Tenor D. Ickes,
Intern,
Oswald Law Firm

Fraudulent activities pose a significant threat to lenders, and combatting this ever-evolving nuisance requires a collective effort. With fraud levels on the rise, digital fraud losses are expected to surpass $343 billion¹ globally from 2023 to 2027. In the financial landscape, lenders play a crucial role in safeguarding their businesses, and collaboration is of paramount importance. A “collaborative defense” enables lenders to pool resources, data and expertise to detect and prevent fraud effectively. This article explores the methods that lenders could employ to establish a united front against fraud, fostering a safer and more resilient lending ecosystem.

Step 1: Establish an Information-Sharing Network

With an increase in fraud and more innovative tools available to fraudsters, many wise lenders are looking for ways to gain a competitive edge. One way to accomplish this goal is to participate in industry-wide solutions², or a collaborative defense. A cornerstone of the collaborative defense is the establishment of a network for sharing fraud-related information. Organizations such as the American Association of Commercial Finance Brokers (AACFB), National Equipment Finance Association (NEFA) and Equipment Leasing and Finance Association (ELFA) could each create an engaged, confidential platform where members could consistently share valuable insights and trends³ related to fraudulent activities and develop blacklists of potential fraudsters. By coming together in a secure environment, lenders could warn one another⁴ about potential risks and suspicious borrowers, preventing fraudsters from exploiting multiple lending institutions. Through collaborating with peers in the finance industry, lenders could work together to create a united front against fraud.

Step 2: Share Resources, External Data and AI-powered Data Analytics

In the battle against fraud, lenders could harness the power of AI data analysis⁵ and pool data to bolster their collaborative defense. However, access to the right data could be challenging due to resource constraints and privacy concerns. By establishing an engaged and collaborative data-sharing network across multiple organizations like the AACFB, NEFA and ELFA members from various organizations could share more comprehensive insights, maintain thorough blacklists⁶ of potential fraudsters and stay well-informed about emerging fraud trends.

In addition, by pooling data⁷ and intelligence, lenders could create a more comprehensive view of a borrower’s creditworthiness, provide fraud-detecting technology with a more complete database to pull from, and thus detect fraudulent activities more effectively. Moreover, the use of AI data analysis solutions within the network could allow for swift identification of red flags and unusual patterns, enhancing fraud detection speed and accuracy. Collaboration presents an industry-wide opportunity to harness the power of data in a privacy-protected manner, leveraging teamwork to combat shared challenges.

Lenders could expand their approach even further by incorporating external data sources⁸ (cross-sector collaboration) into their fraud prevention strategies. By combining internal data with relevant information from external bodies, such as industry-specific fraud databases, financial intelligence units, credit bureau information or transaction data, lenders could build a more complete understanding of customer behavior. This broader perspective could empower financiers to recognize unusual patterns and flag suspicious transactions almost instantly, reducing the risk of fraudulent activities slipping through the cracks.

While vigilance against fraud is essential, it is equally important to maintain a customer- centric approach.⁹ A balanced fraud prevention strategy ensures that legitimate customers are not adversely affected by overzealous security measures. By adopting AI tools and advanced analytics, lenders could distinguish between genuine anomalies and typical customer behavior, thereby minimizing the disruption of valid transactions and preserving positive customer experiences.

Ultimately, AI tools, data pooling and collaboration present an opportunity for lenders to elevate their fraud prevention efforts to new heights. Not only will it enhance operational efficiency and risk reduction, but it could be done in a way that encourages future borrowers’ trust and confidence. By staying at the forefront of fraud prevention through cutting-edge technology and collaboration, lenders could safeguard their interests while providing a secure and seamless experience for their customers.

Step 3: Create Standardized Practices for a Unified Front

Standardized fraud practices play a pivotal role in helping lenders establish a unified front against fraud, forging a collaborative defense that could effectively combat the rising risk of fraudulent activities. By implementing and adhering to uniform industry standards, lenders could create a cohesive network where they confidently share crucial insights about fraud trends, potential threats and suspicious activities without compromising confidentiality.

Having standardized practices in place will help ensure that all lenders within the network are engaged and equipped with consistent tools and fraud controls, promoting a seamless exchange of information and intelligence. This uniformity will not only streamline the communication process, but it will also enable lenders to collectively analyze data, identify patterns and detect anomalies more efficiently. As a result, when one lender identifies a suspicious transaction or encounters a potential fraudster, the information could be promptly disseminated to others, enabling quick responses and preventative measures across the network.

Step 4: Deter Legal Disputes

In order to create a collaborative defense in the safest way possible, lenders must carefully craft their reports to avoid potential defamation<sup10 lawsuits. In a defamation case, the prosecution must generally prove 1) a false statement purporting to be fact, 2) publication or communication of that statement to a third person, 3) fault amounting to at least negligence and 4) damages, or some harm caused to the reputation of the person or entity who is the subject of the statement.

To avoid liability, financiers should state only the facts and avoid making false or embellishing statements¹¹ because truth¹² is an absolute defense to defamation. Alternatively, lenders can use opinion statements to avoid liability. Opinions are protected under the law, and as such, the expression of an opinion will not lead to liability for defamation. In sum, make sure to discuss only opinions or facts and refrain from making any accusations or including unverified facts. This style of reporting should be outlined in organization policies and procedures to ensure the most legally protected approach to a collaborative defense.

Examples Of What to Say When Communicating Information About Potential Fraudsters

Facts

• This person said their name was John Doe and I learned their name was Frank Smith.
• This person said they were in business for 20 years, but after investigating, I learned their business was just launched two months ago.
• This person said their credit score was 800, but it was actually 500.

Opinions

• Personally, I don’t trust them.
• I think they have a lot of red flags.
• In my opinion, they are a high fraud risk.

Examples of what not to say (unless you have absolute proof that it is the truth):

• This person has committed fraud.
• They committed fraud against me.
• I think they committed fraud before.
• John Doe is a fraudster.
• Any embellished fact.

While it can be difficult for an alleged fraudster/ plaintiff to win in a defamation case, it is important to be cautious, as each case is unique.

Conclusion

In the face of increasing fraud risks, data sharing and collaboration have emerged as potent defense strategies for lenders. A collaborative defense enables lenders to work efficiently to fight against fraud through the use and/or implementation of information- sharing fraud networks, data analysis, cross-sector collaboration and standardized practices. This calculated approach could empower lenders to proactively prevent fraudulent activities while preserving valued customer relationships. Through mutual support and cooperation, lenders could fortify their defense against fraudsters, fostering an environment of trust, strength and confidence in the financial industry.

¹Pape, Carter. “Report Outlines Unique Fraud Risks Facing the Underbanked.” American Banker, 21 Jul. 2022.
²Barker, Jennifer. “Collaboration Needed in the Fight Against Payment Fraud.” BNY Mellon, 22 Mar. 2023.
³Prasad Pratihari, Shyam. “Reviewing the Fraud Landscape and Evolution of Techniques and Tactics to Stay Ahead.” CeFPro.
⁴Azevedo, Mary Ann. “Plaid Unveils New Collaboration Network Aimed at Giving FinTechs a Way to Share Fraud Intelligence.” TechCrunch, 22 Jun. 2023.
⁵Bassi, Eleonóra. “How Is Artificial Intelligence Used in Fraud Detection?” CoinTelegraph, 24 Apr. 2023.
⁶Kadar, Tamas. “Fraud Trends 2023: What They Really Mean for Fraudsters and Your Business.” SOEN.
⁷Kirk, Ted. “To Prevent Fraud, Everyone Should Be in the Pool.” American Banker, 11 Feb. 2020.
⁸Hale, Oliver. “How CFOs Can Use External Data to Improve Risk Management and Fraud Detection in Finance.” Trovalo,
10 May 2023.
⁹“A New Approach to Fighting Fraud While Enhancing Customer Experience.” McKinsey & Company, 8 Nov. 2022.
¹⁰Sember, Brette. “Differences Between Defamation, Slander, and Libel.” LegalZoom, 11 May 2023.
¹¹Doskow, Emily, and Barrett, Stacy. “Defamation Law Made Simple.” NOLO.
¹²“What Should I Do If I’m Accused of Libel?” ForThePeople.

ABOUT THE AUTHOR: Tenor D. Ickes, was born in Wurzburg, Germany, to U.S. military parents serving abroad. He is a summer intern at Oswald Law Firm, where he enjoys writing on trending business, banking & finance law and litigation topics. He earned a B.A. from San Jose State University while working as a law clerk at a Silicon Valley banking litigation firm. He is currently pursuing a Juris Doctor degree, and he is a student member of the San Francisco Bank Attorneys Bar Association and The Bar Association of San Francisco. In his free time, Tenor enjoys spending time with family, international travel and writing music.

The above article provides information only and does not create an attorney client relationship. It should not and cannot be construed as legal advice. Need help with fraud litigation? Oswald Law Firm can help. Contact Harmony Oswald, Esq. at [email protected]