What is First-Party Fraud: Types, Differences, and Impact

First-party fraud stood as the second most prevalent form in 2022, impacting 34% of global ecommerce merchants. Consequently, it is crucial to combat first-party fraud. Businesses must remain vigilant, adaptable, and dedicated to safeguarding financial systems. To enhance the security of the digital future, the focus should be on preventing fraud and improving cybersecurity, thereby reducing the risks associated with first-party fraud.

In this article, we will delve into the concept of first-party fraud, exploring its various types, differentiating it from second and third-party fraud, and examining its impact on both individuals and businesses.

What is First-Party Fraud?

First-party fraud is the fraudulent activities where an individual or entity uses their own identity, or a fabricated version of it, to engage in deceptive or criminal behavior. Unlike third-party fraud, where an external actor uses stolen or fabricated identities, in first-party fraud, the fraudster is the actual account holder or the person applying for credit.

What are the Types of First-Party Fraud?

First-party fraud is when a fraudster uses their own identity or a modified version to deceive and commit fraud. Here are the main types of First-Party Fraud:

1. Identity Theft

  • In this type of fraud, someone steals another person's personal information to pretend to be them.
  • Example: A fraudster gains access to someone's Social Security number, address, and date of birth. Then, they use this information to open bank accounts, apply for credit cards, or make purchases. In fact, first-party fraud credit card is one of the most popular types of fraud.

2. Application Fraud

  • Application fraud occurs when the fraudster gives fake information when applying for financial services.
  • When someone applies for a loan, they might lie about how much money they make or owe. They might also give false information about their job to get approved.

3. Account Takeover Fraud

  • Account takeover fraud occurs when scammers gain unauthorized access to an existing account. They often do so by stealing login credentials or exploiting vulnerabilities in the account security.
  • A cybercriminal uses phishing or hacking to get someone's online banking login information, which is also known as first-party fraud in banking. Once inside, they can make unauthorized transactions, change account details, or conduct other fraudulent activities.

4. Employment-Related Fraud

  • An individual provides false information to gain financial benefits or credit.
  • Example: A person seeking a loan or credit card misrepresents their job title, salary, or employment history to appear more creditworthy than they actually are. This is commonly known as first-party fraud credit card.

5. Insurance Fraud

  • The policyholder lies or purposely causes an insured event to make a fake claim.
  • Example: Someone intentionally damages their own property or stages an accident to file a false insurance claim and receive a payout.

6. Healthcare Fraud

  • An individual lies or tricks the healthcare system to get money or services.
  • Example: A person may submit false claims for medical services or prescriptions they did not receive to a healthcare provider or insurer.

7. Tax Fraud

  • The person lies on their tax returns to lower taxes or get refunds they don't deserve.
  • Example: Falsifying income, deductions, or credits on a tax return to pay less tax or receive a larger refund than legally entitled.

8. Mortgage Fraud

  • Deceptive practices in mortgage transactions, like lying to get a mortgage loan.
  • Example: Providing false information about income, employment, or assets on a mortgage application to obtain a larger loan than one qualifies for.

It is apparent that in all types of first-party fraud, people exploit weaknesses to get unauthorized benefits. Fraudsters often pretend to be the real account holder when dealing with service providers. This might involve impersonating, fabricating identities, and manipulating information.

Manipulating information is a flexible technique. It includes changing data, giving false details, or leaving out information to commit fraud, like getting loans or credit. These methods show how fraudsters use different approaches in fraud schemes. It emphasizes the need for strong security measures and careful monitoring to stop these activities.

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How Does First-Party Fraud Work?

The process of first-party fraud can vary, but it generally follows a sequence of steps. Here's a general overview of how first-party fraud works:

1. Information Gathering

The fraudster collects personal information about themselves or another individual.

There are many ways to gather this information, such as:

  • Tricking people
  • Hacking
  • Asking them directly

2. Fabrication or Manipulation

The fraudster creates a false narrative or manipulates existing information to deceive service providers or institutions.

This step may involve:

  • Creating a fictitious identity
  • Altering existing details,
  • Strategically omitting information to enhance the likelihood of success during the fraud attempt

3. Application Process

The fraudster applies for financial products or services using fabricated or manipulated information.

The application process may vary depending on the type of fraud, but it often involves Submitting false details in

  • Credit card applications
  • Loan applications
  • Other financial transactions

4. Verification and Approval

The scammer tries to pass identity checks and get approval for the requested financial service.

The application may be approved if the identity verification process is weak or if the fraudster creates a believable identity.

5. Utilization of Services or Resources

Once approved, the fraudster can exploit the financial product or service for personal gain.

This may involve:

  • Making unauthorized purchases using a fraudulently obtained credit card
  • Withdrawing funds from a bank account
  • Engaging in other activities that provide financial benefit to the fraudster

6. Avoiding Detection

Criminals aim to avoid first-party fraud detection by service providers and institutions.

The fraudster might have to act normal, copy what the real account owner does, or find flaws in monitoring systems

7. Repetition or Escalation

Certain scammers commit first-party fraud multiple times, using different identities or increasing their actions over time.

This could involve:

  • Applying for additional credit products
  • Increasing credit limits
  • Expanding the scope of fraudulent activities

What are the Three Types of Fraud?

Fraud is a broad term that encompasses various deceptive activities. The three main types of fraud are:

1. First-Party Fraud

As mentioned above, in first-party frauds, the individual committing the fraudulent act is the same as the victim or entity being deceived. This type often involves the perpetrator using their own identity, or a manipulated version of it, for deceptive purposes.
Common examples of first-party frauds are:

  • Identity theft
  • Application fraud
  • Account takeover

2. Second-Party Fraud

Second-party fraud, also called fraud against businesses, happens when one business or person tricks another. In this case, the perpetrator and the victim are distinct entities.
One example of fraud is business email compromise. In this scam, a fraudster pretends to be a trusted boss and tricks employees into giving money or secrets.

3. Third-Party Fraud

In third-party fraud, someone tricks another company using fake or stolen information. The victim often does not know their identity or information is being used for fraud.
In fact, credit card fraud is a popular example. This happens when someone steals credit card information to buy things without permission. 

The Difference Between First-, Second-, & Third-Party Fraud

To better understand the difference between between the three types of fraud, take a look at the following table:

Aspect

First-Party Fraud

Second-Party Fraud

Third-Party Fraud

Perpetrator

The individual committing the fraud is the same as the victim. 

The perpetrator and the victim are distinct entities. 

The perpetrator uses stolen or fabricated information from a different entity. 

Identity Usage

Uses their own identity or manipulated version of it for deceptive purposes. 

May impersonate a trusted entity to deceive another business or individual. 

Uses stolen or fabricated information to deceive a separate entity, often without the victim's knowledge.

Examples

Identity theft, application fraud, account takeover.   

Business email compromise, supplier fraud.      

Credit card fraud, identity theft, phishing scams. 

Awareness of Victim

The victim is aware of their own identity being used for fraudulent activities. 

The victim is aware of the fraud perpetrated against them. 

The victim may be unaware that their information is being used for fraudulent activities.

Prevention Focus

Robust identity verification and monitoring measures.

Enhanced cybersecurity, and employee training.

Secure authentication fraud detection systems.

Impact

Direct financial harm to the victim.   

Direct financial harm to the deceived entity.

Financial harm to both the deceived entity and the victim of stolen information.

How Does First-Party Fraud Affect Businesses?

First-party fraud can have significant and varied impacts on both businesses and individuals. The consequences can range from financial losses to damage to reputation. This can be caused by the lack of insufficient due diligence processes, including customer due diligence and enhanced due diligence. Here's a breakdown of how first-party fraud affects businesses and individuals:

Impact on Businesses

1. Financial Losses

Businesses can lose money directly due to fraud or unpaid debts from first-party fraud.

2. Credibility and Reputation

First-party fraud can make customers lose trust in a business's ability to protect their information and do secure transactions.

Fraud incidents can harm a business's reputation by generating negative publicity.

3. Increased Costs for All Customers

To compensate for losses due to fraud, businesses may increase prices or fees, impacting all customers.

4. Regulatory Compliance Issues

If a business does not stop first-party fraud, it may face fines and legal consequences due to regulatory issues.

5. Operational Disruptions

Fraudulent activities can disrupt normal business operations. This leads to service interruptions and potential damage to customer relationships.

Impact on Individuals

1. Financial Losses

Individuals may experience direct financial losses if the fraudster exploits their identity to access financial accounts, obtain credit, or make unauthorized transactions.

2. Credit Score Damage

Fraud, especially first-party fraud credit card, can harm a person's credit score and make it hard to get loans or credit in the future (Read more about Loan Fraud).

3. Emotional Stress

Finding out you've been a victim of first-party fraud can be emotionally distressing and cause anxiety and frustration.

4. Time and Effort for Resolution

Victims of first-party fraud often spend a lot of time and effort resolving issues. They have to dispute unauthorized transactions, fix their credit reports, and deal with the aftermath of the fraud.

5. Potential Legal Consequences

Sometimes, people can get legal consequences if someone else commits fraud using their identity.

6. Trust Issues

After being victims of first-party fraud in banking, people may lose trust in banks and businesses, making them hesitant to use online services. 

7. Impact on Future Opportunities

If someone's credit history and reputation are damaged, it may be harder to get loans, mortgages, or jobs later on.

Conclusion

To sum up, the complex world of money and online interactions has led to an ongoing problem called first-party fraud. As we use the internet for shopping and banking, we must be aware of people who steal identities for money. This article explains how first-party fraud affects businesses and consumers, including its methods and impact. Also, following a fraud prevention strategy can be very helpful for first-party fraud prevention.

Moreover, collaboration across industries and the establishment of comprehensive regulatory frameworks are crucial in the fight against first-party fraud. Businesses can work together to fight fraud when they share intelligence and best practices. This creates an environment where legitimate transactions can succeed and fraudulent activities can be stopped quickly. Automation also enables businesses to proactively fight against fraud. This automation can enhance any business’s KYC and due diligence processes, including customer due diligence and enhanced due diligence. 

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