What Are The 2 Basic Types Of Fraud?

14 May 2024

Fraud, online fraud, in particular, is considered a major threat in today's digitalized environment for it has significantly affected individuals and organizations, businesses and their customers equally. Therefore, to avoid, and reduce risks, safeguard assets, and maintain trust in financial transactions, it is essential to understand the basic categories of fraud.

Fraud in a business generally belongs to two main categories: external and internal of a business. And there are many variants and approaches within each category, each posing different difficulties and necessitating specific preventative and detection plans.

1. Internal Fraud

Internal fraud occurs when people within an organization misuse their positions of authority, authority, and privileges, or take advantage of them to commit dishonest acts for nefarious or personal gain. In this category, fraudulent behavior is typically committed by internal staff including managers, workers, contractors, or insiders using their insider knowledge, privileges, or trust. There are several forms of internal fraud, including:

• Embezzlement: A person who embezzles is someone who takes money, assets, or property that is committed to their care or supervision without authorization. To hide their wrongdoing and illegally profit themselves, those involved may falsify transactions, tamper with financial records, or reroute corporate resources.
• Asset Misappropriation: When firm assets are taken without authorization or stolen for one's gain, this is known as asset misappropriation. This covers the theft of stock, materials, tools, or intellectual property belonging to a company. The individuals implicated may steal tangible items, falsify inventory records, or use company credit cards for intimate purposes.
• Corruption: The act of using one's position or personal authority to unlawfully benefit oneself is known as corruption. Two common examples of corruption include taking bribes and embezzling company money without authorization.
• Fraudulent Financial Reporting: The act of purposefully altering or fabricating financial statements for a business is known as financial statement fraud. The business analysis approach used by the audit team becomes deceptive as a result.

2. External Fraud

External Fraud happens when people or organizations from outside deceive, manipulate, or take advantage of the organization's systems, procedures, or stakeholders to commit fraud. External scammers frequently use a variety of platforms and techniques to attack companies, individuals, or financial institutions. Typical instances of external fraud consist of:

• Payment Fraud: The personal information of cardholders, including payment data, credit card numbers, bank account information, and digital wallet information, is stolen by identity fraudsters. To execute asset theft schemes, they employ some techniques, such as the use of malicious code, to breach card information.
• Identity Theft: Important identity documents, such as driver's licenses, passports, and citizen identification cards, are regularly taken from victims by con artists. After that, these documents are used to access online accounts or open accounts fraudulently.
• Business Email Compromise (BEC): Scammers target businesses and organizations regardless of their size (BEC). They impersonate workers or corporate representatives in an attempt to deceive victims into sending money or disclosing personal information. To fool their targets, they send fake invoices using fictional email addresses.
• Phishing and Social Engineering: A type of fraud known as "online fraud" uses digital methods to acquire personal data, including passwords, login credentials, and bank account information. Scammers will manufacture emergency circumstances by sending texts, emails, or phone calls pretending to be from major organizations. Their goal is to coerce victims into disclosing every detail about themselves.

Above are two main types of fraud in organizations: internal and external. By understanding how these fraud types operate, businesses can be able to create tactics that effectively stop them. Moreover, strict controls and risk mitigation during financial transactions are two more ways that people and organizations can improve security.

By working with reputable payment processing companies like PayCEC, businesses may get the help and knowledge they need to guard against fraud and preserve financial integrity. PayCEC provides a solid platform for processing payments, lowering fraud risks, and averting financial losses thanks to its state-of-the-art fraud detection capabilities, secure payment solutions, and adherence to compliance standards.

To strengthen your defenses against fraud and guarantee the security and reliability of your financial transactions, take immediate action and incorporate PayCEC into your operations.