Of the many challenges facing private lenders today, fraud has quickly moved to the forefront as one of the most difficult to meet. Wire fraud, bank fraud, appraisal fraud, invoice fraud, and seller impersonation fraud are becoming increasingly pervasive, posing significant threats to lenders and their clients. Financial fraud in the private lending sector has seen a sharp increase, with reported cases of wire fraud alone rising by over 50% in the past three years.¹

These fraudulent activities can lead to substantial financial losses, reputational damage, and major operational disruptions. And it’s not only large lenders who are targeted by fraud. As small private lenders gain market share, they are quickly becoming an attractive target for bad actors.

The Growing Threat of Fraud in the Private Lending Space

With large transaction sizes and complex payment processes involving dozens of contractors and vendors, the private lending sector is particularly vulnerable to various forms of fraud. Here’s a high-level look at some of the most common types:

1. Wire Fraud: Fraudsters often impersonate legitimate parties to redirect funds into their accounts. This can happen during real estate transactions, loan disbursements, and other financial operations, leading to significant financial losses—and it’s getting worse. The average year-over-year increase in fraud in small and midsized lending businesses was 14.5% in 2022, compared to 6.9% in 2021.²
2. Bank Fraud: This involves the use of fraudulent means to obtain money or assets from financial institutions. Tactics include fake bank statements, forged documents, and identity theft. The Association of Certified Fraud Examiners (ACFE) indicates that bank fraud cases have increased by 30% in recent years.³
3. Appraisal Fraud: Inaccurate or manipulated property valuations can mislead lenders about the true value of collateral, leading to poor lending decisions and potential losses. Studies show that appraisal fraud was involved in 25% of mortgage fraud cases reported in 2021.
4. Invoice Fraud: False or inflated invoices are used to deceive lenders, causing them to release funds based on non-existent or overvalued transactions. The International Association of Financial Crimes Investigators (IAFCI) highlights that invoice fraud has grown by 40% in the last five years.⁵
5. Seller Impersonation Fraud: Seller impersonation fraud involves fraudsters posing as the owners of vacant or unoccupied properties to transfer funds from the sale into a fraudulent account.

Technological Solutions

To combat these challenges, along with increased internal vigilance, lenders need robust and reliable technological solutions to safeguard their operations. The list of software platforms such as this is growing, but few offer a comprehensive suite of services that address each of the unique challenges faced by private lenders.

Sekady offers a robust, easy-to-use solution to help mitigate the risk of fraud with:

1. Account Validation Services (AVS): Account validation services verify the authenticity of bank accounts and other financial details provided by borrowers. This helps ensure that funds are being transferred to legitimate accounts, significantly reducing the risk of wire fraud before it starts.
2. Entity Validation Services (EVS): Entity validation services verify the existence and legitimacy of borrowing entities, helping prevent bank fraud and identity theft. This service includes checks on business registrations, ownership structures, and other critical details.
3. Rigorous Internal BSA/AML Compliance Programs: Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) programs, which include Know Your Customer (KYC), Office of Foreign Assets Control (OFAC), and Suspicious Activity Report (SAR) components round out a robust organizational compliance approach. These programs help ensure the utmost security standards are being upheld.
4. Real-Time Monitoring: Real-time monitoring enables lenders to detect and respond to suspicious activities promptly. This proactive approach helps in mitigating potential fraud before it can cause significant harm to lenders and their clients.
5. Comprehensive Reporting: Provides detailed, live reports that give lenders a clear view of the validation process and any potential red flags. These reports are crucial for informed decision-making and maintaining due diligence.
6. Secure Wire Instructions: Secure wire instructions are a critical component in ensuring funds are transferred to the right place, and stopping wire fraud before it even starts.
7. Platform Security: Secure, encrypted portals should exceed even bank-grade encryption of sensitive data. Sekady is also SOC Type 2 certified—adhering to strict organizational controls and security to protect sensitive information. Routine penetration testing and web application firewalls help make Sekady an industry leader in security.
8. Direct Payments: Paying subcontractors and vendors within a secure ecosystem helps mitigate fraud by ensuring they’ve been thoroughly vetted and verified prior to payment scheduling.

In an environment where fraud is a constant threat, private lenders both large and small need robust and reliable solutions to protect themselves and their clients. By choosing Sekady, lenders are not just protecting their financial interests—they are also safeguarding their reputation and building trust with their clients. As fraud continues to evolve, Sekady remains committed to staying ahead of the curve, providing the cutting-edge solutions that lenders need to thrive in a secure and fraud-free environment.

References

1. Business Wire. (2021). Financial Fraud in Private Lending Sees Sharp Increase. Retrieved from [businesswire.com].
2. 7LexisNexis. (2023). 2023 Small Business Lending Fraud Study. Retrieved from [lexisnexis.com].
3. ACFE. (2021). The 2021 Report to the Nations: Banking and Financial Services Fraud. Retrieved from [acfe.com].
4. PwC. (2022). Global Economic Crime and Fraud Survey 2022. Retrieved from [pwc.com].
5. IAFCI. (2022). Invoice Fraud Report. Retrieved from [iafci.org].
6. FBI. (2020). 2020 Internet Crime Report. Retrieved from [fbi.gov].