Financial crime has a broad definition that sometimes includes all illegal activity targeting financial institutions, or even any illicit generation or use of money for an advantage. Here are ten common types of financial crime.
Fraud
Financial fraud crimes encompass any activities intended to gain or protect financial benefits through deceitful and unethical means. Fraud is a wide category that can include many of the other crimes on this list, such as impersonation, counterfeiting, identity theft, and falsifying business records.
Money Laundering
Money laundering is a financial crime that aims to cover up the source of the proceeds of crime. Its first objective is to sneak money generated through illegal activities into a financial system (placement). Its second objective is to move that money around to build up a transaction history, giving it the appearance of legitimacy and making it difficult to trace back to its original criminal source (layering/structuring). Its final objective is to return the money to criminals for them to spend without attracting attention from authorities (integration).
Terrorist Financing
Terrorist financing refers to entities providing financial assets to terrorists—both individuals and groups. Their aim is to help terrorists purchase weapons, supplies, and anything else they need to carry out attacks on innocent civilians.
The penalties for being caught aiding terrorists are very severe, so terrorist financing is somewhat akin to money laundering. That is, criminals wanting to finance terrorists have to use tricks to sneak assets into legitimate financial systems, then conceal where the money is coming from and going to.
Embezzlement
Embezzlement is when an entity is entrusted with—or given access to—funds to be used towards certain ends, with the entity then illicitly using that money for other purposes. They may transfer it to their own accounts or those of another, creating fake invoices or receipts to try and cover their tracks. Embezzlement often occurs within organizations and can range from petty theft to multi-million dollar schemes.
Corruption and Bribery
Similar to embezzlement, corruption is when an entity in a position of power acts outside of its mandate in order to unlawfully gain advantages—including financial ones—for themselves or others. Corruption can actually involve embezzlement, and it can also involve bribery.
Bribery is the other side of corruption. It’s when an entity illegally gives financial benefits to authorities in exchange for receiving preferential treatment in decisions affecting the public. An example is a company paying officials in a country to get them to allow it to operate there without needing to comply with all necessary regulatory obligations.
Tax Evasion
An entity intentionally not paying their taxes, or paying less tax than they owe, is a financial crime called tax evasion. There are several ways to commit tax evasion. One is to deliberately fail to report taxable income. Another is to purposely claim more tax deductions than one is entitled to. Refusing to file a tax return at all also counts as tax evasion.
An entity may also commit tax evasion by storing or investing their assets in banks or companies in other countries, or that are “shells” (i.e. they have no physical location and/or no active operations). This allows them to falsely claim that they have fewer assets than they actually do, in an attempt to illegally pay less tax than they truly owe.
Insider Trading and Market Abuse
Sometimes, an entity may cheat the stock market by buying or selling securities based on proprietary information regarding a company’s financial situation. This is called insider trading, and it’s a financial crime in many places. This is because the entity either was entrusted with the information for other purposes (similar to corruption and embezzlement) or outright stole it. So they got an unfair advantage by using information the public wasn't supposed to know (yet).
There are other ways criminals can illegally manipulate stock markets. One example is “wash trading”—purchasing and then immediately re-selling shares in a company. This creates the illusion that the company’s stock is seeing a lot of financial activity, which can inflate its price.
Another such scheme is called “pump and dump”. This involves an entity purchasing a low-value stock, then spreading rumors or other misinformation suggesting that the stock will soon increase in price. Their goal is to create a flurry of trading activity around the stock, thereby inflating its value. Then they sell off their shares for a profit before others realize the hype surrounding the stock was fake, and trading activity returns to normal.
Forgery and Counterfeiting
Other financial crimes involve unlawfully manipulating or duplicating financial assets. These are known, respectively, as forgery and counterfeiting.
Forgery is illicitly altering a genuine financial asset to create an unintended benefit. In check fraud, for example, a criminal may name a different payee on the check, or change the amount the check is for. They may even attempt to fake the signature or other credentials of the check payer or endorser to make it seem like they authorized the check, when in fact, they did not.
Meanwhile, counterfeiting creates imitations or unauthorized copies of legitimate financial assets. The criminal’s intention is to spend these fakes as if they were genuine, hoping the other transaction party doesn’t notice the difference. However, many financial assets now have security features that allow people to tell the difference between an imitation and a genuine one, or when a genuine one has been illegally copied.
Identity Theft
While identity theft doesn’t involve directly stealing financial assets, it’s often considered a financial crime anyway. This is because it’s typically used as a means of committing other financial crimes.
The goal is for a criminal to steal someone’s private identity or account access credentials, then use them to forge the person’s authorization for transactions. This allows the criminal to illegally profit while the victim bears the costs.
A criminal can use many different methods for identity theft. A common one is phishing, where they trick victims into revealing their credentials with an enticing and/or urgent request—often appearing as if it came from a legitimate and authoritative source. They can also break into online accounts to steal credentials or impersonate victims. Or they may simply purchase credentials exposed by data breaches from the black market.
Cybercrime
As more financial activity moves online, so too does financial crime. Fraudsters are turning to digital channels for stealing money and authorization credentials, exposing sensitive information, forging and counterfeiting financial assets, manipulating markets, and committing many different types of fraud.
Virtual currencies are proving to be especially popular tools for financial crime. Reasons for this include a current lack of financial regulations surrounding them, as well as most transactions being semi-anonymous. In addition, many virtual currencies have non-centralized administration on the blockchain, making transactions difficult to undo once recorded.
All of this has made virtual currencies ripe for schemes such as market manipulation, money laundering, terrorist financing, tax evasion, and other forms of fraud.
