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Peer2Peer Finance News | July 18, 2019

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Fighting fraud

Fighting fraud
  • On November 11, 2016

Where there is money changing hands, the risk of fraud is always present. But in the rapidly-growing P2P sector, new risks are emerging and new solutions are being developed…

Between the Lending Club scandal and the ongoing crisis in China, the global peer-to-peer community has been rocked by allegations of fraud over the past year. Money laundering and identity fraud are two of the biggest challenges to the industry’s credibility, and no platform wants their brand to be associated with this sort of negative publicity.

So it is no surprise to learn that the UK’s P2P lenders are determined to position themselves as being among the most fraud-savvy and secure players in the industry.

“When it comes to preventing fraud, our rule of thumb is to leave nothing to chance and ensure no stones are unturned,” says Andrew Holgate, chief credit officer and co-founder of Assetz Capital. “From the lender perspective, we start off by making sure every registration is contacted and we verify all personal IDs, which are checked against fraud databases and approved ID check registers.

“We also profile their lending appetite and monitor if it comes out of kilter with expectations.  This means our customer service team and monitoring systems can easily detect irregular payments.  For example, if someone who tends to invest £100 per month suddenly increases it to £10,000, it will immediately be flagged as potentially suspicious.”

According to this year’s global economic crime survey by accountancy firm PwC, money laundering transactions are estimated at 2-5 per cent of global GDP, or roughly $1trn to $2trn (£817m to £1.6trn) annually. In the UK alone, money laundering and other financial crimes cost billions of pounds each year.

“The P2P sector is not immune to fraud and we do not feel more or less of a target than any other financial service provider,” says Martin Klass, fraud manager at RateSetter. “We are aware of the threat of fraud and consistently work to try and mitigate all forms of financial crime. Don’t forget that fraud is not just somebody being impersonated by a third party: it can also include trying to hide adverse credit data and exaggeration of income, for example.”

Of course, one of the major concerns for peer-to-peer investors is the risk of money laundering among borrowers. As designated ‘Money Service Businesses’, all P2P platforms are bound to comply with the UK’s anti-money laundering (AML) laws. This means that they have to carry out regular risk assessments, conduct full due diligence on all customers and report any suspicious behaviour to the proper authorities.

“The P2P sector is remarkably simple,” says Kevin Caley, co-founder and chairman of ThinCats. “The only real risk of money laundering is if the funds are sent from a doubtful source to a platform’s client account and then transferred back into a different – presumably legitimate – bank account.

“It’s easy to spot attempted money laundering,” he adds. “We anticipate that it will always impact a very small percentage of the loan book as it will with all P2P platforms. Whilst we see no reason why fraud by borrowers should increase, it can never be entirely eliminated.”

The relatively small scale of the P2P sector means that large-scale money laundering is unlikely to go unnoticed. However, as platforms expand in size, so does the risk.

“As the volume of applications increases, so does the chance of some of them being fraudulent,” says Klass. “It is up to each company to continue to be diligent and ensure that we stop as much as possible from occurring.”

Money laundering may be easy to spot, but the other risks are much harder to identify.

“The main risk in P2P is from a borrower obtaining a loan by fraudulent means or committing an act of fraud which impacts on the repayment of the loan,” says Caley. “A more generic risk to all businesses handling client money is that of a rogue member of staff that has access to the client accounts.”

It is the responsibility of each individual platform to ensure that its loans and investments do not break any laws or put investor money at risk, but the reality is that some risks are bound to be harder to spot than others. In late 2015, Prosper Marketplace facilitated a P2P loan of $28,500 (£23,391) to a law-abiding and financially solvent couple living in California. A few days later, that couple massacred 14 people and wounded 20 others in a terrorist attack in San Bernardino.

Although the loan application claimed that the money was needed for ‘debt consolidation’, it has been alleged that the loan was actually used to purchase the weapons used in the attack. There has been no suggestion that Prosper had any knowledge of the attack and it is worth noting that Prosper is regulated at both a state and a federal level and subjects all loan applicants to a rigorous background check.

“All loans originated through the Prosper platform are subject to all identity verification and screening procedures required by law, including US anti-terrorism and anti-money laundering laws,” said a Prosper spokesman following the San Bernardino attacks. “As part of our standard procedures, we also confirm that all loan funds are disbursed into a verified US bank account in the borrower’s name.”

The platform has recently implemented a number of new fraud-prevention checks in an effort to win back investor trust, but it may be too late. In the first quarter of 2016, the platform’s loan volume fell by 12 per cent and it was no longer being listed on loan-referral websites LendingTree and Credit Karma.

Fraud will always be a concern for any lender – P2P or not. However, the sector is certainly doing its fair share to keep investors and borrowers as safe as possible. New technologies are being developed with the specific aim of eliminating fraud and vetting potentially illegal transactions, and some of these are particularly suited to the P2P sector.

Recently, UK-based P2P lender Kuflink hired Contego, a multi-source identity verification and risk-scoring platform, to carry out checks on individuals in an effort to pacify investors.  Each potential borrower is screened against PEP and sanction lists and Contego has created a bespoke risk scorecard which will allow it to check people and companies simultaneously and in real time.

However, the traditional methods still have some value. A number of P2P lenders told Peer-to-Peer Finance News that they employ fraud-prevention teams to check on new borrowers and ensure that they are as solvent as they claim to be. One property lender, who asked to be anonymous, has a checklist of key signs to look out for when surveying a supposedly empty buy-to-let property – these include checking for photos on the bedside table and looking inside the fridge for perishable food. Another P2P lender likes to quiz the borrowers’ employees to make sure that they are actually in charge of the company.

To the outsider, these may seem like extreme tactics, but despite agile regulation and astute risk management, mistakes do happen.

“One time we identified someone who we thought was a shadow director,” says Holgate. “It seemed to us this person was the real force behind the business despite not being a director or shareholder.  We found out they had been made bankrupt and banned from being a director two years before and we declined to deal with them any further.”

The FCA is still very much getting to know the ins and outs of the P2P sector and the challenges therein, but combatting fraud is – understandably – high on its agenda. In fact, the FCA has issued an open invitation to readers of Peer-to-Peer Finance News to get in touch with their concerns regarding money laundering and other types of fraud.

“We have invited feedback from readers and we are conducting research and investigation into the market to understand to what extent the issues flagged are significant and have the potential to lead to consumer detriment,” said an FCA spokesperson. “We will be publishing feedback in due course.”

Clearly there is still a long way to go in the fight against fraud and there will always be people looking to abuse the system, move illegal money and commit fraud. But as a relatively new sector, P2P lenders have the near-impossible job of anticipating and weeding out every fraudulent activity while building consumer confidence in their online-only platforms.

As Caley says, “fraud can never be completely prevented, only minimised, so I think that everyone working in the financial sector needs to be vigilant.”

What are you doing to combat fraud?

“We are using a range of industry-leading fraud tools and have an experienced in-house team of fraud underwriters that manually review high-risk cases.” – Martin Klass, fraud manager at RateSetter

“Our world-class team of credit underwriters incorporate the very best technologies when it comes to identity checks and verification. This, coupled with the fact that we screen all applicants against fraud databases, means we are able to stop fraudsters in their tracks.” – Richard Litchfield, head of credit underwriting, LendingWorks

“Among other things we use proprietary tools, layered with our own comprehensive checks to ensure the business selling the invoice, their invoiced customer and the invoice itself is genuine. Checks are completed during both the application and funding process.” – Anil Stocker, CEO and co-founder, MarketInvoice

“We insist the funds are transferred from a regulated and Bank of England-approved account. Then, after they have been invested on the ThinCats’ platform, they can only be returned to the same account – unless we have undertaken satisfactory anti-money laundering checks on a new bank account and there is a reasonable explanation for the change.” – Kevin Caley, co-founder and CEO of ThinCats

“Our processes constantly review each individual portfolio for suspicious activity. All of our staff are anti-money laundering trained and we only send money back to one account, which has been a proven practice to stop layering in money laundering.” – Andrew Holgate, chief credit officer and co-founder, Assetz Capital