Finance & Banking , Fraud Management & Cybercrime , Industry Specific

Silent Surge: The Sudden Rise in Synthetic Business Fraud

Experts Say Fraud Related to Fake Businesses Has Grown 150% in the Past Year
Silent Surge: The Sudden Rise in Synthetic Business Fraud

While banks and fraud fighters focus their energies on combating synthetic identities used by individuals, fraudsters are simultaneously establishing fake business entities to exploit the system for more money with far less hassle.

See Also: The Evolution of Online Fraud in 2023 and Best Practices to Plug the Gaps

The lack of stringent controls and specific fraud solutions makes the creation of fictitious businesses significantly more lucrative for fraudsters, who can secure business loans exceeding $100,000, a far higher amount than the typical personal loan offers, making the scheme highly profitable.

The synthetic company problem is getting worse and is not restricted to the U.S. The U.K.'s Companies House - an executive agency of the British government that maintains the register of companies - adds about 4,000 companies each day. About 800 of those firms are fake. That's more than double the number from a couple of years ago.

A Companies House spokesperson that criminals have no doubt misused U.K. company IDs to commit fraud, money laundering and other forms of economic crime, but the agency is now taking corrective measures. "Last month, we began the phased rollout of new and enhanced powers to improve the quality and reliability of our data and tackle misuse of the companies register. We're investing in systems and people to develop our intelligence capability," the spokesperson said.

Frank McKenna, co-founder of PointPredictive, said the industry doesn't have good estimates, but "if the current estimate of annual losses is $6 billion on personal synthetic identity, then I believe business synthetic identity at this stage is probably somewhere between $1 [billion] to $3 billion. This is a problem that is emerging quickly though, and I believe business entity fraud will be as large as the personal synthetic identity fraud within a few years."

Business entity fraud is similar to synthetic identity fraud. It involves using real identifying information from a business - such as an address, telephone number or officer's name - to create a new business entity. Fraudsters also may pose as an existing business entity or create a completely new business.

What's Causing the Increase?

Financial intuitions have spent years building defenses on the consumer side only to leave the commercial side exposed. Fake businesses in the past were primarily used as shell or shelf companies to move or hide funds. Now, some synthetic entities or fake businesses are purely used to commit fraud. The PPP loan fraud that rocked many states in the U.S. during the pandemic is a perfect example.

"To make matters more difficult, there are 450,000 new businesses created monthly, of which a majority of them are micro and small businesses that will not show up on traditional data aggregators. Hence, it is tough to gauge the magnitude of this type of fraud," said Steve Lenderman, head of fraud solutions, North America, at Quantexa. "Banks have done a great job defending against consumer fraud. Where they need to improve is commercial fraud."

Data about consumers is everywhere and solutions are common, but the same cannot be said for the commercial space. "The data here is shallow and dirty, making it very difficult to authenticate a commercial entity. A shift to look at the data and the relationship or lack of is required to tackle fraud in the future," Lenderman said.

Karen Boyer, senior vice president of financial crimes at M&T Bank, highlighted practical challenges to tackling B2B fraud. "I don’t think fraud teams leave the business or commercial side exposed purposefully. It's challenging to get senior or product buy-in that fraud actually occurs in this space, since these are typically good and profitable customers

The problem becomes compounded as government business registrars do not have the ability or tools to verify the information provided by new businesses.

Since 2020, organizations have rapidly transitioned to digital operations, which was a significant shift from the pre-COVID era when individuals typically walked into an office to file for a new LLC or corporation. This change removed the personal interaction and inherent friction of face-to-face conversations with officials, whether at the state or national level. With the move to digital, the process of forming a new corporation has accelerated. Remarkably, over 16 million businesses have been established in the last three years in the United States alone, a feat that would have overwhelmed traditional paper-based processes. But now most of these agencies lack the resources needed for thorough verification.

State agencies aim to maintain verification and authentication standards. "I've had discussions with several officials who are keenly aware of these issues. However, devising effective strategies to tackle fraud presents a new set of challenges. Moreover, these bodies were not originally designed as fraud-prevention entities, adding another layer of complexity to addressing these issues," said Andrew La Marca, senior director, risk and public records operation with Dun & Bradstreet (see: Fake Firms Flourish as Fraudsters Focus on B2C Scams). Dun and Bradsteet, a leading global provider of business decisioning data and analytics, investigated 1,000 synthetic entities in 2023, an increase of 150% from 2022.

A former Small Business Administration official who asked not to be named said fraud has never been a consideration for the organization. "It is all about ease of business. We want to make it as frictionless as possible for new entrepreneurs to flourish," they said.

The Way Forward

The way forward is to take the lessons from the consumer side and apply them to the business side. "These fake companies usually have sole proprietors, so they are actually an individual in that sense. There's going to be a number of signals that we could look at during that KYB process that businesses can leverage," said Mary Ann Miller, fraud and cybercrime executive advisor with Prove (see: The Rising Threat of Fake Business Accounts).

She said other signals need to be checked during the onboarding process. "We can look at phone signals. We can check whether the actual device has been registered and connect the dots and more importantly, triangulate to a point that we can make the right decision of whether this is really a legitimate person wanting to create a business."

Companies House is incorporating a stricter identity verification process for companies. For existing companies on the register, key people will need to verify their identity within a set period. "For new companies and other registerable legal entities, this will mean that all directors - or equivalent - and people with significant control - PSC - will need to complete identity verification before or as part of the company incorporation process. Identity verification will be directly through Companies House or via an authorized corporate service provider," the spokesperson said.

Predictability is another factor that fraud defenders can look into. Graham Barrow, director at The Dark Money Files, said, "We see a great deal of predictable company names because they're being produced algorithmically rather than through AI. There is a certain way the human brain functions. If you see a dozen companies with roughly the same length of company name, then it's quite unlikely that's happened coincidentally. The way the human brain works is: When you're trying to invent companies, you might come up with lots of different names, but they will be about the same length."

About the Author

Suparna Goswami

Suparna Goswami

Associate Editor, ISMG

Goswami has more than 10 years of experience in the field of journalism. She has covered a variety of beats including global macro economy, fintech, startups and other business trends. Before joining ISMG, she contributed for Forbes Asia, where she wrote about the Indian startup ecosystem. She has also worked with UK-based International Finance Magazine and leading Indian newspapers, such as DNA and Times of India.

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