As early as 300 BCE, Greek merchant Hegestratos attempted to sink his ship to claim insurance – a plan that highlights financial deception is not a modern issue and there are many examples of fraud infiltrating the highest levels of power. While tactics have evolved from forged documents to digital manipulation, the underlying motive remains the same.
The Evolution of Fraud
Traditionally, fraud was a localized crime that involved physical impersonation, counterfeit documents, or direct theft. These were limited by geography and required personal interaction. The digital age has given fraud a global reach. With online banking, digital wallets, and complex credit products, fraudsters operate across borders, exploiting cyber vulnerabilities. Techniques like data breaches, phishing, social engineering, and synthetic identities allow fraudsters to manipulate financial systems. This has made fraud harder to detect and added a new risk to institutions and individuals.
What is Sleeper Fraud?
Sleeper fraud is a sophisticated form of financial deception characterized by calculated patience. In this long-term scheme, fraudsters establish accounts using fake, stolen, or composite identities and cultivate the appearance of trustworthy customers. They make timely payments, maintain low balances, and steadily build a credible financial profile. This deceptive behaviour can persist for months and even years, during which the account appears entirely legitimate. Then the fraudster “activates” the account and maxes out credit lines, draws substantial loans or executes high-value transactions, before disappearing. Since these accounts have earned a foundation of trust over time, such actions evade traditional fraud detection systems, rendering sleeper fraud particularly challenging to predict and prevent.
Economic Impact of Sleeper Fraud
- Financial Losses: First-party fraud, which includes sleeper fraud, accounted for ~US$28 billion in losses in 2016. These figures underrepresent the true scale, as many remain undetected.
- Disruption of credit ecosystem: Sleeper fraud undermines trust in digital lending platforms, particularly affecting first-time and low-credit borrowers. This erosion of confidence makes it more difficult for legitimate applicants to access credit transparently and fairly.
- Long-term consumer harm: Individuals impacted by sleeper fraud often deal with severe damage to their credit profiles. The fraud typically comes to light after substantial financial loss, leaving the victim with limited recourse and long recovery periods.
- Reputation Damage: The inability to detect or prevent sleeper fraud can tarnish the reputation of financial institutions. Loss of consumer trust may lead to reduced customer retention, lower investor confidence, and long-term brand damage.
How to Safeguard Against Sleeper Fraud
Mitigating sleeper fraud requires a structured defence strategy. With Extended Know Your Customer (EKYC), financial institutions can better prepare themselves against sleeper fraud. By doing a thorough screening of the identity of high-risk customers at the time of onboarding, assessing the risk profiles, and consistently monitoring for suspicious transactions by flagging anomalies throughout the customer lifecycle, EKYC measures play a crucial role in safeguarding against fraudulent activities. This proactive approach helps prevent illicit transactions before their impact can spread widely and affect a larger segment of the financial system.
Conclusion
Sleeper fraud is a growing threat in the digital age, leveraging the anonymity and fragmentation of online financial services to evade detection. Its long-term, covert nature makes it dangerous and difficult to combat. Addressing sleeper fraud requires ongoing innovation in fraud detection, greater data sharing among institutions, and heightened consumer awareness. By staying ahead of evolving tactics and fostering industry-wide collaboration, financial institutions and consumers can better protect themselves from this silent, but costly, form of fraud.