Romance Scams on the Rise: How Banks are Battling Increased Reputational and Financial Risks
Romance scams, especially those involving sextortion, are on the rise, causing significant concern for financial institutions worldwide. A recent report from Moody’s revealed that in 2024, there were 1,193 newly identified entities and individuals linked to these fraudulent activities, marking the highest number in six years. This alarming trend highlights the urgent need for increased awareness and preventative measures against romance scams.
The Growing Threat of Romance Scams
The data indicates a 14% increase in new romance scam profiles compared to 2023. This follows a staggering 57% surge in profiles during 2021, which was largely attributed to the global lockdowns of 2020. Notably, the United States is the leading contributor, accounting for 38% of the new scam profiles, with Nigeria, India, and the UK also being significant players.
Understanding the Mechanics of Romance Scams
Richard Graham, a director in Moody’s Compliance & Third-Party Risk Management team, emphasized the sophistication of these scams. He stated, “Romance scams often use shell companies to obscure the flow of money overseas.” This tactic complicates efforts to trace illicit funds and increases the risk of financial institutions becoming unwitting accomplices.
Financial Risks for Institutions
As romance scams proliferate, they pose serious risks to banks, including potential reputational damage and hefty fines. Criminals often attempt to launder the proceeds of these scams through traditional financial systems, which can jeopardize the integrity of financial institutions.
Mitigation Strategies for Financial Institutions
To combat the escalating threat of romance scams, banks are implementing several key strategies:
- Understanding customer transaction behaviors
- Increased scrutiny of funds directed to shell companies
- Enhanced due diligence processes
Moody’s assists financial institutions by providing vital data, including negative news stories, sanctions, government watchlists, and information on politically exposed persons (PEPs). This data is essential for compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.
Conclusion
The rise in romance scams, particularly those involving sextortion, is a clear call to action for financial institutions to bolster their defenses. By adopting comprehensive risk management strategies and leveraging available data, banks can better protect themselves and their customers from these sophisticated frauds.
For further insights into financial risk management, visit our Financial Risk Management page.
