In today's rapidly evolving automotive industry, dealerships face a myriad of challenges that extend beyond sales targets and customer satisfaction. Among these challenges, fraud and identity theft have emerged as significant threats, posing risks not only to financial stability but also to the integrity and reputation of businesses. As the industry becomes increasingly digital, the sophistication of fraudulent activities continues to grow, necessitating a proactive and informed approach to risk management.
Fraud and identity theft in automotive dealerships can manifest in various forms, from falsified loan applications and deceptive financing schemes to the unauthorized use of personal information. These activities not only result in inventory loss and substantial financial loss, but also erode customer trust and confidence.
For dealerships, understanding the nuances of these threats and implementing effective countermeasures are crucial to safeguarding their operations and maintaining competitive advantage.
Types of fraud
Two types of fraud can affect automotive dealerships:
- First-party fraud involves individuals misrepresenting their identity or providing false information for financial gain. This type of fraud can include falsifying income or employment details to secure a car loan with no intention of repaying it. Nearly 80% of all auto fraud cases involve first-party fraud.2
- Third-party fraud involves falsifying information on loan applications to secure financing for vehicles. Fraudsters may use stolen identities or fabricate income statements and credit histories to obtain loans they otherwise wouldn't qualify for. This fraud can lead to significant financial losses for lenders and dealerships. Forty percent of third-party identity fraud cases involve individuals with credit scores above 800, most with no prior delinquencies on their credit files.1
The latest trends in dealership fraud
Schemes to defraud dealerships continue to evolve, with fraudsters adapting and refining their tactics to evade suspicion. It's essential to stay informed of the latest emerging trends to safeguard property and finances. Two notable trends are synthetic identity fraud and deposit fraud:
Synthetic identity fraud involves creating fake identities by combining real and fabricated information. Fraudsters use these synthetic identities to secure loans and purchase vehicles, making detection more challenging. Synthetic identity theft has increased noticeably, with the incidence of fraud rising from 2.8% in Q2 2023 to 8% in Q2 2024.1
Deposit fraud is when a customer provides a fraudulent or invalid deposit as part of the vehicle purchase agreement. Bounced cheques, forged bank drafts and stolen or fake credit cards can significantly impact automotive dealerships, both financially and operationally. Deposit fraud has also seen a sharp increase, growing from 27.4% of first-party fraud in Q2 2023 to 41.2% in Q2 2024.1
Strategies for fraud prevention
The rise in fraud within the automotive industry underscores the need for enhanced fraud detection. In the face of escalating threats, dealerships must adopt a comprehensive approach to risk management that addresses the complexities of fraud and identity theft.
Recognizing red flags
A first line of defense against dealership fraud scams is vigilance. Knowing what might indicate a suspicious transaction can empower dealerships to be cautious. Unusual customer behaviour might be the buyer coming from out of town, attempts to complete a transaction over the phone or email without visiting the dealership, or customers who appear very knowledgeable about the purchasing process.
Dealerships should review Identification carefully, request multiple forms of identification such as a driving licence and passport and compare them to online social media profiles. Dealerships also should scrutinize bank drafts for legitimacy, paying careful attention to the paper type and verifying with the issuing bank. Ideally, dealerships should wait for payment to clear before releasing a vehicle.
Identity verification technologies
Solutions like AI-powered identity verification provides real-time authentication and prevents criminals from using fake or stolen identities to secure financing or drive away with vehicles. Automation reduces manual processes, speeding up transactions and minimizing errors, as well as benefitting consumers with quicker, seamless customer experiences.3
As digital transformation reshapes the landscape, the need for robust identity verification technologies becomes paramount. By integrating AI verification methods, dealerships can ensure secure and accurate authentication of customer identities.
Employee training and awareness
Equally critical is the cultivation of a vigilant workforce through targeted employee training and awareness programs. Regular training sessions equip staff with knowledge of fraud tactics and cybersecurity best practices, fostering a culture of vigilance and empowerment. Communication with other dealerships in the area can also be beneficial, as it's possible the fraudsters will target multiple dealerships in the same area with the same tactic.
By encouraging employees to identify and report suspicious activities, dealerships can effectively mitigate potential threats, maintaining the integrity and security of their operations.
Data analytics and monitoring
Leveraging data analytics and monitoring systems further enhances fraud detection capabilities. By analyzing transaction data, dealerships can identify unusual patterns that indicate fraudulent activities. Real-time monitoring systems enable swift detection and response to threats, minimizing risks and ensuring proactive protection. This data-driven approach allows dealerships to stay ahead of emerging threats, safeguarding both business operations and customer trust.
Responding to fraud
Recognizing fraud is just one step in a proactive approach to risk mitigation. Dealerships should also establish clear protocols for their staff in handling a suspected fraudulent incident. Acting quickly and effectively by documenting the incident and notifying financial institutions, law enforcement and the insurance provider can help disrupt criminal activity and increase the likelihood of recovering inventory and finances.
Real world cases
These Canadian cases highlight the real threat posed to dealerships of all kinds and the importance of vigilance.
Synthetic identity fraud ring arrested
The fraud: Toronto Police Service announced the arrest of 12 individuals and laid 102 charges in a major synthetic-identity fraud investigation. The police investigation, which took eight years from the start of the scheme to the arrests, uncovered that criminals had created more than 680 synthetic identities to open hundreds of bank and credit accounts across Ontario.4
Prevention: Training employees to recognize signs of synthetic identity fraud and encouraging them to report suspicious activities are crucial. Employees should be aware of the tactics used in synthetic identity fraud and how to spot them.
Luxury car scam
The fraud: Three suspects were charged for allegedly using fraudulent bank drafts to purchase high-end cars, resulting in losses exceeding $850,000.5
Prevention: Before finalizing any transaction — especially for high-value items — sellers should verify the authenticity of bank drafts directly with the issuing financial institution, by contacting the bank to confirm the draft's validity and ensuring it matches their records.
Small business defrauded
The fraud: The owner of an excavation company was defrauded of $108,367 when he sold a skid steer and was given a fake bank draft. Despite the draft initially clearing, it was later declared fraudulent.6
Prevention: Encourage the use of secure payment methods such as wire transfers or certified checks, which are harder to forge than bank drafts. These methods provide more security and traceability.
Conclusion
In the dynamic automotive industry, fraud and identity theft pose significant threats to financial stability and business reputation. As digital transformation advances, these threats become more sophisticated, demanding proactive risk management strategies. Fraud in dealerships can manifest in various forms, leading to substantial financial losses and eroding customer trust. Understanding these threats and implementing effective countermeasures is crucial for safeguarding operations and maintaining a competitive edge.
Comprehensive insurance coverage serves as a cornerstone of a robust risk management strategy. By securing policies that address various types of fraud and identity theft, dealerships can mitigate financial losses and provide peace of mind. Regular reviews and updates of insurance coverage ensure alignment with the evolving risk landscape, underscoring a commitment to robust protection against unforeseen events. This dedication to comprehensive coverage reflects the industry's resolve to safeguard assets and maintain trust in an increasingly complex environment.