10 Common Types of Financial Fraud & Schemes (With Examples)

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Anthony Aguilar

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    Scammers Are Smart. You Have To Be Smarter.

    Credit card and other types of financial fraud have increased more than 70% in the past year with Americans losing $56 billion to scams [*]. 

    Criminals are getting more advanced and aggressive with their scams, and most of us don’t know what to do about it. According to a recent study, 79% of Americans feel they aren’t protecting their identity online as well as they should [*].

    While there are too many types of financial fraud to beware of, almost every scam is based on these nine types of fraud. Here’s how to know if you’re the target of financial fraud and how to protect your finances from fraudsters. 

    The 10 Most Common Types of Financial Fraud To Beware Of

    1. Identity theft that leads to loan fraud, credit fraud, and bank scams
    2. Advance fee fraud
    3. Cashier’s check or fake check fraud
    4. Tax refund fraud and “ghost” tax preparers
    5. Fraudulent charities
    6. Credit card fraud
    7. Financial account takeovers
    8. Ponzi schemes and other investment frauds
    9. Small business fraud (embezzlement, employee theft, etc.)
    10. Romance scams or pig butchering scams.

    1. Identity Theft Leading to Credit, Bank, or Loan Fraud

    Identity theft refers to any kind of fraud committed by stealing personal information. An identity thief uses your personally identifiable information (PII) — such as your name, birthday, and Social Security number (SSN) — to gain access to your accounts and assets.

    An identity thief can drain your bank account, open new loans in your name, or max out your credit card. A recent report found that on average, victims of identity theft lose $1,100 [*].

    How does identity theft happen?

    Criminals have a few options when it comes to stealing your sensitive information.

    They might target you with a phishing attack where they email, call, or text pretending to be from your bank. Or, they could target you with a cyber attack to get you to install malware on your devices that steals your logins and passwords.

    They might even steal your mail or illegally change your address to get your credit card statements sent to them. In some cases, the "thief" could even be a family member who opens a credit card in your name.

    But by far, the easiest way to steal your identity is to buy your personal information off the Dark Web. 

    Hackers have stolen billions of pieces of PII in the past year alone through data breaches. So even if you haven’t been directly targeted by a criminal, there’s a good chance you’re still vulnerable to financial fraud.  

    Be especially careful with your SSN as it's not always possible to change your Social Security number — even after identity theft.

    How do you know you're being targeted?

    • Unfamiliar transactions on your credit card.
    • Strange charges on your bank statements.
    • New credit cards or loans in your name.
    • Missing or error-filled tax returns.
    • Calls from debt collectors about purchases you didn’t make. 
    • A drop in credit score.
    • Bounced checks.
    • Calls verifying unfamiliar purchases. 
    • Hard inquiries on your credit report. 
    • Fraud alerts from your bank or credit monitoring service.

    What to do if you’re a victim

    You’ll need to take different actions depending on what financial fraud a criminal has committed under your name. But in all cases, you’ll want to:

    • Contact all impacted companies and financial institutions. 
    • File an identity theft report with the Federal Trade Commission (FTC) at IdentityTheft.gov.
    • File a police report with local law enforcement.
    • Freeze or cancel affected accounts. 
    • Set up a credit freeze or lock to stop further financial fraud. 
    • Review your credit report and dispute any fraudulent activity
    • Change your account passwords and start using a password manager. 
    • Enable two-factor authentication (2FA) using an authenticator app.
    • You can also follow our fraud victim's checklist for step-by-step instructions on how to recover from fraud.

    You might also want to consider signing up for credit monitoring and identity theft protection

    For example, Aura monitors all your financial accounts and alerts you of suspicious activity. And if the worst happens, you’re covered by a $1,000,000 insurance policy for eligible losses due to identity theft. 

    📚 Related: Is Identity Theft Protection Really Worth It?

    2. Advance Fee Fraud

    Advance fee fraud is when a thief requires you to send money in advance for payments, products, or services. The promised rewards can range from better credit to money from a foreign prince, and more. But in the end, they either aren't what was promised, or never arrive.

    One common example is a con artist claiming to get you a better deal on a loan or reverse mortgage in return for a “finder’s fee”. They’ll ask you to sign a contract that requires you to pay the fee once they introduce you to the financing source. 

    But after you pay, you’ll often discover it isn’t what the “finder” claimed it to be. Or worse, that you’re ineligible for the loan. And because you signed the contract, you have no recourse. 

    What are the warning signs?

    • A business asking you for prepayment for services such as securing a loans
    • Businesses or individuals that operate out of PO boxes or mail drops. 
    • Individuals that you can’t reach directly (i.e., they’re never in when you call but will call you back later).
    • Asking you to sign a contract like a non-disclosure agreement (NDA) that limits you from discussing the deal with other people. 
    • Businesses that don’t show up on the Better Business Bureau. (You can also run a Google search for “Their name/business name + scam/fraud”.)

    What to do if you’re a victim

    Unfortunately, if you’ve been a victim of advance fee fraud, there usually isn’t a way to get your money back. But you should report the scam to the Federal Trade Commission (FTC) at ReportFraud.ftc.gov to protect future consumers.

    Be wary of any offer that seems too good to be true or that only accepts unusual payment methods, like wire transfers or gift cards. Only share financial information once you’re sure a process is legitimate.

    3. Cashier’s Check and Fake Check Fraud

    The cashier’s check fraud is a simple bank scam that relies on the fact that it can take weeks for a cashier’s check to be verified. Reports of this scam have grown by 65% since 2015 [*], prompting all the more reason to be aware.

    How does cashier’s check fraud happen?

    Scammers send a forged cashier’s check with false information, which you’re able to deposit without a problem. Then, they ask you to make a withdrawal of some or all of the money and send it to them or a third party as a wire transfer.

    When the check is discovered to be bank fraud, the scammer is gone — along with the wire transfer (which you can’t reverse). 

    This same scam can be run using fraudulent checks as well. A scammer will wait outside a financial institution or send you a picture of a check and ask you to deposit it for them.

    Then, they’ll tell you to keep some of the money for yourself and send them the rest. When the check bounces a few days later, the money will be taken out of your account.

    What are the warning signs?

    • A seller who only accepts cashier’s checks.
    • Offering you more money than you’re asking for a product. This is especially risky on marketplaces like Craigslist or Facebook Marketplace.
    • Asking you to deposit a check for them and wire them the money (minus a fee).

    What to do if you’re a victim

    If you’ve deposited a cashier’s check and sent the scammer a wire transfer, there unfortunately isn’t a way to get your money back. 

    Instead, you should report the fraud to the FTC at ReportFraud.ftc.gov. 

    If you’ve only deposited a cashier’s check, don’t send money back to the scammer unless you know them personally. Even then, you should suggest a more secure online payment method like PayPal or escrow instead.

    📚 Related: What Is Credit Monitoring (And Do You Really Need It?)

    4. Tax Refund Fraud and “Ghost” Tax Preparers

    Most people get stressed when dealing with their taxes or the IRS. That makes tax fraud an appealing target for financial scams. One of the most common ones is tax refund fraud

    How does tax refund fraud happen?

    Tax refund fraud is a type of identity theft where criminals fraudulently file tax returns in your name. They’ll report incorrect income in order to maximize your refund, which the criminal will then deposit. 

    In 2020, the IRS flagged 5.2 million tax returns as fraudulent [*].

    There are a few other versions of this scam. In one, a fraudster pretends to be from the IRS and demands personal information or payment for taxes owing. You could also deal with an unethical tax preparer who steals your information or fraudulently files for a refund under your name.  

    What are the warning signs?

    • Getting a letter from the IRS stating that multiple returns have been filed in your name.
    • Receiving unfamiliar tax documents like a W-2 or 1099 form. 
    • Notifications of an unfamiliar IRS.gov account.
    • Receiving unsolicited tax transcripts. 
    • Your bank blocks your tax refund check
    • You receive a refund check before you file your taxes. 
    • Your tax preparer refuses to sign your return or can’t explain discrepancies.

    What to do if you’re a victim

    If you’ve received a letter about tax return fraud from the IRS, follow the steps laid out in the letter. If you learn about the scheme on your own, contact the IRS immediately and follow their recommendations.

    In most cases, you’ll need to fill out an Identity Theft Affidavit and print and mail it with your legitimate return. 

    If you’ve sent money to a fraudulent IRS agent or tax preparer, immediately cancel the transfer. If you’ve given them your bank information or credit card number, call your financial institution’s fraud department. 

    You should also report the fraud to the IRS at phishing@irs.gov (for scam emails) or 202-552-1226 (with the scam number that contacted you).

    5. Fraudulent Charities

    Scammers use philanthropy as fraud, too. Charity fraud entails creating a fake charity and collecting “donations” that disappear along with the thief.

    How does charity fraud happen?

    Scammers create fake charities — like military veteran charities — that sound like ones you know and trust. These scams are especially common during natural disasters or international news events. 

    What are the warning signs?

    • Claiming that you’re a previous donor when you know you’ve never sent them money.
    • Only accepting donations through cash, cryptocurrency, gift cards, or wire transfers. 
    • Pressuring you to donate or even offering to pick up the money in person. 
    • Using unsecured websites. (A secure website uses “https://” not “http://” and should have a small padlock symbol near the URL). 

    What to do if you’re a victim

    If you’re a victim of charity fraud, report it to the FTC. Unfortunately, there usually isn’t a way to reclaim the money you’ve given.

    Be wary of unfamiliar charities asking for donations. Before donating, check sites like Charity Navigator or CharityWatch. Never share information such as your bank account number when you can use another payment method.

    📚 Related: 7 Ways to Spot FEMA Scams and Protect Your Relief Money

    6. Credit Card Fraud

    There are several ways that criminals can steal your credit card information. They could steal your physical card, trick you into entering information on a phishing website or email, buy your details on the Dark Web, or use any number of other credit card scams

    Hackers can also create a clone of your physical card using just your credit card numbers. 

    What are the warning signs?

    • Suspicious transactions on your credit card or bank statement. 
    • Small unfamiliar charges on your account. (Fraudsters use a scam called carding to validate your credit card before making large purchases.)
    • Fraud alerts from your bank, credit card issuer, or credit monitoring service. 

     

    Aura credit and fraud monitoring
    Source: Aura credit monitoring
    • Calls from creditors about purchases you didn’t make or new accounts you didn’t open.
    • A lower balance than expected. 
    • Sudden changes to your credit score. 
    • Transactions from locations you haven’t been (i.e., foreign countries). 

    What to do if you’re a victim

    If a scammer has access to your credit card, you’ll want to act fast and shut down your compromised accounts and prevent credit card fraud. 

    Contact the fraud department of your lender, card issuer, or financial institution and explain the situation. They’ll be able to help you freeze or close your accounts and get new cards. You’ll also need to file a report with the FTC at IdentityTheft.gov and file a police report if your physical card was stolen. 

    Next, review your credit report for any fraudulent activity and dispute the charges. Finally, you’ll want to set up a credit freeze or fraud alert to stop further transactions. 

    If a criminal has access to your credit card, they most likely have other sensitive information. Change all your account passwords to be more secure and consider signing up for credit monitoring.

    📚 Related: What Is Credit Protection? Are You Making the Most of It?

    7. Financial Account Takeovers

    When an identity thief scams you online to gain access to one of your online financial accounts (or any account), it’s known as an account takeover (ATO). A recent study showed that as many as 38% of consumers had been victims of account takeovers [*].

    How do financial account takeovers happen?

    Typically,  this kind of scam works because someone gains access to your email and password through phishing, a data breach, or an emerging cyber threat such as a man-in-the-middle attack where they steal your credentials while using public Wi-Fi.

    You might think that hackers only want access to your accounts at financial institutions. But there are plenty of other valuable accounts that many users don’t secure. For example, a thief can buy goods with access to your Amazon account, or ask friends for money on Snapchat.

    Plus, if you reuse passwords or use single-sign on accounts (i.e., log-in with Facebook), they can access multiple accounts with a single takeover. 

    What are the warning signs?

    • Being locked out of your financial or social media accounts. 
    • Notifications of failed login attempts or two-factor authentication codes you didn’t ask for. 
    Google verification code sent over SMS
    Source: How to Geek
    • Your account looks different. 
    • Strange messages sent from your social media accounts
    • Alerts that someone logged into your account from a different IP address or location.
    • The email or phone number associated with the account is changed without your permission. 

    What to do if you’re a victim

    Immediately contact the impacted companies and follow their recommendations to verify your account. 

    Once you’ve secured your accounts, you’ll want to change all your passwords. Use strong pass phrases that combine letters, numbers, and symbols. Consider a password manager for keeping them safe.

    Whenever possible, enable two-factor authentication (2FA) on your online accounts. This is a special, one-time code that’s required to log into your accounts along with your password and username. 

    However, don’t use SMS as it can be compromised if your phone is stolen or hacked. Instead, use an authenticator app like Google or Okta. 

    8. Ponzi Schemes and Other Investment Fraud

    Simply put, investment fraud gets you to put money into an investment that isn’t real. While we often imagine predatory structures like Ponzi schemes, the most common fraud schemes are simple: the thief disappears with your money.

    How does investment fraud happen?

    Fraudsters often lure victims with promises of large gains, little risk, and once-in-a-lifetime opportunities. In many cases, investment schemes target affinity groups — such as people who share a common religion or cultural background — to build trust. 

    Sometimes the supposed investors are asked to sign non-disclosure agreements, which can keep victims quiet once the thieves disappear.

    What are the warning signs?

    • Special investment offers sent though unsolicited emails. 
    • One-of-a-kind or too-good-to-be-true opportunities. 
    • Anyone who claims they’re offering a “semi-legal-investment opportunity”.
    • Investment schemes where the company is new or you can’t find additional information about them online. 
    • Investors asking you to sign an NDA before sending payment.

    What to do if you’re a victim

    Victims of investment fraud should report the fraud to the FTC. Unfortunately, it’s unlikely you’ll recover money from this type of scam. Instead, do what you can to protect others. Leave negative reviews on sites or be vocal about the fraud. Scammers rely on our silence to keep on defrauding innocent people. 

    9. Small Business Financial Fraud (Embezzlement, Misuse, etc.)

    If you’re a business owner or entrepreneur, you’re at special risk for financial fraud. Losses from employee theft, embezzlement, and misuse of funds makes up for $50 billion dollars a year [*]. 

    Your employees can steal from your business in several ways. The most common scams are embezzlement and misappropriation of funds. 

    Generally, white-collar crimes occur when employees have financial power without oversight and control. For example, where they have freedom to use a company credit card or write off lost or damaged merchandise.

    Often the fraudsters are trusted employees, which makes this an emotionally devastating type of financial crime.

    What are some warning signs?

    • Employees who are secretive about expense accounts or inventory. 
    • Missing inventory or a higher-level of loss than you expect.
    • Unexplained expenses on your company credit card.
    • Employees who suddenly show signs of financial gain they can’t explain.

    What to do if you’re a victim

    If you suspect an employee is embezzling money from your company, speak to a lawyer and other experts. These are sensitive cases. You’ll need legal advice to handle the situation correctly.

    In the future, restrict access to financial information to only trusted employees who need access for their day-to-day work and perform regular audits.

    10. Romance Scams

    How To Protect Yourself From Financial Fraudsters

    Financial fraud can be devastating. Whether a scammer gets access to your credit card numbers or convinces you to invest in a fraudulent scheme, you’re out your hard-earned money. 

    Follow these fraud prevention tips to keep your accounts safe from scammers. And for extra protection, consider Aura’s credit monitoring and identity theft protection service. 

    Even if you have no idea what to do if your identity is stolen, Aura has your back.

    With Aura, you get:

    • Near-real-time credit monitoring and fraud alerts — We’ll monitor all your bank and credit accounts (including your credit report) for suspicious activity. Aura alerts you of potential fraud 2X faster than the competition. 
    • Account monitoring — Know right away if your online accounts have been compromised. 
    • Dark Web scanning — We scan the Dark Web for your personal information, like your credit card or Social Security number.
    • VPN with Wi-Fi and malware protection — Keep all your devices safe from hackers and malware with military-grade encryption and Wi-Fi protection.
    • One-click credit lock — Secure your credit report from unwanted inquiries by locking your Experian report.
    • $1,000,000 insurance policy — Every Aura plan comes with a generous insurance policy for eligible losses due to identity theft. 
    Ready for iron clad identity theft protection? Try Aura for 14 days free.

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    1. Financial identity theft and fraud
    2. Medical identity theft
    3. Child identity theft
    4. Elder fraud and estate identity theft
    5. “Friendly” or familial identity theft
    6. Employment identity theft
    7. Criminal identity theft
    8. Tax identity theft
    9. Unemployment and government benefits identity theft
    10. Synthetic identity theft
    11. Identity cloning
    12. Account takeovers (social media, email, etc.)
    13. Social Security number identity theft
    14. Biometric ID theft
    15. Crypto account takeovers