Risk Identification

Online Fraud

Businesses that sell products online have much great risk of fraud than traditional brick and mortar establishments. Fraud is a serious risk for all online retailers and the number of reported cases increases each year. In 2004, online fraud cost merchants $2.6 billion. The damage done to business that experience fraud can potentially take years to recover, if the business can recover at all.

Business Implications

The implications of online fraud are extensive, requiring a paradigm shift in security in order to avoid losses due to criminal activities. No longer can security be an after-thought, it is a critical component of business intelligence, planning and strategy.

As the Internet became main stream, businesses had to protect themselves against hackers that caused temporary outages, denial of service and defacement. Today, business still need protect themselves against hackers, but now they also have to protect themselves against criminals that access systems and steal data in order to sell it for profit. Another disturbing trend involves criminals finding security holes and extorting money from businesses in order to protect the publicizing of the vulnerability.

Business intelligence needs to incorporate criminal intelligence by means of risk assessments. Businesses need to defend against cyber-criminals by broadening the security programs to include personnel, physical and financial assets as well as services. Businesses need to monitor all activities, including those of business partners. Background checks should be run on any person or organization that is linked to the business systems. Businesses offering financial services also need to prevent money laundering by identifying and implementing safeguards. Lastly, businesses need to form communities with other organizations and law enforcement in an effort to keep abreast of recent threats and preventative measures.

Fraud can be costly, however there are indirect costs associated with fraud as well. Fraud can damage a company's reputation resulting in significant fallout, which could lead to a decrease in stock value. Customer confidence decreases, resulting in reduced revenues and profits. Finally, employee morale can suffer, causing a decrease in productivity and high turnover.

Legal Implications

The government has had to step up to the plate, creating news laws governing how certain industries must do business. Businesses need to keep abreast of regulations governing their business practices. For example, in October 2005, the Federal Financial Institutions Examination Council (FFIEC) updated their guidance, "Authentication in an Internet Banking Environment," to take into consideration the many legal and technical changes pertaining to the protection of client data, increased number of theft and fraud cases and enhanced authentication technologies. The guidance addresses the need for risk assessments, customer awareness and risk mitigation strategies. The guidance provides financial institutions with guidance on authentication and addresses suitable risk assessments, client authentication, validation of new clients, as well as tracking and reporting.

Businesses need to do everything in their power in order