What is Second-Party Fraud?

December 7, 2023/ Jarrod Wright /

First-party and third-party fraud are simple ideas. The former involves a genuine user falsely claiming a transaction to commit fraud. The latter involves an imposter acting as a real user to defraud someone else.

Second-party fraud, however, is a bit more complex. It occurs when a fraudster orchestrates a crime, but uses someone else, either willing or unwilling, to carry out the nefarious activities.

This article will take a deep dive into what second-party fraud entails and examine its mechanics. We’ll also learn why it’s challenging to fight against and provide tips to prevent these types of attacks.

What is Second-Party Fraud?

Second-party fraud involves someone willingly letting another individual use their identity or personal details to mimic a legitimate user and engage in fraudulent activities.

When it comes to financial fraud, second-party fraud sits between first-party and third-party fraud, essentially blending components of the two. With third-party (“criminal”) fraud, the scam is executed by an external party, unrelated to the victim, who uses stolen personal details without the victim’s awareness. With second-party fraud, though, the account owner either engages in fraud via a secondary party or allows another entity to use their information for fraudulent purposes.

Second-party fraud presents great challenges in terms of prevention. Although the account holder may be the perpetrator, another party’s involvement complicates tracing the crime back to its source.

Common Examples of Second-Party Fraud

Second-party fraud always involves two players: the primary fraudster and an accomplice. Like other fraud threats, there are various tactics that fall under this mantle:

Second-Party Chargeback Scams

A cardholder shares their details with another person who makes fraudulent purchases from an unlinked device. The cardholder then falsely reports these as unauthorized for a refund, and they split the proceeds.

Fake Merchant Scams

Here, a cardholder buys non-existent goods from a fraudulent merchant, files for a refund claiming non-delivery, and then shares the money with the fake merchant.

Money Muling

A person is duped or coerced into using their information to open an account for moving illegal funds. While some are knowing accomplices, others are unwittingly involved.

Gift Card Laundering

Often seen in grocery stores, this involves transferring illegal funds into gift cards, which are hard to trace, through duped individuals lured by fake job offers.

Leading the Witness

This occurs when financial institutions initiate chargebacks on behalf of customers for suspected fraudulent transactions, sometimes based on automated prompts, leading to false claims even for legitimate purchases.

These examples illustrate the complexity and diversity of second-party fraud strategies.

How to Prevent Second-Party Fraud

Combating second-party fraud is a daunting task. It’s notoriously difficult to detect and prevent. That said, it’s not entirely impossible.

Here’s a breakdown of what various groups can do to avoid becoming victims:

For Consumers

Consumers are often on the front line for second-party fraud, which makes it important to be vigilant in any of the following situations:

• Exercise caution with job offers and promotions. If something seems too good to be true, it likely is.
• Avoid transactions that involve moving money through your bank account.
• Refrain from creating new companies or LLCs under your name as part of any offer.
• Never allow others to use your bank account to transfer money.

For Banks

Banks are insured by the US government and aren’t really on the spot for fraud losses as much as consumers and merchants, but that doesn’t make them immune, either. Banks should be on the lookout for the following second-party fraud red flags:

• Look out for signs of mule accounts or money laundering, like sudden activity in dormant accounts or high-value deposits quickly transferred to foreign banks.
• Be wary if users are too familiar with account applications, suggesting repeated use of false identities.
• Data familiarity; suspect accounts where users frequently delete, cut and paste, or use automation for entering data.
• Advanced computer skills beyond the average consumer level can be a red flag.

For Merchants

Merchants tend to suck up a lot of heat for fraud, whether it be first-, third-, or second-party fraud. They tend to get stuck with revenue loss, reputation damage, and the chargebacks that come as secondary surprises after the fact.

This is why merchants really need to focus on the following areas to keep their businesses safe:

• Develop a long-term fraud detection strategy.
• While direct detection of second-party fraud is tough, you can blacklist suspicious users or accounts to prevent repeated fraud.
• Monitor for red flags like high-value purchases, a surge in transactions, numerous returns, or purchases deviating from usual patterns.
• Implement a multi-layered approach to fraud detection using various tools and strategies to combat fraud effectively.

Finally, you should prioritize building out a multilayer solution for fraud detection. Only by deploying multiple tools as part of a broader strategy can you hope to intercept and eliminate fraud.

Last Update: December 7, 2023