Moody’s data identified 1,193 new entities and people globally with potential ties to romance scams in 2024. This is a six-year high and a 14% increase from 2023. While not a walk in the park, it is important banks, and financial institutions identify these risks within their screening and monitoring processes.
In romance scams, criminals build fake online identities and, over time, gain the trust of their victims. These victims are then manipulated into sending money, financial information or valuables to the fraudster under the belief they are in a relationship with them.
Perpetrators are experts in deception and manipulation, becoming the perfect love interest to their victims to gain trust. Often, scammers invent emergencies to prompt the target into willingly sending funds without taking time to fully consider their actions.
Romance scams are indiscriminate, affecting individuals across all age groups, genders, and backgrounds, which underscores their pervasive nature. However, older adults often stand out as primary targets due to their potential isolation and accumulated financial resources, making them particularly attractive to fraudsters.
Additionally, people undergoing significant life transitions, such as a recent divorce or the loss of a loved one, can be more susceptible to romance scams. Scammers exploit emotional vulnerability, which can result in heightened susceptibility to accepting online companionship. It's no surprise that during the COVID-19 pandemic, where loneliness and isolation were at their peak, the rate at which these types of fraud were reported grew significantly.
Social media platforms and dating apps are common channels for these fraudulent relationships to develop. According to experts, those who are less tech-savvy may also find themselves at a disadvantage, as they might struggle to recognize fraud tactics commonly utilized in these scams.
Romance scams can expose banks and other financial institutions to reputational and financial risk as the money gained by fraudsters via romance scams is often laundered via traditional banking systems. Financial institutions need to ensure they have policies in place to identify and address this type of fraud.
It is crucial for banks to regularly update their screening processes to keep pace with the evolving tactics of scammers. The use of robust anti-money laundering processes and fraud prevention tools can enable better detection of illicit acts and help prevent bad actors from further profiting from their actions.
Integrating advanced technologies such as artificial intelligence and machine learning into screening and monitoring processes can significantly enhance their effectiveness. These technologies can analyze vast amounts of transactional data in real-time, identifying unusual patterns and flagging suspicious activities that may be associated with romance scams.
Financial institutions are increasingly leveraging adverse media as a critical tool in their risk management strategies. Adverse media, or negative news screenings, involves monitoring news sources, social media, and other public information channels to identify potential risks associated with financial transactions and customer activities. By integrating adverse media signals with other risk indicators, banks can gain a comprehensive view of potential threats and take preemptive measures to mitigate them.
For instance, when screening for romance scams, financial institutions can combine multiple adverse media signals with indicators such as the use of shell companies. By doing so, they can identify patterns and behaviors that are characteristic of fraudulent activities.
Collaboration between financial institutions, regulatory bodies, and law enforcement agencies is also essential to combat the growing threat of fraud. Sharing information and best practices can help create a unified front against many types of scams, including romance schemes, making it harder for fraudsters to exploit the system. Developing industry-wide standards for identifying and reporting suspicious activities can also streamline efforts and improve overall efficiency in tackling romance scams.
Romance scams, like sextortion, can have a profound effect on both victims and their families. There is a huge personal cost attributed to these crimes and they have been directly linked to suicide rates. Along with the personal cost, there is also the financial cost to victims. The FBI estimates, that in the US alone, $652 million was lost to romance and confidence scams in 2023, though this number may be considerably higher as many instances will have gone unreported.
“Romance scams often use shell companies so that it doesn’t look like money is going overseas,” says Richard Graham, a director in Moody’s Compliance & Third-Party Risk Management team.
The use of shell companies is not illegal, but it is a tactic employed by fraudsters to launder money and hide ill-gotten financial gains. By setting up shell companies across different jurisdictions, scammers can obscure their money trail, complicating efforts by authorities to detect and intercept transactions.
Using advanced tools such as Moody’s Shell Company Indicator allows financial institutions to identify risks associated with these entities. The tool analyzes various data points to flag companies that exhibit characteristics commonly associated with shell entities, such as lack of operational transparency, minimal physical presence, and inconsistent financial records.
Furthermore, financial institutions can implement stringent due diligence procedures, including Know Your Customer (KYC) processes, to verify the legitimacy of their customers and their associated business activities. Regular audits and monitoring of transactions can also help detect unusual patterns that may indicate the presence of shell companies and therefore fraud.
The main challenges in tackling romance scams lie in achieving international cooperation as well as countering the use of sophisticated technology by scammers. Due to the cross-border nature of fraud, law enforcement agencies from multiple countries may need to collaborate to trace and intercept illicit financial flows. This requires not only sharing intelligence and resources but also the harmonization of legal frameworks to ensure scammers cannot exploit jurisdictional loopholes.
Additionally, scammers often employ advanced technological tools to stay ahead of detection mechanisms. To combat this, financial institutions can invest in cutting-edge technology and analytics, such as Moody’s Shell Company Indicator, to identify and mitigate risks associated with shell companies. By leveraging data-driven insights and implementing robust KYC protocols, banks can enhance their ability to detect and prevent fraud, better protecting customers and maintaining the integrity of the financial system.
For more information on ways to implement effective intelligent screening and risk monitoring to prevent fraud, please get in touch. Our solutions and data can help you stay ahead of growing threats such as romance scams, helping better protect vulnerable populations while keeping your organization alive to fraud risk.