Fraud protection for SMEs

Advances in communications and accounting technologies over the last decade, while time-savers, have also opened the door to equally sophisticated forms of fraud. The issue of fraud, including identity theft and supplier impersonation, rarely appears on the small business radar in light of more immediate and tangible concerns arising from day to day operations.

However, while business owners may feel these issues are of little consequence to their own small operations, the scope of financial deceit can range anywhere from a nominal amount to bankruptcy and no business is too small.

An Australian Bureau of Statistics survey found 800,000 Australians had been victims of some form of personal fraud in a one year period, at a cost of almost one billion dollars. At the same time, over 5.8 million Australian reported exposure to some form of scam during the same period. With these figures in mind, small businesses need to ensure they have the appropriate safeguards in place.

Here are some ways SMEs can better detect and deter fraud:

  • Defining and understanding fraud
  • Understanding your legal obligations
  • Implementing automated ID verification systems


Defining and understanding fraud

The number one mistake most small businesses make is in underestimating their own level of appeal to the fraud community. Most fraud isn't directed at larger enterprises and well-known entities, which typically have high levels of security and early warning systems to detect any signs of fraud or money laundering.

Deception is the most successful when conducted in numerous small fraudulent operations, spread across a number of targets over many months, rather than in one big scam. The most common types of deception include: credit card fraud, identity theft, lotteries, pyramid schemes, financial advice and advance fee fraud.

In a 2007 study conducted by the Australian Bureau of Statistics, victims who suffered a financial loss from personal fraud totalled $976.9 million, or an average equivalent of $2,156 per person.

Understanding your legal obligations

In addition to understanding fraud, small businesses must also be aware of their legal responsibilities in order to better protect their assets and reputation. Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act), businesses and reporting entities providing financial services are required to verify customers' identity and keep all relevant records. They are obliged to conduct customer due diligence and reporting of any suspicious matters, threshold transactions and international funds transfer instructions, according to the Australian Transaction Reports & Analysis Centre (AUSTRAC).

This process has become more straightforward following recent amendments to the AML/CTF Act in 2007 and 2010, which now enables information from credit reporting agencies such as Dun & Bradstreet to be used during the identity verification process.

These reforms expand the interpretation of businesses providing designated financial services to include real estate agents, dealers in precious metals and stones, the legal sector, accountants and trust or company service providers. For the first time, credit reporting information can also be used to verify identities, making it easier for firms to pick up on any illegal activity based on, for instance, the number of defaulted payments or multiple credit card accounts.

Implementing automated ID verification systems

Businesses can look into developing or implementing automated identity verification systems into their financial transactions to reduce the likelihood of approving a false customer as well as cut operational costs. Having an automated system such as telephone or online verification services, rather than manually verifying each customer, can also speed up the processing of an application.

Dun & Bradstreet's Identi-Check service enables D&B customers to verify an individual's identity before entering into a transaction with them. Details are checked against a number of external and internal databases in order to quickly and accurately confirm a prospective customer's identity.

Databases can encompass the Australian Electoral Roll, White Pages, Department of Foreign Affairs & Trade and visa or passport databases. The Electoral Roll can only be accessed for AML/CTF purposes.

Checks can be done to verify common identification paperwork such as driver's licences and passports and is particularly suited to small businesses that more often do business with individuals rather than corporations.

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