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Third-party fraud is a prevalent form of scam where hackers exploit an individual's Personal Identifiable Information (PII) without their permission. It often leads to unauthorized access to existing accounts or helps fraudsters create new ones. For instance, fraudsters might use someone else's identity to sign up for a phone contract or apply for a loan.

Fraudsters’ techniques evolve letting scammers work out new approaches to hunt down unsuspecting victims who regularly use different popular social media platforms. It comes with a significant risk to people's financial security and highlights the need for heightened awareness and measures to prevent different types of third-party fraud.

What Is Third-Party Fraud?

Also known as identity theft, third-party fraud occurs when a victim’s account or personal information is used by a third party without consent. This is how fraudsters try to gain access to resources, credit, or financial products.
The idea behind the approach is to hide scammers’ true identity behind another person's credentials. This sets it apart from first-party fraud, where fraudsters distort their details or create synthetic identities.

Scammers employ various tactics to commit third-party fraud, including hacking into accounts using stolen credentials obtained through phishing or purchased from the dark web. They may also utilize PII to open accounts or access goods and services illicitly.

With the evolution of online services, PII has become highly available on the internet. It ends up with personal info being compromised or traded on the dark web, fueling third-party fraud and making it a huge issue for not only users but also businesses, as they lose revenues and online reputation.

How Is Third-Party Fraud Different from First and Second-Party Fraud?

Understanding the different types of fraud makes it clearer for businesses how they're executed. First-party fraud occurs when individuals manipulate personal information or create synthetic identities, typically to obtain loans or credit.
As fraud schemes evolve, sorting them out into specific categories has become more challenging, especially with the rise of social engineering and scams. In such cases, we can divide major fraud approaches into the following types depending on the fraudsters’ involvement:

  • First-party fraud takes place when fraaudsters deceive financial institutions or businesses for personal gain. This can include providing false information on a loan application or intentionally failing to make loan repayments. It also encompasses behaviors like 'friendly fraud,' chargeback fraud, and sleeper fraud.
  • Second-party fraud involves individuals allowing someone else to use their details for illicit activities. Typically, the person sharing his or her information is aware that it will be used for fraud or a scam. A common example is when someone provides their account details to a fraudster to receive funds as a money mule.
  • Third-party fraud encompasses two main types: identity theft and account takeover. Identity theft occurs when someone's info is stolen and then used for fraudulent purposes, such as applying for credit cards. Account takeover happens when a fraudster gains unauthorized access to a victim's account and withdraws funds.

Common Types of Third-Party Fraud

Third-party fraud comes in various forms, with fraudsters continually devising new tactics to carry out their schemes. To effectively prevent third-party fraud, businesses must learn about its most common types.

Account Takeover

This type of fraud, as the name implies, occurs when hackers gain unauthorized access to individual bank accounts. Once inside, they try to make purchases or withdraw cash on the victim’s behalf.

Synthetic Fraud

Synthetic identity fraud happens when a hacker steals a real person's Social Security number (SSN) and combines it with made-up personal information like name, date of birth, address, email, and phone number to create a fake identity.
Spotting synthetic identity theft can be tough for traditional fraud detection systems with children, seniors, and homeless individuals mostly at risk. They're less likely to use credit services regularly or keep a close eye on their credit reports.

New Account Fraud

Fraudsters use stolen data to open new accounts. Sometimes, they create synthetic identities or mix fake and real details to pull it off. Once they steal the credentials, they can carry out various fraudulent activities. This not only puts users' sensitive data at risk but also harms business, as it leads to more chargebacks, disputes, lost reputation, and customer loyalty.

Credit Card Fraud

Payment fraud covers a broad spectrum of sneaky tactics designed to unlawfully gain access to financial funds or financial data. It can happen in many ways, from online transactions to credit/debit card skimming, phishing emails, and even tricky phone calls.

Examples of Third-Party Fraud

Let’s have a look at some of the third-party fraud examples that took place in real life:

  1. The globally known golfer Tiger Woods was hacked by Anthony Lemar Taylor. The scammers fraudulently acquired a driver's license and used this stolen identity to splurge $17,000 on various items. He bought a 70-inch TV and even a car. Luckily, the hacker was put behind the bars. Not quite smart of him.
  2. Back in 2017, a guy named Kenneth Gibson pulled off quite the scam. He created about 8,000 fake PayPal accounts using the names of folks he used to work with. He kept shuffling small bits of funds around, then cashed it out using ATMs. Once again, he was caught as he spent too much time at the ATM making people curious.
    Even though these fraudsters were caught, there's a ton of third-party fraud that slips through the cracks and goes unpunished.

Preventing Third-Party Fraud

Preventing third-party fraud is like building a fortress – it needs layers of security measures. By combining different strategies, businesses can slash the risk of third-party fraud and keep their customers' money safe.

3-D Secure

3-D Secure authentication acts like a digital bouncer, adding an extra layer of protection during the online transaction. It's like a secret agreement between a user and a bank, making sure that only the right people get access to money. So, when someone’s buying a new gadget online, he may rest easy knowing that 3-D Secure is there to keep transactions safe.

Address Verification Service

Address Verification Service (AVS) is like a digital detective, double-checking the billing address provided by the cardholder. It works as another security layer, making sure that the person making the purchase is legit. With AVS on users’ side, they can shop online safely, knowing that the billing address is verified and the purchase is protected.

Tokenization

Instead of storing users’ credit card details, tokenization replaces them with special codes, or tokens, that are meaningless to hackers. It's like having a secret code that only you and your trusted merchant understand. By using tokenization, people can shop online without worrying about their info falling into the wrong hands. It is a good prevention means against identity theft, payment fraud, and phishing attacks.

Fraud Blacklist/Whitelist

Keeping a fraud blacklist and whitelist is like having a company’s personal security team. The blacklist is like a "no-entry" list, where you can flag known hackers and promptly block them. On the other hand, the whitelist is like a VIP list, where platforms add trusted customers and partners.

Device Fingerprinting

It keeps track of all features that make a user’s device different from all the others out there. So, when someone is using a smartphone or laptop to shop online or log into an account, device fingerprinting starts working in the background, keeping an eye out for anything suspicious actions or anomalies.

If it notices any strange behavior or usage patterns that don't match up with an individual’s habits, it raises a red flag and alerts potential threats.

Card Security Codes

When a user types in the security code, it tells the merchant that he has the physical card in his hands, adding another level of security to the transaction. So, even if someone manages to get hold of the card number, they won't be able to complete the transaction without the security code.

Geolocation

If a hacker tries to log into someone’s account from a different location (halfway around the world) geolocation services will raise a red flag and alert to the potential security breach.

Biometrics

Biometrics, like fingerprint or facial recognition, take security to the next level by confirming users' identities. They are like a device's digital lock and key, making sure that only a legitimate user can access the accounts.

Velocity Limits

Velocity limits act as a speed bump for fraudsters, preventing them from making several transactions within a short timeframe. It's like putting a cap on how fast they can go, slowing them down, and giving anti-fraud software time to spot any suspicious activity.

Third-Party Fraud Prevention Trends

With the evolution of fraudulent techniques, businesses should follow the latest technological trends for effective third-party fraud prevention. These are the trends to watch for:

  • Two-factor authentication (2FA) is an extra lock to keep sensitive data safe. Financial institutions use it to double-check that it is a legitimate user logging into the account.
  • Real-time account monitoring software keeps track of all your payments and transactions round-the-clock. If something strange happens (a sudden spike in spending or a payment to an unfamiliar account), the system raises the alarm and alerts the team right away.
  • Payment security tools protect users from sophisticated hackers. They keep an eye on every transaction that goes out of the organization. All the financial data is carefully monitored and controlled, ensuring that funds stay safe from start to finish.

Conclusion

Third-party fraud can lead to devastating consequences. Since it often involves sophisticated fraudulent networks, having a solid fraud detection and investigation strategy in place is crucial. That means investing in cutting-edge fraud analytics tools that break down data barriers and analyze connections between different pieces of information.

With the right technology, businesses can speed up the detection and prevention process before scammers cause any more harm. In simpler words, companies can apply proactive measures to keep their business and clients safe.

FAQs

What Is the Difference Between Third-Party Fraud and Synthetic Fraud?

Third-party fraud involves the unauthorized use of a real individual's personal information to carry out fraudulent activities, whereas synthetic fraud involves the creation of entirely false identities using a combination of real and fake information.

What Are the Consequences of Third-Party Fraud?

The consequences of third-party fraud involve financial losses, compromised access to accounts, stolen credentials, reduced customer loyalty, and so on. Moreover, businesses that fail to prevent third-party fraud risk damaging their reputation.

What Is Third-Party Computer Fraud?

Third-party computer fraud happens when hackers gain unauthorized access to a computer system or network with the intent to commit fraudulent activities. They may include stealing sensitive information, manipulating data, or causing financial harm.

What Is an Example of Synthetic Fraud?

An example of synthetic fraud is when a fraudster creates a fictitious identity using a combination of real and fabricated information, such as pairing a legitimate Social Security number with a fake name and address, to open fraudulent accounts or apply for a loan.