulent claim.

Since then the industry has refined its onboarding process to be even more sophisticated and precise, particularly when checking large volumes of data. Now, if your company isn’t in insurance or doesn’t naturally recognise fraud risk — like, say, a bank would — that’s okay. There’s still lots of learning and parallels to take away from this example.

Preventative measures and erring on the side of caution with the aim to prove that data isn’t stolen (rather than verifying that it is), can be a safer mindset to have than. After all, with so much stolen data currently in the wrong hands how can you be sure someone is who they say they are?

What do the enhanced regulatory requirements mean?

To get a better understanding of why fraud risk management is so important, let’s first take a look at the updated Economic Crime and Corporate Transparency Bill (ECCTB) and enhanced regulatory requirements.

The ECCTB is the foundation to the UK’s fight against economic crime, helping legitimate businesses thrive and not fall victim to things like fraud. It does this by allowing certain businesses to share information that can help prevent, detect, and investigate economic crime.

Until recently, those in regulated sectors, such as banks and law firms, were constrained in their information-sharing ability. From the restrictions that came with only being able to see their data in relation to a transaction, to not being able to share information about a suspect customer who has since terminated their relationship with a business, many organisations were unable to see the whole picture when it came to suspicious activity. The updated bill promotes a holistic understanding of a customer’s fraud risk, as well as a greater focus on more unified approaches and procedures for combating fraud and financial crime.

The advantages of combining Fraud and Anti-Money Laundering defences

New regulations like the ECCTB, Online Safety Act and Data Protection and Digital Information Bill mean combining and sharing data from both fraud and anti-money laundering (AML) defences. By doing this it makes it easier for organisations to join the dots between potentially suspicious behaviour.

In a real-life context this could mean that should a bank decide to end a relationship with a customer due to financial crime concerns, that bank can now share the decision with other banks the customer in question may apply to.

Put simply, this is company-to-company and sector-to-sector data sharing, with advantages such as:

Creating a holistic approach
By combining fraud and AML risk defences, organisations create a network of understanding about the potential risks of a customer. Instead of siloed information that can lead businesses to be kept in the dark about potentially risky behaviour, a collaborative approach leads to better, more comprehensive understanding across different departments, companies, and sectors.

Ensuring efficiency and cost-effectiveness
Layering fraud and AML defences can mean using resources and budgets more efficiently, as it can help to streamline processes and reduce the need to double up on work efforts. For example, instead of multiple data analytic tools and monitoring systems, one programme could be linked and repurposed so it can be used for fraud detection as well as money laundering.

Providing enhanced risk management
By combining fraud and AML defences, alongside other corroborative data, organisations can create a consolidated single customer view of financial crime risks. Mapping everything out in a single place will make it easier to spot any potential overlaps and dependencies on a variety of illicit activities.

Understanding the fraud risk to your business

Now we’ve set the scene, let’s take a look at how you can better mitigate and manage your organisation’s fraud risks. To do this, we’ll be looking at three key areas:

Fraud risk management
This is the process of identifying, understanding, and then creating a response to any potential risk of fraud. When done correctly, it can help reduce your organisation’s exposure to things like corruption, theft, and extortion.

From increasing fraud awareness amongst your staff, to continually monitoring and reporting on risks, fraud risk management is an end-to-end process.

Fraud risk assessment
The first step to fraud risk management is completing a fraud risk assessment. If there’s an area of your business that could be exposed to fraud – this can be internally or externally – a fraud risk assessment needs to take place and be maintained regularly.

By examining things like company assets, financial documentation, and disclosures, an assessment aims to identify, uncover, and analyse potential risks, as well as giving you a game plan for mitigating or controlling them.

Fraud risk scoring
This is an analytical approach to uncovering the likelihood of certain activities or transactions being fraudulent. Each action can be assigned a risk score based on network connections, transaction history, and user behaviour. They can then be measured against a predefined set of data points.

Types of fraud and who’s most at risk

To gain a better understanding of fraud risk management, assessment, and scoring, let’s look at the most common types of fraud to mitigate against, and which sectors are considered high risk.

Understandably, fraud risk in fintech companies is higher and more prevalent. However, every business regardless of sector should remain vigilant. Including – but not limited to:

• Accountants and tax advisers
• Banks, credit, and financial institutions
• Cryptoasset businesses
• eCommerce platforms
• Estate agents
• Gaming and casino businesses
• Legal professionals
• Luxury goods and art dealers
• Management consultants, auditors, and insolvency practitioners
• Trust providers

The fraud risk assessment process

1. Identification – listing all the potential risks your company faces, from legal to operational, credit, and strategic.
2. Measurement – applying scores to each risk to more accurately understand their probability and volatility.
3. Mitigation – creating a plan of action to prevent or minimise each risk, alongside ways of resolve issues should they arise
4. Reporting and monitoring – regularly assessing risks to ensure your organisation’s exposure remains at the optimal level of tolerance

Avoiding key mistakes

Before undertaking a fraud risk assessment, it’s always handy to have a checklist of things to watch out for. While this shouldn’t be considered a comprehensive list, as there will always be organisation- and industry-specific considerations, these are the most commonly made mistakes when it comes to risk assessments:

• Missing or incomplete customer data
• Using generic assessments and not industry-specific ones
• Not keeping risk assessments up to date
• Not communicating findings to the wider organisation
• Ignoring or failing to recognise regulation changes

How to better reduce fraud risk

Strengthening collaboration and information sharing

Creating more efficient information sharing and collaboration between businesses, internal teams, law enforcement agencies, and regulatory bodies is vital. So much so that we are establishing a Fin-Crime Bureau to better share intelligence, suspicious activity reports, and relevant data to facilitate more effective detection and prevention of financial crime.

Enhancing Due Diligence and KYC procedures

Banks and financial institutions have to regularly review and enhance their customer due diligence and Know Your Customer (KYC) procedures. However, this is good practice for all organisations, no matter the sector. Think about implementing advanced identity verification technologies, leveraging data analytics for risk assessments, and conducting ongoing monitoring to detect and mitigate suspicious activities.

Investing in advanced technologies

Artificial intelligence (AI) and machine learning is no longer a nice-to-have for organisations to experiment with, it’s a necessity. Fraudsters and criminals are using AI to commit more sophisticated financial crimes, which means businesses should invest in cutting-edge technologies to fight back. Detection and prevention can both be improved with machine learning.

Providing comprehensive employee training and awareness

By ensuring that all employees are fully aware and trained up on all things financial crime, from emerging risks to evolving regulatory requirements, is essential. Creating a culture of vigilance and compliance can lead to earlier detection and overall prevention of things like money laundering and fraud.

Continuous monitoring and risk assessment

When it comes to financial crime monitoring and risk assessments, a proactive approach is the best approach. This means undertaking regular risk assessments to spot vulnerabilities and implementing robust monitoring systems that can flag emerging trends or unusual patterns that could mean a financial crime is taking place. As well as this, regular audits and internal process reviews can help you identify and resolve any weaknesses in your systems.

Collaborating with regulators and industry peers

By actively engaging with regulatory authorities, industry associations, financial institutions, and organisations, you can better understand the best practices used elsewhere and share intelligence with the overall goal of combating financial crime.

Strengthening governance and oversight

Ensuring robust governance structures is a critical step when ensuring compliance and deterring financial crime. By creating independent and comprehensive compliance functions, with clear reporting lines to senior management and the board of directors, organisations can better identify areas for improvement and ensure adherence to regulations.

In conclusion

Following on from a sharp rise in fraud, with money laundering alone estimated to cost the UK economy over £100 billion per year, the ECCTB has been updated and tighter checks are required to protect UK businesses.

By strengthening information sharing and collaboration, as well as enhanced due diligence procedures, companies can mitigate the risk of fraud for themselves, their customers, and their industry as a whole.

However, not everyone has got the memo and many businesses are either unaware or underprepared for this changed landscape. As well as awareness around the new regulations, a fundamental mindset shift in how companies tackle fraud is needed.