What is fraud? Fraud definition, types, and consequences

What is fraud?

Fraud is the purposeful act of deceit to acquire a benefit, which may be for an individual or institution, through the use of deception to alter or hide the truth. People commit fraud in diverse settings – from corporate offices or financial institutions to religious organizations, non-profit organizations, and sports leagues.

The fraud triangle

Most people committing fraud fall into one of the three categories in Dr. Donald Cressey’s fraud triangle. The fraud triangle theorizes that people must have an opportunity, financial pressure, and rationalization to commit fraud.

• Opportunity: People with access to systems, such as electronic or paper files, who can alter documents. There is a lack of checks and balances at work where one person can “do it all,” such as submitting and approving payment for invoices.
• Financial pressure: Someone with financial pressure, such as medical or credit card debt, or pressure to live beyond their means. Someone who is battling an addiction or substance disorder and owes cash to various lenders.
• Rationalization: People who rationalize the theft with thoughts such as, “This company owes me this because I work so hard,” or “I’m just borrowing it, not stealing,” or “They won’t miss the money. This company (or fund) has so much of it.”

Consequences of fraud

Fraud charges can be pursued through criminal or civil cases against fraudsters. When a criminal fraud case goes to trial, the perpetrator (fraudster) may be sentenced and sent to jail. Money may be recovered during a trial, and rights can be reestablished. Penalties from fraud cases can include forfeiting assets, restitution, hefty fines, prison time, and repercussions for the fraudster’s reputation.

Common types of fraud

The most common types of fraud are financial fraud, identity theft, mail fraud, business fraud, and medical fraud.

Financial fraud

Financial fraud is an umbrella term for fraud that happens when a scammer takes your assets through deceptive practices or criminal activity. Financial fraud can include ATM scams, HELOC fraud, credit card fraud, IRS scams, bank fraud, insurance fraud, mortgage fraud, Ponzi schemes, ransomware, and embezzlement.

Identity theft fraud

Identity theft is a serious offense. It happens when someone obtains your personal information, such as your name, credit card number, or Social Security number, and uses it without your knowledge or permission to commit fraud or other crimes. Identity theft commonly occurs online through phishing or cyberattacks.

Mail fraud

Mail fraud letters arrive in your mailbox and will ask you to send your personal information or money to receive a “gift” or other item. Mail fraud letters appear legitimate, but what they offer is fake. Examples of mail fraud can include letters for vacations, sweepstake winnings, prizes, and other rewards or valuable offers.

Business fraud

Business fraud commonly refers to fraudulent activities that occur within a company or organization. Businesses may use false or misleading information to commit fraudulent behavior. Examples of business fraud (also known as corporate fraud) include financial statement fraud, securities fraud, embezzlement, skimming, conflicts of interest, payroll fraud, diversions, bribery, tax fraud, and disbursement fraud.

Medical fraud

Medical fraud, also known as health care fraud, is fraud committed by patients, medical providers, or others. It aims to deceive the health care system and obtain illegal payments or benefits.

Common types of medical fraud:

• By patients and individuals: Identity theft or swapping, fake marketing, and impersonating health care professionals.
• By medical providers: Upcoding, unbundling, double billing, and phantom billing.
• Involving prescriptions: Diversion, forgery, and doctor shopping.

How to protect yourself from fraud

Protecting yourself from fraud can feel overwhelming. Focusing on cybersecurity is the first step in building a line of defense against fraud and financial losses. It’s the best way to prevent scammers from stealing your information or assets.

Here are the best tips for maintaining cybersecurity and preventing fraud:

• Beware of spam. Don’t open emails from unknown email addresses or senders. Contact the sender through other means if you’re unsure if the email is legitimate or if it is an attempt to scam you.
• Ensure a website address is secure before inputting personal information such as passwords, Social Security numbers, account numbers, or dates of birth. You can install anti-phishing software to help you detect malicious URLs and avoid scams. Also, look for “https://” in the URL or verify SSL certificates.
• Before entering your personal information online, ensure the site is legitimate and not a fake website built by scammers. Scammers commonly change a letter or number to resemble trusted website addresses closely.
• Use a cybersecurity tool such as Threat Protection Pro™ to help you block malware, phishing, trackers, and ads and protect your identity and money.
• Update your software or operating system when software updates are available. New updates may include antivirus or firewall features.
• Encrypt your data with a VPN. VPNs protect you from hackers by sending your internet traffic through an encrypted VPN tunnel, which means hackers can’t read your data.

What to do if you’ve become a victim of fraud

Victims of fraud should report it using the Federal Trade Commission’s (FTC) Report Fraud online tool. You can report a company, unwanted calls, or scams via their online form to the government. After submitting your report, it is sent out to over 2,800 law enforcers. The FTC then uses the data to investigate cases of fraud and bring cases against different scams, frauds, and bad business practices.