2021 Fraud Review: Watch Out for These Financial Scams

Today, many people and small businesses are operating in survival mode. In addition to managing the effects of the pandemic, they're now struggling with skyrocketing inflation and other financial concerns.

In November, the consumer price index (CPI) was up 6.8% over the prior year, the highest year-over-year increase since June 1982. The largest contributors include gasoline, shelter, food, used cars and trucks and new vehicles. Over the same period, the producer price index (PPI) increased 9.6%—the highest increase on record. Some analysts anticipate the Federal Reserve may raise interest rates to help curb inflation.

These conditions have created a perfect storm—including motives, rationalization and opportunities—for significant fraud losses. In fact, the IRS recently issued the following statement confirming today's increased fraud risks: "The combination of the holiday shopping season and the pandemic create additional opportunities for criminals to steal sensitive personal or financial information."

Here's an overview of the common fraud scams in play today, along with ways perpetrators persuade victims to let down their guards.

What's Hot?

The FBI maintains a list of common fraud schemes. In particular, individuals and small business owners should pay attention to these types of frauds in today's marketplace:

Discount scams. Perpetrators may offer too-good-to-be-true deals on merchandise or services, especially during the holidays or at year end. Some collect payment in advance without living up to their end of the deal. In other cases, the product or service isn't delivered on time or doesn't have the promised level of quality.

Bogus charities. Shady nonprofits often crop up around the holiday season and following disasters, such as the recent tornadoes in Kentucky or Hurricane Ida in Louisiana, to prey on people's philanthropic intentions. These bogus organizations may use names and web addresses that look and sound deceptively similar to legitimate ones.

Investment fraud. People who are struggling to make ends meet are especially vulnerable to fast-money scams, like the massive Bernie Madoff Ponzi scheme that collapsed in 2008. In a so-called Ponzi scheme, investors are unwittingly paid with funds from more recent investors, rather than from profits from a legitimate business activity. While most investment frauds are avoidable with a basic level of caution, others can fool even sophisticated investors.

Internet auctions. The FBI warns consumers against participating in Internet auction transactions without doing some due diligence. "Learn as much as possible about the seller, especially if the only information you have is an email address." If the auction is sponsored by a business, consult the local Better Business Bureau, the FBI advises.

Telemarketing fraud. This happens when a persuasive or threatening person calls and convinces an unsuspecting victim to donate money to support a worthy cause, provide sensitive personal data to receive an award or submit payment to avoid some kind of serious trouble. For instance, the IRS recently published information about a scam involving gift cards. The victims received a threatening call or text from someone impersonating an IRS agent, demanding payment of a bogus tax penalty with gift cards from various stores.

Counterfeit drugs. With prescription drug prices on the rise and household budgets on the decline, some people may be looking for inexpensive alternative suppliers. These drugs may not necessarily be FDA approved or subjected to the FDA's rigorous standards if sold by a foreign entity. Poor quality ingredients and incorrect dosage amounts may be hazardous to your health.

In fact, the pandemic has spawned a variety of new scams, including sales of air filters and testing devices that are alleged to eradicate and test for the presence of the virus. Some fraudsters even offer bogus vaccines and booster shots, even though the genuine ones are available without charge. Check with the Centers for Disease Control or your doctor's office to verify whether such products are legitimate.

How Do Fraudsters Win People's Trust?

Con artists may use sophisticated emotional and psychological ploys to convince people to hand over cash and other valuable assets. For example, the Federal Trade Commission (FTC) has identified the following steps to a successful telemarketing scam:

1. The perpetrator calls you or your small business, pretending to represent an organization that you're familiar with, such as the Social Security Administration, a utility company or a large charity. The phone number that appears on your caller ID display may be changed to a fake number that appears to be from the purported organization.
2. The scammer says there's a prize to claim (for a fee) or a problem to address. For instance, the caller may say you owe money, need to verify account information or must help a family member in trouble.
3. The perpetrator may resort to pressure tactics—such as yelling or threats of arrest—if you don't immediately respond as desired. The idea is to get you to act before you can reflect on the matter, do outside research and recognize the scam for what it is.
4. Once you've caved to the demands, the scammer gives you instructions. You might be asked to use a money transfer service, provide your account number and password, deposit a check and remit a portion of the proceeds to the scammer, or purchase large denomination gift cards and give the redemption codes to the scammer.

A subtler fraud happens when a perpetrator determines your bank account number and can make a deposit on your behalf, but lacks the ability to withdraw funds from it. After making a modest deposit, the fraudster pretends to be from a government agency that has overpaid you for some benefit (such as a tax credit or Medicare payment). Then he or she instructs you to remit more than the amount you received.

These kinds of schemes don't just happen to individuals; small businesses can also fall victim. For instance, a phony customer might make a payment and then asks the business to issue a refund for overpayment. Fraud happens when the company cuts the refund check before realizing that the customer's check bounced.  

7 Prevention Tips for Small Businesses

With careful planning and minimal investment, your small business can improve its ability to detect and prevent fraud. Here are seven steps to consider:

Set a consistent, proactive tone at the top. Employees will model the example set by management. For example, if an owner occasionally pays for incidental personal expenses with the company's petty cash, employees may view such behavior as permission to do the same.

Perform due diligence on new hires. In today's tight market, your HR department may be eager to fill new positions. But you can't afford to sidestep screening procedures, including calling references, checking educational credentials and conducting formal background checks on candidates who will have access to accounting systems, employee and customer data, cash and other valuable assets.  

Mandate vacations. Segregation of duties—dividing job responsibilities among more than one individual—can be challenging at small businesses with a limited number of employees. But giving one person too much responsibility can provide an opportunity for fraud. Beware of workers who are unwilling to share their duties or take time off. Most fraud schemes require constant attention, so implementing a mandatory vacation policy gives management a chance to detect fraud while an employee is away from the office.

Create a perception of detection. If the appropriate internal controls are in place, it signals to employees that their work is being reviewed and their actions are being monitored, which can help deter fraudulent behaviors. But beware: There's a fine line between trusting employees and sending a message that the business is focused on stopping fraudulent activity.

Educate employees. Some frauds are perpetrated by people outside of your organization. For example, retail businesses experience shoplifting, and banks deal with check fraud. These crimes differ from internal theft committed by employees. Consider training all employees, regardless of their functions, to recognize the warning signs of internal and external fraud. The training should also provide information about how workers can report suspicious behavior, including collusion and conflicts of interest between coworkers and external stakeholders.

Stay on top of recent scams. Fraudulent schemes constantly evolve. In a retail operation, for example, managers may be looking for employees taking cash out of the register or stealing merchandise in their backpacks at the end of the night. But they may not be looking for cashiers working with outside organized shoplifting rings. In these cases, a cashier may charge a customer for one or two items at the register but stuff several more items into bags without ringing them up. The customer then returns the paid-for items and gets a refund. The remaining items are sold at online auctions, swap meets or pawn shops.

Conduct external audits. Consider engaging your accounting firm to conduct periodic audits of your company's financial statement and/or its control environment, as well as surprise audits of high-risk functions. For example, implement a quarterly audit of all processes involving the receipt of cash. By engaging a third-party firm experienced in uncovering business fraud, you send a strong message to employees that unethical conduct won't be tolerated.

These are just some of the steps you can take to help prevent losses. No matter how overwhelmed your business is during the pandemic, don't be shortsighted by ignoring fraud prevention and detection. In the event that illegal behavior is discovered, you can quickly resolve the issue and mitigate the losses. An ounce of prevention can be worth a pound of cure.

Like individuals and small businesses, fraudsters are learning to adapt to today's volatile market conditions. During the pandemic, thieves have discovered creative ways to steal cash, sensitive personal information and other valuables. A strong dose of caution is in order to protect you and your business from potential losses.