Fraud: What You Need to Know
Cheryl Obermiller knows firsthand the pain of financial fraud.
“In January of 2010, I received a notice from the Internal Revenue Service that I had a substantial tax problem,” says Obermiller, president of Obermiller Construction, a heavy construction company located in Harrisonville, Missouri. “My accountant was out of the office that day due to bad weather, and when I called to ask her about it, she seemed confused and upset.”
Once she started investigating, Obermiller realized that her accountant had stolen tens of thousands of dollars and payroll tax money and that was “just the tip of the financial iceberg.” The damage to Obermiller personally and professionally amounted to more than $1 million, a situation that took “several years to fix,” she says.
The accountant pleaded guilty to financial fraud and was sentenced to 33 months in the federal penitentiary. She had used multiple fraud tools to steal the money, Obermiller says. “The primary loss was through check forgery, but there was also credit card fraud, payroll fraud, and insurance fraud committed, as well."
In a way, Obermiller was fortunate. Authorities caught the fraudster, and Obermiller was able to keep both her finances and business afloat after the incident.
Others aren’t so lucky, as fraud continues to take its toll on unsuspecting Americans, who rarely see the crime coming.
How severe is the problem of fraud?
While the data varies, a February 2017 study by the Stanford Center For Longevity and the FINRA Investor Education Foundation reported that among individuals surveyed for the study, average losses across all fraud types were $1,173 per victim. In addition, “more than 1.2 million fraud complaints were made to law enforcement and federal agencies in 2015, and over half of the consumers filing complaints reported losing money,” the report stated.
Additionally, the Coalition Against Insurance Fraud states that insurance fraud alone accounts for $80 billion in losses annually.
What is fraud?
Step No. 1 in avoiding being a fraud victim is to know what it is and how to make distinctions from other data security crimes—like identity theft—so you’re better prepared to defend yourself against financial fraudsters.
“Fraud comes in countless forms, but some are more common,” says Jef Henninger, founder of the Law Offices of Jef Henninger, in Tinton Falls, New Jersey. “Insurance fraud, credit card fraud, tax fraud, and mortgage fraud are some of the most common. Fraud can be defined as ‘deception intended to result in financial or personal gain.’”
It’s important for financial consumers not to equate identity theft with financial fraud. While there may be distinct similarities, there are also fundamental differences between the two, Henninger states. “ID theft is a form of financial fraud,” he notes. “While ID theft is often linked with monetary loss, it can be used to assume someone else's identity for non-monetary reasons.” That can separate the crime from pure financial fraud.
Others agree, noting that there are larger differences between financial fraud and identity theft.
“Identity fraud means criminals are trying to make unauthorized transactions using your credit card number or your bank account,” says Neal Ungerleider, founder of Almost Millions, a personal finance site for freelancers and the self-employed. “However, identity theft means someone is using your personal data—things like your Social Security number or birthdate—to open new accounts or buy expensive products and services in your name.”
While sophisticated criminals favor some types of fraud (especially computer fraud, such as phishing and ransomware), other types of fraud are more prevalent among the common thief, he notes.
Those categories include the following types of fraud:
Credit card fraud
Credit card fraud is the theft of your credit card or bank debit card, leading to the unauthorized use of an individual cardholder's funds. As long as the cardholder resists contacting his or her financial institution to report card fraud, the criminal can and may continue to use the card to make unauthorized purchases.
Best step to combat credit card fraud? Keep your card safely at home until you really need it. Don’t give your card number out indiscriminately, and always keep an eye on your card during any purchase experience. Also, if you’re purchasing items online, don’t reveal your card number unless you're confident the retail site you’re using is safe and reputable.
By and large, tax fraud, also known as tax ID theft, primarily occurs when a criminal steals and uses an individual’s Social Security number to file a tax return, most always to claim a fraudulent tax refund. Victims often discover the problem when the IRS notifies them that someone else has filed a federal tax return using the same Social Security number.
Best steps to combat tax fraud? Avoid any attempts by others to obtain your Social Security number online or via mobile texting. The IRS will initially contact you, for any tax reason, only by mail. Thus, to stop tax fraud in its tracks, avoid giving your Social Security number to any unverified contact, whether by email, phone or text.
The Pennsylvania state government describes welfare fraud as “when an individual uses fraudulent means to receive public assistance benefits to which they were not entitled.”
Best steps to combat welfare fraud? While welfare fraud can target individuals—when a victim's Social Security number is unlawfully used to collect benefits—most welfare fraud comes in the form of fraudsters filing false benefits claims with state governments. Welfare fraud abusers should know that the legal penalties are significant. For example, the state of Pennsylvania says, “If found guilty of committing welfare fraud, a defendant must make full restitution of the overpaid benefits, can receive a sentence that can include community service, probation or incarceration, pay costs and fines to the court, and be disqualified for a period of time from public assistance benefits.”
Check fraud primarily aims to defraud an individual, business or government agency by either forging another individual’s name on the legitimate owner’s check, altering the face of a check, creating a fraudulent check, or intentionally writing fraudulent, or “bad,” checks to individuals and businesses. While state laws vary, check fraud can carry severe penalties. These can include jail time and significant fines.
Best ways to combat check fraud? Never leave your checkbook unsecured, and always cover your checks when using them for payment purposes. Check fraud perpetrators often use high-tech devices to obtain your checking account and bank routing numbers, and use them to engage in check fraud. Also, don’t share your checking account number online, unless the website in question is safe and secure (i.e., a bank, credit card, or other business that uses high levels of web security to protect consumers).
The FBI defines mortgage fraud as "the material misstatement, misrepresentation or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase or insure a loan." Mortgage fraud often targets banks and other lenders that offer mortgage loans to consumers and businesses. It usually does not target individuals, although home sellers may see a home sale collapse in the event of a mortgage fraud scenario. Also, individuals can be victimized by mortgage fraud when their Social Security numbers are illegally used to obtain home loans or mortgage lines of credit.
Any homeowner looking to sell a home should have any potential buyers fully vetted before signing any home purchase documents.
Fraud, fraud and more fraud
While the fraud categories listed above are at the top of the list of most law enforcement officials, they aren’t the only forms of fraud.
“There are so many ways people get defrauded,” says David Edwards, president at Heron Wealth, a New York City-based financial advisory firm. Besides common forms of fraud, like credit card or Social Security fraud, Edwards lists these additional fraud categories:
Consumer finance fraud: This includes, “working with companies that promise to repair credit, remove tax liens, modify a mortgage or help with business financing,” Edwards says. “Often consumers end up paying interest rates of up to 50% while their checking account gets cleaned out.”
Medical fraud: “Another common identify theft is submitting false medical claims on someone else’s insurance records,” Edwards adds. This can also result in felony charges.
Charitable fraud: Fake charities that entice people’s funds without a legitimate purpose.
Lottery fraud: “Fake lotteries entice people to claim their prize after sending in cash ‘to pay for taxes,’” Edwards adds.
Senior fraud: “Seniors are particularly susceptible to pitches over the phone, including the “IRS” scam where an “inspector” demands immediate payment by credit card of a “tax lien,” says Edwards.
How To Report Fraud
If criminals commit financial fraud against you or someone you know, take action. Depending on the type of fraud, there's often help available. Here are some suggested contacts:
The Federal Trade Commission (for ID theft and most types of consumer fraud) – Visit the FTC Complaint Assistant or call at 877-382-4357.
The FBI’s Internet Crime Complaint Center (for online-based scams, investment and sales fraud, extortion, hacking and phishing scams, and email fraud) – Visit this site to file a complaint.
The U.S. Postal Service/Postal Inspection Service (for mail-related crimes, but mostly for outright mail theft that often leads to Social Security and credit card fraud.) – You’ll find the agency’s site here.
For outright credit card, debit card, or check fraud, contact your financial institution directly for steps to take after being victimized by fraud, and to close affected accounts. You may also want to file a police report so that you have an official record of the crime.
Don’t take fraud lightly
Financial fraud is sinister and an all-too-common crime across the U.S. To protect your financial assets, know the types of fraud that could target your household, and know where to go in the unfortunate event financial fraud happens to you.
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