Can Energy Crisis Lead to Increase of Loan Fraud?

Energy Crisis has become the primary topic already. Especially in Europe, the crisis was knocked sideways and is expected to worsen down the track. When the lockdowns started and Ukraine’s invasion got off the ground, the energy crisis has become the most relevant topic recently.

While the energy crisis stroke, consumers started to apply for benefit loans from banks, and that being the case, benefit fraud or loan fraud had become the primary thing to take into consideration.

What is Loan Fraud

Any dishonest behaviour intended to obtain a financial advantage during the loan application process is referred to as loan fraud, lending fraud, or lending theft.

Mortgage fraud, payday fraud are just a few examples of the various sorts of loan fraud. In each of them, someone will lose money while the counterparty makes money and then vanishes.

However, the situation is far more serious online, where companies are trying to draw clients in with quick and easy transactions.  

It's important to keep in mind that depending on the sort of lending fraud, the victim or criminal roles may alter.

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How Does Loan Fraud Work?

All lending fraud is built on deception. At some point in the money lending process, someone is pretending to be someone they are not.

Most of the time, the debtor will give inaccurate information. They will utilise IDs that have been stolen or fake IDs that combine the information of real people with made-up data. Once their loan has been accepted, they won't return to pay it back. The same is true for loans for businesses.

More skilled fraudsters will meticulously return their loans in order to improve their credit histories. They will then take out a sizable loan and vanish.

What Are the Types of Loan Fraud?

1. First-Party Fraud (or Personal Loan Fraud)

Here, the applicant will intentionally provide false information or exaggerate their financial status to get approval for credit they might not ordinarily qualify for. These illegal attempts make most digital lenders misconstrue first-party fraud as a credit loss.

2. Second-Party Loan Fraud

Second-party fraud occurs whenever an individual gives their personal information to another person to commit fraud. The accomplice can be a family member or friend. Sometimes, the person who’s details are being used might not even be aware of the borrowing scheme. It’s hard to spot second-party loan fraud as there’s often no sign of illegality. After all, the information provided is legitimate.

3. Third-Party Loan Fraud

Otherwise known as identity theft, third-party loan fraud is when an individual uses a fake identity or another person’s identity (without their consent) to gain credit with no intention of payback.  

This is mainly supported by synthetic identities, in which the fraudster creates a new persona by combining stolen and fake information. After that, they legitimize this new persona and inflate its credit score by borrowing small amounts and actually paying off the debt.  

This allows them to then borrow large sums and proceed to vanish without a trace. Third-party loan fraud can also happen offline, wholly or partially. For instance, fraudsters have been known to use stolen SIM cards to apply for loans.

4. Loan Stacking

Loan stacking happens when the same borrower applies for several loans in a short period, with no intention of repayment.  

Given how new accounts and credit inquiries can take up to 30 days to display on a credit profile, sometimes lenders can’t identify who applied for multiple loans within a short time frame until it’s too late. Fraudsters recognize this loophole's lucrative and exploit it to their advantage.  

Such fraud risks can cripple your lending companies, especially microlenders, startups and fintech pioneers. You need a robust, insightful fraud detection and prevention solution to keep fraudsters in check.

What is Causing Energy Crisis and Why It is Important?

The primary cause of the energy crisis is a rebound from an economic slowdown during the COVID-19 pandemic. The situation got worse in February when Russia invaded Ukraine. Gas prices in Europe increased by more than ten times their normal historical levels as a result of European sanctions and Russian retaliation that reduced the availability of Russian natural gas, which fuels electric generators and heats buildings.

A perfect storm of market pressures that threaten to destroy the economy from household energy providers to heavy industry, from factories to farmers, has thrown Europe's energy system into instability. The UK has some of the lowest levels of gas storage capacity in Europe, making the market particularly vulnerable to the supply shortage despite the clear need for fossil fuels for energy, houses, and heavy industry. The UK holds less than 1% of the gas that is in reserve in Europe.

Rising energy costs and struggling suppliers won't be the only effects of the energy crisis. Large manufacturers, chemical industries, and steel mills are all susceptible to the effects of rising energy costs and are already suffering from the shock of the energy price.

Steelmakers are already stopping operations during the hours of peak power consumption, according to the steel industry association UK Steel, to avoid record-high pricing.

Rising pressure on the government to address the issue of expensive energy before it undermines the UK's post-Covid economic recovery Even though gas may not run out in the UK, a shortage of reasonably priced gas would be a concern.

What are the Precautions Europe Took?

In the event that the Russian natural gas supply is cut off, the EU has developed an emergency plan. All member nations are required to reduce their gas use by 15% as part of the plan, which translates to a reduction in gas use of almost 45 billion cubic metres yearly across the union.

For the member states' underground natural gas tanks to be filled until the winter season, the EU has also drafted legal measures.

Energy ministers from EU nations gathered to discuss new strategies to combat rising prices after Russia abruptly stopped supplying natural gas to Europe through the Nord Stream project. EU nations quickly tasked the EU Commission with creating legislation that restricts low-cost power providers' earnings, benefits fossil fuel firms, caps the price of natural gas, lowers electricity consumption, and gives energy businesses liquidity.

• UK

Low-income households received £400 ($467) in support from the UK for their energy expenses. The poor persons receiving public assistance received an additional £650, and retirees received an additional €300. Shale gas projects will be promoted, and the new nuclear power plant plan has been approved.

Some coal power stations now have a longer operational season. The nation made the decision to maintain yearly home energy costs at a maximum of £2,500 for two years.

Households will also receive an additional £400 in aid for their energy costs. To run brand-new gas and oil fields in the North Sea, licences will be provided.

• GERMANY

For a total cost of €125 billion ($126.6 billion), the German government devised three relief programmes to lessen the impact of rising energy prices on the general public. Fuel taxes were decreased, and until September, unlimited public transportation passes were available for €9.

The nation agreed to switch off the lighting of public buildings and monuments, as well as billboards, and set a maximum heating temperature for public buildings of 19 degrees Celsius.

Some coal facilities that were previously scheduled for closure have been restarted. Two nuclear power reactors that were previously scheduled for closure were determined to be kept by the nation.

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Relationship Between Loan Fraud and Energy Crisis

As you read above, the energy crisis has increased, and most European manufacturers are dealing with extreme bills. This situation causes the manufacturer, steelmakers and other producers are started to go through the mill. Under these circumstances, banks developed A new strategy to prevent the decrease in production and offer loans to companies to combat the energy crisis. At the beginning of September, Deutsche Bank announced that it started to offer loans to companies. Not only companies but also civilians proposed loans from banks. As a result of these circumstances, gloating people can abuse of these offers. This situation can lead increase of loan fraud in Europe and leave banks in a tight spot.

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How Can You Prevent Loan Fraud Risks?

Loan fraud risk can be reduced in addition to effective underwriting procedures by accurately profiling each applicant based on both their device setup and the data they provide to us about themselves, such as their IP, email address, and phone number.

There is an easier way to stop loan fraud. You can protect your bank or firm by using KYC module developed by Formica. By using Formica's KYC module, reduce workloads while increasing the working efficiency of your risk experts with different AI models. Scale up the data faster than ever. Get real-time alerts for risky situations without spending extra time thanks to instant reporting and alarm management. You can check out our KYC page to get more information!