Why Britain is failing to catch up with fraudsters

Good morning. Fast payments and leaps in connectivity have created a global stockpile of vulnerabilities ripe for nefarious exploitation, especially if law enforcement lags behind. To put this into perspective: 40 percent of British crime is financial fraud, but only 1 percent of police staff are assigned to deal with it. In most cases, victims in Britain can now claim reimbursement, but the lack of oversight and under-reporting of fraud remains a damaging obstacle.

Foiled à deux

Suppose you see a beautiful wardrobe for sale on Facebook Marketplace (where you can even buy entire houses). You send the seller a message for his bank details and you transfer the amount. The item never shows up. Hooray, you just got scammed. Buy scams like this account for two-thirds of “authorized push payment fraud”. Those coming from Meta platforms including Facebook and Instagram deceive someone in Britain every seven minutes, Estimates from Lloyds Banking Group. Much of it is becoming increasingly sophisticated – persuading people to pay using a plausible story, for example – and is run by international and organized crime networks.

Fraud has incurred a socio-economic cost of around £16 billion to 10 million victims in Britain between 2021 and 2023, according to the Social Market Foundation analysis published last month. As Claer Barrett writes in her interpreter’s reader comments, the psychological consequences are long-lasting, but more difficult to measure.

Great Britain does “relatively well” when by comparing the international fraud threat level, the SMF found. But it is one of the first economies to require payment service providers (PSPs) to reimburse fraud victims up to £85,000 under new rules that came into force last week (reimbursing victims was previously voluntary). It is hoped that banks will step up their anti-fraud measures if these payouts end up on their balance sheets, with reimbursement costs split 50:50 between the bank sending the payment and the bank receiving it. One of them may charge a £100 excess when settling the fraud claim.

Will this work? Richard Hyde, co-author of the SMF report, says: “It’s a worthwhile experiment to see if you can remove some of the consumer harm. We will see in a few years whether it is net positive or net negative.” Industry lobby groups warned that fraud could increase as criminals could stage fraud cases and abuse the framework. Some fear that people will become less careful.

PSPs can refuse refunds if they can prove the customer acted with gross negligence – one test of which is whether they ignored banks’ warnings – but this is a high bar and does not apply to customers considered “vulnerable”. Vulnerability, as defined by the FCA in this thick documentincludes having “low knowledge of financial matters”. PSPs must also consider the extent to which the fraud has been victimized “banned” from scammers. So this stuff can get quite gray. (This strange case from 2023 of a deceived couple who were scammed by scammers and I think of a fake advert from Andrew Marr promoting cryptocurrency. Under the ‘spell’ of criminals, the couple lied to their banks and went ahead anyway even after the latter warned they could be scammed.) Sorting through reams of transactions and APP fraud cases to identify the vulnerability could prove operationally difficult, especially for smaller fintechs.

When John Asthana Gibson ironically fell victim to fraud while co-writing the SMF report, he noticed another problem with the new repayment regime. His bank paid him back, so in his eyes “no real crime was committed.” Now that banks have been ordered to reimburse victims within five days, there seems to be little reason for people to bother reporting this to the local police. (The obligations for payment service providers to report to the police will depend on the specific facts of each case and the extent of consumer cooperation.)

Moreover, the reporting system does not inspire confidence. The Strategic Review of Policing shows that in the period 2020-2021, only 3 percent of frauds were reported to Action Fraud, Cifas or UK Finance. were assigned a police investigation and 0.6 percent resulted in an indictment or summons. The number of suspects prosecuted and convicted for fraud offenses in England and Wales has fallen by 77 percent between 2010 and 2022. The maximum penalty of ten years’ imprisonment (compared to twenty years in the US for similar offences) for someone convicted under the Fraud Act 2006 is very rarely used. Even cases where the fraud involved is up to £100,000 normally get four yearssaid Stuart Miller Solicitors.

Investigating fraud is technical and labor intensive, not to mention an estimated 70 percent of it has an international elementaccording to the City of London Police – so you can understand why the police bill could fall not in favor of using limited resources to eradicate the perpetrators. Hyde found from his research that at least some of the public believes that even if police could trace the fraud operation, there are no officers ready to tackle it. That then discourages reporting.

The SMF estimates that Britain needs an additional 30,000 specialist police officers and staff (e.g. digital forensics experts) to achieve a police force commensurate with the scale of crime caused by fraud. Any progress depends on international cooperation. Data sharing between the public and private sectors – for which there is broad public support, according to SMF polling – is also important and has enabled a more coordinated approach in places like South Korea.

But legal experts I spoke to said sharing information between British companies to prevent fraud is complex. Piers Reynolds, partner at Freshfields, said: “There is a perception among some PSPs that barriers have been created by privacy and data sharing laws, which are creating tensions around fraud prevention.”

During the Covid loan scheme, we have seen problems in connecting different agencies and banks. Like this writing in the Institute for Government says: “Lack of expertise in the field of fraud and errors made it more difficult to establish the correct data exchange with private banks.” Many other reasons hindered the rapid data exchange needed to identify fraud. Ministers accepted the high risk of fraud (£4.9 billion of fraudulent loans out of a total of £47 billion of loans in the Bounce Back programme) because of the speed. But the affair highlights the cultural, technical and capability barriers that must be overcome to disrupt criminals who are already taking advantage of their sophisticated data networks. Laying the groundwork for similar sharing agreements is critical.

Labour’s manifesto promised it would introduce a “new comprehensive fraud strategy to tackle the full range of threats” and the party drew up plans before the election to hold tech companies liable for fraud reimbursement. These suggest a serious reckoning, but many more levers need to be pulled and combined with international efforts. The reimbursement scheme is only one piece of the puzzle. Until the state strengthens a specialized law enforcement response, it will lag behind the swarm of criminals around the world.

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