Effects of Fraud on Individuals, Businesses, and Government


A source defines fraud as wrongful or criminal deception intended to result in financial or personal gain, or simply, according to Cambridge Dictionary, the crime of obtaining money or property by deceiving people. This type of criminal act, which is mistakenly deemed a victimless crime, can have devastating impacts on individual victims, businesses, and government. Fraud is a pervasive issue that impacts organizations of all sizes, industries, and locations. Anywhere valuable assets are present, the risk of fraud exists. Fraud is always going to happen, no doubt about it. But knowing how it affects more than just money helps individuals and public organizations make smarter choices.

Effects of Fraud on Individuals

Fraud causes lasting mental and physical trauma for victims and can increase the disadvantage, vulnerability and inequality they suffer. If you have been a victim of fraud, you may feel like you have not only lost your money, but also your sense of security, self-esteem, and dignity. In fact, fraud can really mess with your mental health, leading to anxiety, depression, and even thoughts of suicide.

And if someone steals your identity, it can have lasting effects, leaving you vulnerable to more fraud and possibly affecting your ability to access important services or benefits. Not sorting out the financial mess from fraud can seriously mess up your money situation and credit score in the long run.

Fraud impacts people who depend on government services, like the elderly, vulnerable, sick, and disadvantaged. For example, fraudsters diverting money from payments and programs can have detrimental effects on victims, causing them to miss out on crucial services and support they depend on. This misuse of funds not only deprives victims of necessary resources but also leads to missed opportunities for the intended recipients.

According to a recent study conducted by AARP, it has been estimated that a staggering $28.3 billion is lost annually to elder fraud scams. Shockingly, the study revealed that 72% of this amount, which equates to over $20 billion, is taken by individuals who are known to the victims, such as family members, friends, or advisers.

In a poignant example of the devastating impact of these scams, Rich Brune, a 75-year-old retiree residing in Virginia, USA, shared his harrowing experience with CBS News in October 2023. Brune recounted how he fell victim to an online scam the previous year, resulting in a loss of nearly $800,000. The perpetrators, posing as Microsoft employees, contacted Brune online and falsely claimed that his computer had been hacked, his financial accounts were compromised, and immediate action was required to rectify the situation.

In July 2018, a 61-year-old Australian man named Raffaele di Paolo falsely claimed to be a qualified in vitro fertilisation (IVF) specialist and proceeded to perform a series of treatments on 30 unsuspecting victims. Despite never having studied medicine, di Paolo deliberately deceived his victims, defrauding them of $370,000 and subjecting them to invasive procedures. This deceitful act not only resulted in financial loss but also robbed some victims of the opportunity to conceive a child through legitimate IVF providers.

According to the Commonwealth Fraud Prevention Centre, di Paolo was sentenced to a minimum of 6 years and 6 months in prison. Additionally, he was ordered to be a registered offender for life. 

Fraud can have extensive consequences that extend beyond the individual victim, leading to stress and disruption for families and caregivers as they work to address the situation. Furthermore, fraudulent behavior has the potential to proliferate. When individuals witness others engaging in fraudulent activities, they may justify their own actions by believing that if others are committing fraud, it is acceptable for them to do so as well. Consequently, they may acquire the skills and knowledge necessary to engage in fraudulent activities themselves.

Effects of Fraud on Businesses

The Financial Crime Academy highlights the severe consequences of fraud on businesses. These consequences include substantial financial losses, irreparable damage to reputation, potential legal ramifications, and a decrease in employee morale and trust. Ultimately, these factors can threaten the survival of the organization.

Community services and charities can face additional challenges when dealing with fraud victims. For instance, victims may require assistance in accessing financial, welfare, mental health, and healthcare services, which can strain the resources of these organizations. This can ultimately limit their capacity to support other vulnerable individuals in need. 

Moreover, if fraud occurs within a community service, it can significantly impact their operations and ability to fulfill their mission. This could result in a loss of trust from the community, leading to decreased engagement with the service provider and potential disruptions in service delivery.

Systemic fraud poses a significant threat to the integrity of an entire industry. Legitimate businesses can suffer reputational damage simply by association, leading to a loss of trust from both the government and the public in their ability to provide reliable services. The widespread prevalence of fraud can erode trust in the industry as a whole, ultimately undermining its credibility and sustainability.

The business costs associated with responding to fraud cannot be underestimated. These costs are often significant and extensive, yet they are frequently overlooked. However, it is crucial to identify and measure these costs in order to gain a comprehensive understanding of the true financial impact on a business. By considering these business costs, organizations can better appreciate the importance of investing in preventative measures, which may ultimately prove to be more cost-effective.

The costs associated with responding to fraud include:
  • Assessment costs: Resources such as staff, time, and systems are required to assess allegations or referrals of fraud and determine whether further investigation is warranted.
  • Detection costs: Detecting fraud within a business requires resources.
  • Investigation costs: Fraud investigations can be resource-intensive, and understanding these costs can help organizations prioritize prevention efforts over reactive measures.
  • Response costs: Taking action once fraud has been identified necessitates additional resources.
According to Alloy, a leading fraud prevention company trusted by over 500 top banks and fintech companies, nearly 60% of banks, fintechs, and credit unions experienced direct fraud losses exceeding $500,000 in 2023. The Association of Certified Fraud Examiners (ACFE) Report reveals that U.S. businesses lose an average of 5% of their annual revenues to fraud each year.

Effects of Fraud on Government

Fraud poses a significant threat to government resources across various sectors, including investigations, compliance, prosecution, prisons, welfare, identification, and computer systems. The diversion of finite resources due to fraud not only hinders the government's ability to provide essential services but also undermines its capacity to achieve desired outcomes. When funds and resources are misappropriated or services fail to meet required standards, the impact is far-reaching.

Instances of substantial fraud against public entities can result in a widespread erosion of trust in the government. This erosion of trust can have detrimental effects on how individuals, industries, and states engage with the government. It may lead to a reluctance to share information, a lack of confidence in the government's ability to implement programs or policies effectively, or even a perception of the government as an easy target for further exploitation.

The erosion of trust in the public sector's integrity has been linked to a decrease in legal compliance. In the United States, for example, there was a case where a Department of Motor Vehicles employee and trucking school owner colluded to fraudulently issue commercial driving licenses to individuals who had not passed the necessary tests. 

Consequently, individuals with these fraudulent licenses were operating passenger buses, tractor-trailers, and trucks carrying hazardous materials on interstates nationwide, posing a significant risk to public safety. The agency's inability to prevent unqualified drivers from obtaining these licenses not only jeopardized public safety but also eroded citizens' trust in the agency.
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