With the threat of a looming recession, businesses don’t only need to prepare for slower sales — they also need to anticipate and prepare for more fraud. In 2009, the Association of Certified Fraud Examiners (ACFE) studied the relationship between economic downturn and fraud prevalence — the two had a positive correlation.
The study specified three main factors that increased fraud during economic recession:
- Financial pressure (49.1%): People didn’t have enough money to maintain their lifestyles;
- Increased opportunity (27.1%): Businesses and individuals were easier to target; and
- Increased rationalization (23.7%): Tough times call for tough measures, right?
Does this still ring true over ten years later? Yup. Take your pick:
- Experts call the COVID relief frauds one of the “biggest scams in a generation.”
- Consumers reported losing 30% more money to fraud in 2022 within just one year.
And that’s just the tip of the iceberg — so, what does this mean for your business now?
Whether Canada goes into recession or not, it’s a good idea to get your business in order. Part of that means protecting your assets from fraud and having a handle on your operations. For most, this means strengthening internal controls and remaining vigilant of potential fraud in your operations. Creative Clan can help with that.
In the meantime? We’ll cover some of the ins and outs of the troublesome relationship between fraud and recession, what to look out for, and how to protect your business.
What is the main impact of a recession?
Recessions mean people have less money to spend. This translates to slower sales, smaller margins, and, unfortunately, layoffs. On a broader scale, recessions are periods of negative economic growth.
Sadly, less income and high unemployment lead to worse living conditions, homelessness, and worse mental health outcomes. According to the Centre for Addiction and Mental Health, people with a mental health disorder are twice as likely to suffer from addiction, like alcoholism or drug abuse. Even more striking, the cost of mental illness in Canada is close to $50 billion per year. Imagine the additional economic and societal costs added to this number during a recession.
But another domino effect is making businesses more vulnerable to fraud. When businesses lose personnel, can’t afford certain services anymore, and people in the economy are struggling financially, the possibility of fraud naturally increases.
Overall, recessions cause both individuals and businesses to spend less, which leads to: higher rates of unemployment, higher costs of production, inflation, and fraud.
Is Canada in a recession?
From Toronto’s $7 iced lattes? You’d think so.
But while both economists and individuals have referred to a 2023 recession in Canada, Canada isn’t technically yet in a recession. In other words, no person of “official status” has declared a recession in Canada. However, other parts of the world are feeling the same financial stress. In fact, Germany declared a recession earlier this year. Fortunately, Bloomberg thinks Canada’s future recession may be lighter than originally expected.
This is mostly due to the surprising strength of the Canadian labour force. At this point, maybe due to the lasting effects of the COVID-19 pandemic, job openings still far exceed the number of workers. This has kept Canada’s unemployment rate extremely low, at 5%.
However, the Bank of Canada suspects that the economy will continue to cool until the end of 2024, when the economy should be back in the upswing. During this time of economic cooling, however, a recession could still be on the horizon. Because of this uncertainty, it’s vital to safeguard your business against potential fraud.
Does fraud during an economic recession increase?
Think about it this way. A threat to your survival and financial security could make things previously unthinkable become, well, reasonable. Some fraudsters become this way from desperate times and loss of income. But most jump on the bandwagon for the open window of opportunity. Recessions make people frantic; less prepared. Pair that with a rapidly growing dependence on technology without parallel education or training? For instance:
- The marketing consultant might not have the budget to hire a cybersecurity analyst.
- The shopkeeper might not hire the most observant cashiers.
- Heck, even the government might become overwhelmed with aid applications and let a few unjustified grants slip by.
The data links recessions to more financial fraud. We’ve seen this in all sorts of ways, from homeowners being defrauded of their property to business owners getting screwed with fake cheques. Another big part of the equation is technology. One RBC survey shows that Canadians are sharing more data online than they should. The result? You’re more susceptible to fraud. Then there’s the middle management equation. Downsizing companies tend to let go of the managers that keep everything together. Without them, there are fewer people to catch suspicious activity or fraudulent behaviour.
Here are different types of fraud that have become more prevalent in the last few years:
- CRA frauds: People may fraudulently claim to be the Canada Revenue Agency (CRA) and ask for personal information. This CRA scam is most often carried out through a text message or an email, used to get your personal information such as your social insurance number or date of birth. You can stay up-to-date on various scam alerts on this website from the CRA.
- Sweepstakes scams: A tempting scam, especially during a hard economic time. Scammers will email or text, saying that you’ve won a prize, but taxes or a fee must be collected before you can receive it. In 2021, sweepstake scams increased by 27%.
- Fraudulent business payments: Are you sure that cheque will clear? You better stick to your guns of strict payee verification to avoid the increase of cheque fraud.
- Social assistance fraud: People may provide false or misleading information to the government about their income or dependents to receive social assistance they may not actually qualify for.
- Forgery: While many of our payments are digital nowadays, be on the lookout for any paper business checks that may have gone missing. Sometimes employees or others can get ahold of these checks and make them out to an individual. Another type of forgery? Art — Canada saw one of the biggest art forgery scams in its history this year.
- Embezzlement: Unfortunately, embezzlement tends to be on the rise as recessions occur. Most business owners don’t check on people who have been at the company for a long time, but embezzlement can be done by anyone. Be vigilant.
What factors lead to financial fraud?
Tons of factors and theories explain financial fraud during an economic recession, or otherwise. For example, the “Fraud Triangle Theory” or “Fraud Pentagon Theory” point to various personal and environmental factors that may lead a person to commit fraud. Often, people don’t just commit fraud because they felt like it one day. They usually experience a series of factors that enables them to rationalize fraud. Here are some of the most common factors that scholars point to:
What are the worst effects of a recession?
Apart from slow business and unemployment, recessions cause devastating effects on the overall economy and health of the people, aka economic scarring. Some of these long-term negative effects include:
- Less educational achievement: People have less money to put their family or themselves through school.
- Less economic opportunity: Job loss can put families into financial peril, and can affect their children’s economic outlook.
- Less investments and savings: With fewer liquid assets, people are often saving and investing less during recessions, which dominoes into later retirement and financial insecurity.
- Less small businesses and less small business activity: Many small businesses go bankrupt during recessions, which can keep small business owners from risking a new start.
Who is most at risk during recessions?
According to the National Bureau of Economic Research, recessions affect men, Latino and Black workers, younger workers, and less educated workers the most. Why? Because these groups make up a large part of the labour force hit the hardest in a recession. We’re talking retail, hospitality, tourism, construction, and transportation — all industries with many of the above groups in their workforce.
How can you protect yourself from fraud during an economic recession?
Here’s how you can keep yourself and your business safe from fraud during economic recession:
- Update your tech. Make sure to keep your digital security software up-to-date. Update your security solutions with newer, and more complicated solutions that deter criminals. Also consider cybersecurity insurance so you’re protected if the worst of the worst happens.
- Train your staff. Keep employees trained on different scams and how these scams may look in their day-to-day work.
- Keep your security teams active. Don’t get rid of people and then regret it later when you miss a fraudulent payment or hack.
- Get your business in order. Understand the difference between redundant and protection. Organize your files, processes, and strategy.
But the most valuable step you can take right now? Give us a call at Creative Clan. We’ll help you secure your business and protect it from fraud via month-to-month bookkeeping, internal control and design implementation, and more. Book a consultation!