Did you know that fraud can be classified as either First, Second, or Third party? All fraud is damaging not only to individuals but businesses as well, causing financial losses and mistrust. Let’s dive in for a closer look at these 3 types and explore examples, red flags, and prevention.
First-party fraud occurs when a customer either fraudulently disputes a legit transaction or claims to not receive something they ordered just to get a refund. It is also sometimes referred to as “Friendly Fraud” because it involves a real customer who actually made a purchase but denies it to get their money back. This is more common than you think, we see it a lot with disputes and some ACH items. To be fair, there are times when these are honest mistakes, and it can be difficult at the time of dispute to tell. However, a first-party fraudster may seem legitimate during interactions but with true fraud the malicious intent always rears its ugly head eventually. If a customer has had multiple previous disputes or chargebacks, request unusually high refund amounts, or the transactions don’t align with their typical purchase history, these could be red flags.
Here are some examples of First-party fraud:
- Chargeback fraud: when a customer disputes a legit debit/credit card transaction
- Goods lost in transit fraud: when a customer falsely claims they didn’t receive a package
- De-Shopping: when a customer buys an item, uses it, then returns for a refund
- Fronting: when a customer uses another person’s id or info to obtain a service or product for their personal gain
- Bust-out fraud: when a customer establishes a credit account then “busts-out” by incurring excessive debt and never paying
Second-party fraud occurs when an individual knowingly gives out their information or allows it to be used by another person to commit fraudulent activities. This includes using someone else’s bank account to launder money or allowing someone to use your credit card details to make fraudulent purchases. With second-party fraud, the victim knowingly and willingly provides their information and are aware it is being used for illegal activity. With second-party fraud, the person allowing their information to be used can be held just as liable as the person using it. There are serious legal repercussions for this involvement. And transactions involving second-party fraud may be difficult to detect because they appear legitimate and all parties are complicate.
Here are some examples of Second-party fraud:
- Money muling: when someone allows their bank account to be used to receive fraudulent funds, often for a percentage of the total
- Credit/debit card fraud: providing your credit/debit card information to a fraudster so they can make purchases
- Gift Card Laundering: when someone is lured into accepting funds into their bank account and a fraudster transfers those funds to gift cards which are then laundered
- Chargeback fraud: when you give out your debit/credit card information to a fraudster to make purchases and then file disputes on those purchases
Third party fraud is more commonly known as identity theft. It occurs when someone uses another person’s identity to gain access to their credit or services without the victim’s knowledge or consent. This includes using someone else’s information to open accounts, make purchases, and commit all sorts of financial crimes. Frequent credit monitoring is a huge help in keeping your identity safe. You can check your credit for free by using freecreditreport.com. Also, by contacting the credit bureaus (Experian, Equifax, and Trans Union) and placing a freeze, you can stop unwanted or unauthorized accounts from being opened in your name. Third-party fraud can lead to significant financial losses to victims, impact to credit scores, and sometimes even legal issues.
Here are some examples of Third-party fraud:
- Identity theft: the unauthorized use of another person’s identity including stolen or false information
- Account takeover: when a criminal gains access and control of a victim’s online accounts often by tricking them into giving out information
- Synthetic Identity Fraud: creating a new identity using a combination of real and fake information
