Scam Factories Exploit Advanced Tech to Amplify Payments Fraud

Scam factories, where perpetrators themselves are victims of a system they help perpetuate, present a significant challenge to the integrity of global financial networks, resulting in an estimated $75 billion lost over the last four years.

These fraud factories operate predominantly across developing markets like Cambodia, Laos and Myanmar, Claire Greene, a payments risk expert at the Federal Reserve Bank of Atlanta, highlighted in a recent blog post, adding that tens of thousands of these individuals are confined to compounds and forced to conduct online scams targeting unsuspecting foreign nationals.

“These front-line contacts could themselves be victims of human trafficking, tricked or kidnapped and coerced into working as one cog in a massive criminal enterprise,” she noted.

Such scams often involve the use of fake online identities to initiate phony romantic relationships, then convincing victims to transfer large sums of money through fraudulent cryptocurrency schemes. Dubbed “pig butchering,” it involves gaining the trust of victims over weeks — akin to fattening a pig — before exploiting them.

As PYMNTS wrote in March of last year, “[Pig-butchering] scams blend elements of romance scams and investment scams, where fraudsters create social profiles and personas that manipulate victims to invest in/send crypto. Instead of waiting for victims to come to them, the scammers are prodding and prying and being proactive as they reach out across apps and text messages to find new targets.”

An example of this is when federal authorities seized nearly $9 million in a cryptocurrency confidence “pig butchering” scam last November.

At the time, Nicole M. Argentieri, acting assistant attorney general of the Department of Justice’s criminal division, explained that scammers target regular investors by setting up websites that falsely assure victims that their investments are generating profits for them. “The truth is that these international criminal actors are simply stealing cryptocurrency and leaving victims with nothing,” she added.

For payment service providers, the challenge lies in effective risk management and compliance. With operations spanning international borders, tracking and tracing fraudulent transactions becomes exceptionally challenging. This complexity directly affects traditional anti-money laundering (AML) and know-your-customer (KYC) protocols, along with cross-border regulatory frameworks.

And as fraud evolves and grows more sophisticated, so do the methods of scam factories, making them more effective.

In a recent interview with PYMNTS, Kate Frankish, chief business development officer and anti-fraud lead at Pay.UK, pointed to how digital technologies such as artificial intelligence (AI) deepfake images are enabling fraudsters to mimic individuals with exceptional precision, making it difficult for even tech savvy individuals to tell what’s real.

“The more sophisticated these types of frauds get, the more difficult it is for even the most savvy person to understand that actually, this doesn’t feel right. It’s not real,” Frankish said, adding the line between truth and deception is blurring, making victims more vulnerable to threats.

For businesses and financial institutions (FIs) looking to stay ahead of these constantly evolving tactics, it’s crucial to embrace innovative technologies. And as per PYMNTS Intelligence data, a growing number of these entities are achieving this by prioritizing investments in advanced fraud detection and management systems.

In the past year, nearly 70% of FIs with assets exceeding $5 billion adopted AI and machine learning (ML) solutions to combat fraud and financial crimes, nearly double the percentage from 2022. Furthermore, the study reveals that 97% of firms with asset sizes of $100 billion or more have followed suit.

The good news is that FIs using these technologies are witnessing positive outcomes. According to the study’s findings, institutions employing AI or ML are more likely to observe a decrease in overall fraud rates and less likely to experience an increase in fraudulent activities.