Application Fraud: What is It, Examples & How to Detect It

Published on September 14, 2023 by Bence Jendruszak
To lower your rate of fraudulent applications, you need to look at both who and where they’re being sent from. Digging deep into the source of an application, such as your applicant’s IP, physical address, and PEP status, can give a crucial indication of how trustworthy – or indeed high-risk – they are as an applicant.
Taking a bird’s eye view across the many relevant data points gives you the means to stop things like money laundering and ID theft before they happen.
We discuss what to look out for and share some best practices to help businesses stay alert.
A “high-risk source of application” is a label assigned by risk management teams to flag potentially fraudulent applications for financial services, such as credit cards or loans. The term is mostly related to anti-money laundering regulations, such as 6AMLD (the 6th Anti-Money Laundering Directive), but it also applies to many other areas of fincrime prevention and cyber-security, such as insurance claims and account management.
A high-risk source refers to any individual, location, and/or context that raises concerns from the organization faced with the given application.
In other words, it’s not necessarily the applicant who triggered the label of “high-risk source”. Even a perfectly legitimate person may find their application is rejected if the following scenarios apply:
Common actions that could be flagged as a high-risk source of application include taking out a loan, ordering a new credit card, or sending funds over a certain threshold. Let’s look at some more examples to better understand what else can be classed under this label:
Most countries classified as high-risk sources will be sanctioned countries, such as:
The list may vary depending on which country your company is based in. However, the rules set by the Office of Foreign Assets Control (based in the US) tend to be followed by most countries around the world. Other regions sanctioned by OFAC include:
Organizations may have their own list of high-risk countries. These aren’t mandated by government regulators, but chosen internally after the staff members have taken stock of their own risk challenges. For instance, a neobank that has a historically high number of fraudulent applications from Italy may label the country as high-risk.
Your data can only be truly accurate when it’s been sense-checked, so consult other risk analysts and your fraud prevention system before rejecting an application. Make sure those you proceed with are filed in a suspicious activity report (SAR), which notifies government agencies of potential money launderering.
It’s also important to give those who are rejected a chance to appeal. Most will be sent an automated message with very limited information about why they’ve been declined. Connecting them to your customer service team and offering a chance to appeal should help to reassure legitimate customers who have been incorrectly considered high-risk. This will protect your customer satisfaction rates from the otherwise significant reputational damages of a false positive fraud check.
That said, you should be careful how much you tell a customer about why they have been rejected; revealing too much information can help fraudsters learn how to cheat the system.
Here are some actions you should take if your risk management software is struggling to catch high-risk applications:
By applying these points to your risk management strategy, you can ensure your organization is safeguarded against fraudsters and in accordance with regulatory compliance.
As an end-to-end risk management solution, SEON comes with all the tools you need to detect high-risk sources of application, increase the precision of your current detection model, or even suggest new strategies thanks to machine learning.
Here are the key highlights:
All of the above are available via short-term, cancel-anytime plans, flexible APIs – or even in the form of a separate app for Shopify.
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Bence Jendruszák is the Chief Operating Officer and co-founder of SEON. Thanks to his leadership, the company received the biggest Series A in Hungarian history in 2021. Bence is passionate about cybersecurity and its overlap with business success. You can find him leading webinars with industry leaders on topics such as iGaming fraud, identity proofing or machine learning (when he’s not brewing questionable coffee for his colleagues).
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