TOPIC 12

Fraud, Authorizations,
Lost and Stolen

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FRAUD
• Fraud is defined to be “an intentional perversion of truth” or a “false
misrepresentation of a matter of fact which induces another person
to part with some valuable thing belonging to him or to surrender a
legal right”
• Fraud is a deliberate misrepresentation which causes another
person to suffer damages, usually monetary losses.
• Most people consider the act of lying to be fraud, but in a legal
sense lying is only one small part of actual fraud.
• A sales man may lie about his name, eye color, place of birth and
family, but as long as he remains truth about the product he sells,
he will not be found guilty of fraud.
• There must be a deliberate misrepresentation of the product’s
condition and actual monetary damages occur.

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 FRAUD
Commonwealth Fraud Control Guidelines :
Fraud is defined as dishonesty obtaining a benefit by deception or
other means.
The definition includes:
• Theft;
• Obtaining property, a financial advantage or any other benefit
by deception;
• Causing a loss, or avoiding or creating a liability by deception;
• Providing false or misleading information to another party, or
failing to provide information where there is an obligation to do
so;
• Making, using or possessing forged or falsified documents
• Bribery, corruption or abuse of office;
• Relevant bankruptcy offences; and any offences of a like
nature to those listed above.

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TYPES OF FRAUD
(INVOLVING HOUSING LOANS)
Home improvement contracts:
• Initiated by some contractors who also arrange financing
for their work through a home loan.
• There may be no "improvement" at all.
• The work is substandard or left incomplete.
• The homeowner generally ends up deeply in debt and in
grave danger of foreclosure after contractors (frequently
unlicensed) charge very inflated prices for earthquake
repairs, interior or exterior remodeling, floor coverings,
siding or other similar products

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TYPES OF FRAUD
(INVOLVING HOUSING LOANS)
Foreclosure Rescue
• When homeowners fall behind in their mortgage payments --
even one day late -- lenders may file notices of default against
them and start the foreclosure process.
• Mortgage brokers and hard money lenders scan these notices
of default, which are public record, and use them to target
people for refinance loans which the already strapped borrower
cannot afford to pay back.
• The loan may be presented to the consumer as a "bailout" but
often ends up draining the remaining equity out of a home while
offering little more than postponing the inevitable

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TYPES OF FRAUD
(INVOLVING CREDIT CARDS)
• Lost or stolen - Credit cards that have been reported as lost or
stolen
• Mail non-receipt - Cards stolen in transit-after card companies
send them out and before the genuine cardholders receive them
• Counterfeit - A counterfeit, cloned or skimmed card is one that has
been printed, embossed or encoded without permission from the
card company or one that has been validly issued and then altered
or recoded. Also covers computer generated card numbers,
collusion, wire tapping
• Card not present - Usually the theft of genuine card details that are
then used to make a purchase through a remote channel such as
the phone, Internet, fax or mail order
• Identity fraud - A criminal uses fraudulently obtained personal
information to open or access card accounts in someone else's
name. Perpetrated through Application fraud and Account takeover

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 Some Definitions

• Identity Theft: An illegal act in which someone accesses and

uses the identifying information of an actual person in some
way that involves fraud or deception.

• Identity Fraud: The use of a misappropriated identity in criminal

activity, to obtain goods, services or benefits by deception for
economic gain without the victim being aware.

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 How Can Identity Theft Happen?
a. Your home or vehicle is burgled and your personal information and documents
may be taken.
b. Your personal information may be stolen and used or sold by employees of
legitimate business.
c. Information found in the trash bin.
d. Many important documents are posted to you and can be stolen from your
mailbox.
e. Criminals could request for a “change of address” and have your mail diverted
to another address.
f. Your wallet contains personal information such as your licence, credit and ATM
cards and other personal documents, that may be stolen.
g. You may be the victim of a scam and be conned into providing personal
information over the telephone by an impersonator.
h. Shoulder surfing in public place.
i. Your personal computer could be the weakest link, as it is vulnerable to threats
posed by hacking, phishing and malware.
j. Your identity stolen and used by someone you know and trust - friend, relative or
colleague.

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Misuse of Lost / Stolen Identities

1. Submit false application for credit cards and loans

2. Take over existing accounts
3. Open bank accounts to write bad cheques
4. Open landline or mobile phone account
5. File for bankruptcy
6. Submit false claims on insurance policies, EPF withdrawals,
Tabung Haji withdrawals etc
7. Submit fraudulent tax returns to collect refunds
8. Terrorism financing
9. Money laundering
10. People smuggling (human trafficking)
11. Illegal immigration
12. Drug trade
13. Crimes
14. Abuse of government programmes

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Identify fraud - Warning Signs
(as consumer)
 You (as consumer) receive bills, invoices or receipts for goods which
you have not ordered.
 You receive letters or calls from debt collectors relating to debts that
aren’t yours.
 You receive bank statements for accounts in your name which you
have not applied for or opened.
 There are transactions on your account statements that you don’t
recognize.
 Important identification documents are missing.
 You stop receiving regular mails.
 You did not receive any mail at all.
 New accounts on your credit report.
 Searches on your credit bureau report that don’t relate to any
application made by you.

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 TECHNIQUES IN SPOTTING
POTENTIAL FRAUD
Some red flags to look for the identification of potential fraud:
• The same address used for home and office addresses (unless it is a
home-operated business);
• Variations in telephone number;
• Telephone calls are left unanswered;
• Addresses inconsistent with local street patterns;
• Home and office addresses which are post office boxes;
• Home of office address is a hotel;
• References of questionable nature;
• Fraudulent identity cards. Over the years, many stolen identity cards
have been used for hire-purchase application;
• Tampered income documents like pay-slips. The age and occupation
do not relate with the income receive; and
• Tampered photocopies of bank statements.

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FRAUD IDENTIFICATION AND PREVENTION
(BY BANKS)
• Verification and validation
• The card is genuine
• The cardholder is the rightful owner
• Chip and PIN
• A chip (‘smart’) card holds encrypted details on a secure microchip that
can store and process information. The PIN replaces the signature for
card present transactions
• Biometrics
• Methods of identification by measuring unique human characteristics as
a way to confirm identity. Examples are finger or iris scanning or
dynamic signature verification
• Card Security Code (CSC)
• The last three or four digits of a number printed on or just below the
signature panel on payment cards. It can be requested for transactions
in addition to card expiry date etc.
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FRAUD IDENTIFICATION AND PREVENTION
(BY BANKS)
• Domain names system (DNS)
• Internet security
• Check of number of active domain names registered in “.com” and
“.net”
• Domain names must be checked for authenticity
• DNS queries cover the Top-Level domains and the Root domains,
and IP addresses
• Address verification service (AVS)
• Matches the customer’s billing street address and post code against
the data on file with the issuing bank.
• Other features
• Holograms, UV, unique fonts

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 FRAUD SCORING
• Fraud scoring introduced as a means of numerical scores that look at
many different variables to verify an individual’s identity and determine
fraud risk
• Scoring models typically assign a numeric value that indicates the
likeliness of an individual transaction being fraudulent
• The most efficient scoring models use predictive software techniques to
capture relationships and patterns of fraudulent activity, and to
differentiate these patterns from legitimate purchasing activity.
• Traditional methods of identity checks:
• Manual credit checks
• Use external data services

• Problems:
• Take too long
• Can lose good customers because of bad / incomplete data in databases
searched

• Tradeoff between increased automation and greater human oversight.

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 CREDIT CARD
• A plastic card having a magnetic strip, issued by a bank or
business authorizing the holder to buy goods or services on
credit (usually to a specified limit), payable on specified
terms..
• A card allowing someone to make a purchase on borrowed
money.
• Credit cards are one of the most popular forms of payment
for consumer goods and services today.
• Credit cards have higher interest rates than most consumer
loans or lines of credit.
• A credit card is different from a debit card in that the credit
card issuer lends the consumer money rather than having
the money removed from an account.

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 CREDIT CARD
• Credit card processing involves:
– Authorization - verifying the cardholder's account and credit limit
– Settlement - movement of the funds to the agency
– Reconciliation - verifying receipt of settlement funds

• Authorization is the process by which card issuers either:

• Approve
• Refer (i.e., directs the agency to contact Global for further instructions) or
• Deny requests to accept transactions.

• Approval is based on:

• A validation of the account number and expiration date to verify that a
cardholder’s account is open, and that
• The transaction will not place the account above any credit limit.

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 CREDIT CARD SYSTEM
• A credit card system should comprise at least three major
components, namely:
• credit application approval
• credit authorization
• posting of customer payment

• The aim of the credit application approval process is to prevent the

acceptance of high-risk applications and to accept low-risk
applications.

• The aim of the credit authorization process is to deny fraudulent or

bad transactions while approving good transactions when charge
requests are initiated at the point of sale.
• This process is particularly important for protecting cardholders who have
lost their cards but have not yet reported the loss to the card center.
• Also, it will capture and disallow transactions that are initialized by
fraudulent card owners.
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 CREDIT CARD SYSTEM
• A high-quality authorization process should result in:
• (1) Effective credit control:
• automatic denial of fraudulent or bad transactions
• approval of good transactions.
• (2) Efficient authorization procedure:
• minimum voice contact with the authorizers
• minimum waiting time at the point of sale.

• One major issue related to the credit authorization process is the

possibility of long waiting times at the point of sale during peak hours,
which has a negative effect on the quality of service.
• In addition, shops may request for other credit cards.
• Therefore, the challenge is to develop an authorization process that will
reduce the waiting time of cardholders while maintaining a high level of
credit control.

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 SIX STEPS IN
CREDIT CARD TRANSACTION
Six steps in credit card transaction:
1 – Credit card swiped in terminal
2 – Cardholder and transaction details transferred to merchant’s
institution
3 – If card issued by different institution, details routed to card-
issuing firm
4 – Acceptance/Decline notification transferred to merchant’s
institution
5 – Acceptance/Decline sent to merchant
6 – Merchant verifies credit card signature

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AUTHORIZATION AND
TRANSACTION FLOW

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 FACTORS AFFECTING THE
AUTHORIZATION PROCESS
Three major factors :
(1) Transaction volume
(2) Automatic authorization procedure
(3) The authorizers

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LOST AND STOLEN
• Steps to follow to replace a lost or stolen credit card:
• Notify the bank / issuer immediately
• Destroy other cards on the account and all cash advance checks.
• Notify merchants who auto bill the account that your account
number will be changing

• Once credit card is reported as lost or stolen, it will take

approximately seven days to receive a new one in the mail.
• New account number will be issued
• But PIN Number will remain the same and transfer over to the new
card.
• Once an account number is reported as lost or stolen, it cannot be
used again.

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 MEASURES TO
MITIGATE FRAUD RISKS
Some of the measures that financial institutions can take to minimize fraud
risks:
• Insist on direct and indirect sources to verify key information and data
• Zealously cross-verify the information and data given against a variety of
reliable sources
• Communicate constantly with application in their place of work or residence
• Ensure client has a good credit history with existing bankers by obtaining
documentary evidence such as original bank statements (not photostated
copies)
• Obtain personal references from reliable referees
• Obtain bankers’ reports
• Obtain income tax returns, i.e. EA forms and self assessment submissions
• Obtain relevant documents to verify the purpose of the loan

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