What Is External Fraud? Schemes, Methods, and Targets

Fraud involves intentional deception to secure unfair gain or deprive a victim of a legal right. This conduct manifests in various forms. When perpetrated by individuals or entities outside an organization or against an individual, it is external fraud. This type of fraud poses challenges as its origins lie beyond direct control.

Understanding External Fraud

External fraud involves deceptive practices by individuals or groups outside a victimized organization or individual. Their objective is financial gain through misrepresentation. It differs from internal fraud by originating externally, with perpetrators operating independently using sophisticated methods.

External fraud’s foundational elements involve intentional misrepresentation of facts, inducing another party to act to their detriment. This deception must be material, significantly influencing the victim’s decision. Perpetrator intent and victim reliance on false information are fundamental, leading to financial loss or harm.

Common External Fraud Schemes

Phishing and smishing are deceptive communication schemes tricking individuals into revealing sensitive information. Phishing uses email, impersonating entities like banks to solicit login credentials. Smishing uses text messages for similar purposes, often including malicious links. Both exploit trust for unauthorized access.

Identity theft involves unauthorized acquisition and use of another person’s personal identifying information (PII) for fraudulent purposes. PII includes names, Social Security numbers, and driver’s license numbers. Perpetrators use this stolen information to open new credit accounts, file fraudulent tax returns, or access existing financial accounts. This severely damages a victim’s credit and leads to financial distress.

Credit card fraud involves unauthorized use of credit or debit card information for purchases or withdrawals. This occurs through card-not-present transactions using stolen details, or skimming devices attached to payment terminals. These activities result in unauthorized charges on a cardholder’s statement.

Vendor fraud deceives an organization by manipulating payment processes through false invoices or supplier impersonation. Fraudsters submit invoices for unrendered goods or services, often through shell companies. They may also impersonate legitimate suppliers, providing altered banking details to redirect funds, leading to financial losses.

Business Email Compromise (BEC) is a sophisticated scam where fraudsters impersonate executives, vendors, or partners via email. They trick employees into fraudulent wire transfers or divulging confidential information, often using spoofed email addresses. These schemes target finance departments, requesting urgent payments to fraudulent accounts.

Imposter scams involve fraudsters posing as trusted authorities or acquaintances to solicit money or personal information. Common impersonations include government officials (e.g., IRS, Social Security Administration) threatening arrest or legal action. Scammers also pose as tech support, demanding remote access or payment. Another tactic involves pretending to be a family member in distress, requesting funds.

Ransomware and malware attacks involve malicious software deployed by external parties to gain unauthorized control over computer systems or data. Ransomware encrypts files, demanding payment (often cryptocurrency) for release. Malware includes harmful software designed to disrupt operations, steal data, or gain unauthorized access. These attacks can severely cripple operations and lead to substantial recovery costs.

Data breaches involve unauthorized access and exfiltration of sensitive data from an organization’s systems. These breaches expose personal identifiable information, financial records, intellectual property, or trade secrets. Stolen data is often sold on dark web marketplaces or used for further fraudulent activities, like identity theft or corporate espionage. Organizations face regulatory penalties and reputational damage.

How External Fraud Operates

External fraudsters employ social engineering tactics, manipulating individuals into performing actions or divulging confidential information. This includes pretexting (fabricated scenarios), baiting (infected USB drives), and quid pro quo (offering a benefit for sensitive data).

Many external fraud schemes exploit technological vulnerabilities within systems, targeting weaknesses in unpatched software, outdated operating systems, or poorly configured networks that expose entry points. Fraudsters search for these gaps to gain unauthorized access, deploy malware, or exfiltrate data. Regularly updated security protocols and robust network defenses mitigate these risks.

Fraudsters capitalize on human error, as mistakes create opportunities for illicit gains. This includes employees mistakenly clicking malicious links, downloading infected attachments, or failing to verify suspicious requests. Such errors can grant fraudsters access to internal systems or sensitive information, leading to financial compromise. Training and awareness programs reduce these vulnerabilities.

Stolen credentials are a common method for external fraudsters to gain unauthorized account access. These (usernames and passwords) are obtained through data breaches, phishing, or brute-force attacks. Once acquired, fraudsters use them to log into online services, financial accounts, or corporate networks, impersonating legitimate users to conduct fraudulent transactions.

Impersonation is a pervasive tactic where fraudsters falsely represent themselves as legitimate entities or individuals. This involves spoofing email addresses or caller IDs to appear as a trusted contact, like a bank representative or senior executive. By assuming a false identity, fraudsters deceive victims into believing their requests are legitimate, which is fundamental to many social engineering and BEC schemes.

What External Fraud Targets

External fraudsters primarily target financial assets for illicit monetary gain, including money from bank accounts, credit card details, and investment accounts. They seek account numbers, routing numbers, and security codes to initiate unauthorized transactions or open new credit lines, converting these details into tangible funds or purchasing power.

Personal Identifiable Information (PII) is a highly sought-after target, serving as a gateway to various fraudulent activities. PII encompasses data like Social Security numbers, dates of birth, addresses, and driver’s license numbers. This information is invaluable for identity theft, fraudulent tax returns, or applying for loans and credit in the victim’s name. PII’s comprehensive nature allows for multifaceted exploitation.

Sensitive corporate data is a significant target for external fraudsters, particularly for financial or strategic advantage. This includes proprietary information like trade secrets, customer lists, intellectual property, and financial records. Fraudsters acquire this data for corporate espionage, competitive advantage, or to sell on illicit markets. Compromise of such data can severely impact a company’s market position and future operations.

Gaining system access is a technical objective for many external fraud schemes, providing control over digital environments. This involves acquiring control over computer systems, networks, or databases. Once established, fraudsters deploy malware, exfiltrate data, or disrupt operations. This control allows them to execute broader fraudulent activities or hold systems for ransom.

Login credentials (usernames and passwords) are direct targets, unlocking access to online accounts and services. Fraudsters seek these through phishing, keylogging, or data breaches. Once obtained, they enable unauthorized access to bank accounts, email, social media, and corporate networks. Compromise of credentials provides a direct route to sensitive information and financial resources.

Reputation can be an indirect target of external fraud, especially for organizations. Fraudsters may aim to damage an entity’s credibility and public trust through data breaches or phishing campaigns that impersonate the organization. While immediate gain might be financial or data-related, the long-term consequence can be erosion of the victim’s standing. This reputational damage can result in customer attrition and decreased market value.