4 Common Types of Fraud That New Businesses Should Know to Detect

Starting a business is an exciting and often life-changing moment for many people. It’s one of the few ways that the average person can break out of a conventional 9-to-5 job.

Yes, it does come with a certain modicum of risk, but nothing in this world is achieved without a price. Thus, millions of Americans across the country choose to take the plunge and become entrepreneurs. Some of them fail, but many still find success.

However, just because your business takes off doesn’t mean that you are in the clear. After all, there are several ways that things can go south, and one of them commonly occurs through fraud. Globally, fraud costs businesses over $3.7 trillion every year in losses.

In this article, we will be exploring four common types that new business owners may not be ready for. Let’s get to it.

1. First Party Fraud

One of the most common types of fraud that you can run into is first-party fraud. Essentially, the fraudster manipulates either his personal information or identity during a transaction.

First-party frauds often happen in the financial sector. For instance, someone may want to raise the credit limit on their credit card and falsify information to be eligible. 

Similarly, there are several cases of people manipulating information to qualify for loans that they would not be eligible for. Protecting against them requires that you have a robust identity verification process in place. This includes having the systems needed to validate customer information and detect abnormal behavior.

Regular audits don’t hurt either. Though this fraud is more common in the financial sector, it can happen in any industry where customer information is critical.

2. Employee Fraud

Sometimes, the danger comes not from an external party but from within your ranks. That’s right, your employees can take advantage of the trust that you place in them. This trust often comes with access to sensitive information that they can use for personal gain.

You hear about cases of embezzlement and inventory theft almost every day on the news. The truth is that employee fraud can be extremely harmful to your business because it comes at you like a curveball. Besides having measures in place where no one employee can mess with your business and hiring prudently, there’s little that you can do.

That said, some helpful tips include creating a whistleblower program. Why? It’s because, oftentimes, employees tend to chat with one another. An employee may realize a serious crime is about to be committed and want to warn you. At the same time, they may not want to identify themselves out of fear of unintended consequences.

Whistleblower programs ensure that such employees can report suspicious activity by their co-workers before it’s too late.

3. Friendly Fraud

This is arguably one of the most frustrating types of fraud that you can be a victim of.

While the individual effect on businesses may not be as massive, as a whole, it’s a different picture. According to Ethoca, they cost merchants over $50 billion every year.

In this type of fraud, the customer issues a chargeback against their payment. It’s not always intentional, and there are legitimate reasons to do a chargeback, but it’s very obvious when someone is trying to commit friendly fraud.

You might have packed a product perfectly and sent it via a trusted logistics partner. However, the customer proceeded to claim that the product was damaged, and the proof they sent showed highly suspicious damage. Sometimes they may claim they never even got the package.

It then becomes a he-said-she-said situation, and credit card companies will often issue the chargeback, making it a loss for you. Even if you could treat it as a business loss, the consequences of chargebacks can be greater than you expect.

It’s not uncommon to see online marketplaces ban a merchant if they receive more than a certain number of chargebacks. This also makes it easy for people to carry out targeted harassment against you. Unfortunately, protecting against friendly fraud is hard.

Requesting customers to record their unboxing and keeping detailed records of all transactions can be helpful. Even if you still get the chargeback, you can at least avoid getting your merchant account banned by having enough evidence to prove your innocence.

4. Business Email Compromise

You would think that people would be more careful about clicking links in emails in 2023, but no. People are still falling for phishing scams, and this holds true for businesses as well.

Data leaks and hackers have made it very easy for email addresses to get leaked online. Once they do, it’s just a matter of time until a bad actor decides to try their luck and target your business.

If and when that happens, you need to be prepared. You should do some research because modern phishing attacks can be surprisingly convincing. You might realize that you and your team may be grossly unprepared.

In conclusion, running a successful business is a dream for many Americans. However, it doesn’t come without its challenges. Unfortunately, our world isn't a utopia where bad things don’t happen. Thus, fraud protection is simply something that you need to invest in.

Remember, it’s better to put in the effort rather than find out the hard way.