Second Party Fraud

What Is Second Party Fraud?

Second party fraud is when a person gives their personally identifiable information (PII) to someone to use for fraudulent activity. This could involve the use of their identity, contact details, and/or bank account. Usually, the individual providing their details does so in exchange for money.

Fraudsters use second party fraud arrangements for a range of purposes. Examples include money laundering and taking out fraudulent loans.

The personal information provided as part of second party fraud can also be used to create synthetic identities (synthetic identity fraud). This kind of identity fraud can then facilitate further fraudulent activities.

Examples of Second Party Fraud

Businesses need to be on the lookout for instances of second party fraud. With that vigilance in mind, let’s look at some second party fraud examples to watch out for.

Fraud example	How it works
Money muling (money laundering)	This is where an individual gives their personally identifiable information (PII) to a fraudster, who uses it to open a bank account. The fraudster then uses that account to receive and transfer their ill-gotten gains, usually as part of a money laundering operation. Both the person providing their details (the mule) and the fraudster are accountable for the criminal activity of the money mule operation. The same is true if the individual whose PII is being used has been coerced into providing their details and even if they are unaware that their details are being used (such as when their PII has been stolen).
Chargeback fraud/scams	In a chargeback scam, an individual gives a fraudster their credit card details. The fraudster goes on a shopping spree, using a computer, tablet, or mobile that has no connection to the cardholder. The fraudster keeps the goods, while the cardholder claims the money back from the bank, reporting the purchases as fraudulent. Both the retailer and the bank lose out.
Fake merchant fraud	This scam involves the fraudster pretending to be a retailer, from whom the cardholder purchases pretend goods. When the cardholder doesn’t receive the items (unsurprisingly, as they don’t exist), they claim a refund from their bank. The scammers then split their “profit” while the bank loses out.
Second party loan fraud	Banks are the targets of this type of fraud. The fraudster uses an individual’s PII to borrow money for a loan, such as a mortgage. The borrower defaults and the property approaches foreclosure. The fraudster then approaches the lender, either directly or through an introduction from the borrower, to purchase the house at a reduced price, relying on the lender’s desire to cut its losses.
Gift card fraud/ laundering	Retailers that sell gift cards need to be alert to this particular type of second party fraud. Gift card laundering involves an individual giving their bank account details to a fraudster. The fraudster then moves funds into the individual’s account and uses it to purchase gift cards online. These are sent to the fraudster, who is essentially using this process to turn illegally sourced funds into legitimate gift cards.

Individuals who share their personally identifiable information for use in second party fraud are willingly committing a criminal offense. They are liable to be held responsible for the fraud, alongside the fraudster.

From a business perspective, these examples of second party fraud can be hugely costly. As such, retailers need to ensure that they have robust fraud prevention systems in place to flag up suspicious customers and attempt to head off second party fraud before it takes place.

How Does Second Party Fraud Work?

Second party fraud works by a fraudster using an individual’s PII when they commit an offense. This is often done with the person’s consent, with the individual willingly allowing their PII to be used for criminal purposes. In the examples listed above, the individual providing their details has been complicit with the fraudster.

That’s not to say that trickery can’t be involved. Many fraudsters use phishing, job scams, and the like to fool victims into sharing their personal information. In these cases, the second party fraud is carried out without the individual’s consent. However, in legal terms, they are still complicit in the fraud.

Trends in Second Party Fraud

Second party fraud in banking and retail is part of a growing trend for fraudulent activity in the US. In 2022, consumers reported losing close to $8.8 billion to fraud, according to Federal Trade Commission data – an increase of 30% over the losses reported during 2021.

In terms of fraud trends for 2023, LexisNexis points to the continuing reliance on online retail and the landscape of economic uncertainty as powerful drivers of a range of fraudulent activity.

Why Second Party Fraud Is Dangerous to Your Business

Second party fraud is dangerous to businesses and banks, as both stand to lose out. Let’s take chargeback scams as an example. Chargeback processes exist to protect customers from fraud, but investigating, processing, and paying out on claims is both time-consuming and costly to the businesses and financial institutions involved. According to research by Chargebacks911, every dollar that retailers lose to fraud actually loses them $3.75.

Not only that, but chargeback fraud is on the rise. The Sift Digital Trust and Safety Index observed a rise in chargeback dispute rates of more than 35% between Q1 2022 and Q4 2022. The difficult global economic context is certainly contributing to this rise, as an increasing number of people go to greater lengths to deal with the rising cost of living.

Second party fraud is also dangerous to organizations aiming to comply with legislation such as the 6th Anti Money Laundering Directive (6AMLD). The goal of such legislation is the prevention of money laundering.

Another problem is that second party fraud can be hard to detect and prove. While a retailer may suspect that a shopper claiming a chargeback may be part of a scam, to prove it, they need to provide evidence that links the individual and the fraudster. Plus, all the time and money they expend on doing this could be spent on their regular business operations.

How to Prevent Second Party Fraud

Retailers and financial institutions have a range of tools at their disposal for the prevention of second party fraud. SEON’s solution, for example, provides businesses with an identity verification solution, device fingerprinting capabilities, digital footprint analysis, social lookup, and more.

The comprehensive KYC verification processes that this enables can do much to help organizations weed out suspicious individuals at an early stage of their interaction. The retailer or bank can then blacklist those customers.

Consumers also have their part to play. Guarding against phishing and avoiding the temptation of a “quick buck” can be the difference between innocence and involvement – whether it’s witting or unwitting – in second party fraud.