The panel discussion on the Worldwide Economic Outlook at the recently concluded World Economic Forum Annual Meeting began with the question on everyone's lips: are we heading for a global recession, and if so, how worried should we be?

As the global economy is starting to get back on its feet after the COVID-19 pandemic, a rising number of risks are making it hard to predict the future, leading many analysts to predict a recession.

The Ukraine crisis, Russian sanctions, China's "zero COVID" policy, rising inflation, and interest rate hikes by the US Federal Reserve are all expected to restrict Gross Domestic Product (GDP) in 2022. The question is whether deteriorating conditions and reckless policy decisions would cause a worldwide economic slump.

This is concerning, especially in light of recent layoffs and YCombinator's recommendation to its portfolio founders to "plan for the worst" and prepare for a downturn. Moreover, it may have a substantial impact on fraud, since incentive increases and operational cutbacks make it easier for frauds to slip through the gaps.

Understanding Global Recessions

To be classified as a recession, macroeconomic indicators must deteriorate over an extended period of time. According to the National Bureau of Economic Research (NBER), which is recognized by the US as its national authority in announcing and timing economic cycles, a real recession requires a dip in GDP for two consecutive quarters. Similar to the NBER, the International Monetary Fund (IMF) plays a role in global recessions.

Despite the fact that there is no formal definition of a global recession, the IMF's criteria hold enormous weight due to the organization's worldwide influence. When it comes to global recessions, the IMF, unlike the NBER, does not set a minimum time frame. In contrast to certain definitions of recession, the IMF considers factors other than a drop in GDP. Other economic parameters such as commerce, capital flows, industrial output, oil consumption, unemployment rate, per-capita investment, and per-capita consumption must also deteriorate.

Over the last seven decades, the world economy has had five global recessions—in 1975, 1982, 1991, 2009, and in 2020 dubbed the Great Lockdown – during which yearly real-per-capita worldwide production decreased, accompanied by a decline of other major measures of global economic activity. Global recessions are highly linked, with significant economic and financial disruptions in many nations worldwide.

What Does This Mean For Fraud?

Economic pressures are one of the key reasons why fraud occurs during a downturn or recession. Increasing constraints on people to make ends meet are caused by rising unemployment, greater personal debt, supply chain scarcities, and rising prices of commodities such as food. Personal and corporate motives to breach the rules are growing as sales become more difficult to generate and profit margins and cash flows get tighter.

Internal risks to a company might arise as a consequence of having to reduce its staff, which necessitates more work from fewer people, resulting in disgruntled employees and poor morale. Employees may be more inclined to steal money, merchandise, and other assets from the firm. Middle management may be reduced during a downsizing, limiting a company's ability to prevent and identify fraud.

Management and staff may find themselves breaking the regulations for the benefit of the firm in commercial dealings, such as receiving or offering bribes to close a sale or engaging in side agreements. Financial statement fraud, misappropriation, fraudulent asset valuations, and revenue overstatement are just a few of the possible fraud schemes. "The firm is financially sustainable, I simply have to do this to get us through the recession," or "everyone pays bribes to obtain sales," are rationalizations that may cause an otherwise trustworthy individual to commit fraud.

Theft, suppliers exaggerating expenses, and submitting fraudulent bills are all examples of external threats to an organization. Also, the economic downturn is often seen by cybercriminals as an opportunity to exploit weaknesses.

The fact that many retailers, financial institutions, and other businesses operate abroad in recent times further complicates issues. Even if the nation in which they are located is not suffering a downturn, they may be susceptible to increased fraud levels in countries that are affected.

When The Going Gets Tough

The phrase "necessity is the mother of invention" is accurate. Whether it's a recession, a pandemic, or another type of catastrophe, terrible times have proved to inspire individuals to come up with innovative solutions. Countless instances may be found in the COVID recession of 2020. Businesses were forced to seek out a means to transform their product or service into a digital channel when the COVID epidemic hit. In reality, many fintechs and neobanks have expanded while companies in other industries have been forced to make significant concessions.

New crises bring new concerns and problems that businesses and consumers must address. A bear market or a slump in the economy would be no exception; the finest inventions are still to come.

Start Getting Prepared

As fintechs struggle to stay afloat and keep their doors open, fraud prevention should be included as part of the process to minimize any unnecessary damage.

Gaining a better understanding of fraud risks should be a top goal. Consider it a type of stress-testing strategy. Who are your customers? Where are they located? What is the state of the economy in such countries? What can you do to improve compliance? How can you keep your firm safe from money laundering? plus many other additional inquiries.

The good news is that sophisticated AML compliance infrastructure products, such as Flagright's Platform, outperform conventional solutions significantly. Different solutions including real-time transaction monitoring, risk assessments, crypto and sanctions screening, customer risk profiling, and KYC can be combined to respond to changing macroeconomic conditions. In addition to a flexible pricing strategy that can scale with your company's growth: There are no upfront costs, and pricing is based on usage.

There's no way of knowing whether or not we'll be in a recession anytime soon. But, at the end of the day, preventing fraud is all about keeping risk at a tolerable level. So, if a future economic slump poses a significant danger of fraud developing, it seems to be a risk worth addressing. Don't put off investing in a comprehensive compliance solution that can assist you in navigating the fraud threats of tomorrow, now.

Contact us to learn more about how Flagright can assist your company in preventing and combatting fraud.