How Fraud Prevention Works

Money Scam Image Gallery Clever villains don't just turn up in the movies. This undated picture shows John Palmer, a.k.a. "Goldfinger," who was arrested in 2007 for multiple crimes, including credit card fraud. See more money scam pictures.
Photo credit should read HO/AFP/Getty Images

Maybe it happened when you threw away those old credit card statements. Maybe it happened when you left your debit card at the grocery store, even though the clerk gave it back when you returned to retrieve it. Or maybe it happened when you accessed your bank account at that coffee shop computer.

Whenever and however it happened, someone has gotten hold of your credit card number and used it to buy clothes, cigarettes and -- worst of all -- gasoline. You report the unauthorized transactions to your credit card company. Luckily, they don't stand for credit card fraud, and the transactions are taken off your account. They also cancel your card and issue a new one.


The Federal Bureau of Investigation, financial institutions and merchants are always on the lookout for scam artists. But, as the saying goes, the most effective offense is a good defense. And, as that other saying goes, you are the first line of defense. The best thing you can do to avoid fraud is to know how fraudsters work and how to protect your money and personal information.

In this article, we'll take a look at some common sources of fraud, as well as a number of fraud prevention tips you can use to keep yourself safe from marauding scammers.


Common Sources of Fraud

The Ponz himself. Charles Ponzi scammed people out of their money with a 1920s investment scheme that took investors' money under the pretext of investing in International Reply Coupons.
Photo by Hart Preston/Time Life Pictures/Getty Images

If there's money to be had, fraudsters will find a way to try to get it. Investment scams are a very popular form of fraud. A scammer will call you up or send you an e-mail and try to push you into investing in something like an "up-and-coming company with red-hot stock and a product that will change the world." These fraudsters will tell you the investment is risk-free and sure to pay out. And if you don't act now, you'll miss it.

Investment scams also include the infinitely popular Ponzi and pyramid schemes. The idea behind the Ponzi scheme is to pay early investors with the money contributed by later investors. The pyramid scheme, similar in concept, is based on recruitment. You pay the scammer a certain amount of money. When you recruit new investors, they give you money, and you pass some of that money up to the scammer. Your recruits recruit more people, and so on.


Sadly, another common target of scammers is people using Medicare. Telemarketers, junk mail or e-mail scammers will offer you a product or service that will be covered by Medicare. The scammer asks for your Medicare account number and uses your insurance to pay for things you never get or don't need.

Of course, there's old-school fraud, which includes counterfeiting checks, forging signatures, and just plain stealing credit cards, ATM cards, PINs and banking information. Fraudsters will gain direct access to your funds or simply go on spending sprees with your hard-earned bucks. Usually, crooks find this information by digging through your trash or taking statements and bills from your mail. Clever thieves will use cell phone cameras to capture images of your credit card number when you pull it out to pay for your groceries.

Technophile thieves will steal your financial information over the Internet. If you send account information through an unsecured Web site, a vigilant hacker might be able to intercept your credit card number, login or password and gain access to your funds. Sometimes stealing information is as simple as using a public computer and looking for logins and passwords not erased by the previous user.

Another popular scam in the electronic age is phishing. A phishing scheme starts with an e-mail that appears to be from your bank, credit card company or an online merchant you use. The e-mail looks perfectly legitimate -- it even has the company's logo on it. The most ironic phishing e-mail will tell you there has been an unauthorized access to your account. The e-mail contains a link to a spurious Web site, also a remarkably legitimate-looking piece of work. When you enter your login and password, the phishers take them and use them on the real company Web site.

Now that you know how fraudsters are trying to get your money, it's time to look at ways you can prevent them from reaching it.


Fraud Prevention Tips

Former Chairman Kenneth Lay of Enron was charged with bank fraud related to the collapse of the corporation.
Photo by Dave Einsel/Getty Images

There are a number of steps you can take to keep your money and personal information safe. Scammers are salespeople. Their job is to look good and sound good. They want to earn your trust so you will give them your money. So don't get carried away by a charismatic salesperson. By the same token, don't give in to someone who's insistent or pushy. No, you don't need to act now. Any offer can wait long enough for you to ascertain its legitimacy. Don't let your good manners get in the way of making an intelligent decision.

When someone offers you an investment opportunity, get a prospectus for the deal. Research the company before you invest in it. Discuss the opportunity with the owners of the company, not just the sales agent. Talk to your family, friends and professional advisers about the opportunity.


Be smart with your personal and financial information. Don't let your mail sit in your mail box, especially if it is not a locked box, and consider using a post office to send your outgoing mail (instead of letting it sit in the mailbox for the postal worker to pick up). Shred bank and credit card statements and old bills. Don't keep your debit card PIN in your wallet -- keep it buried in a file cabinet or, better yet, a safe. Likewise, keep your Social Security card in a safe place, and don't give the number out except when necessary. Don't give your banking information out to someone who calls you or sends you an e-mail out of the blue.

Fraud isn't always as obvious as outright stealing. Review your bank and credit statements for unauthorized charges. If you don't know where a charge came from, contact the merchant (often the merchant's contact information is listed in the charge on your statement) and your bank. Occasionally order your credit report to make sure no one is opening credit accounts in your name. Although you are entitled by federal law to receive a credit report once per year at no charge, make sure you get the report from a legitimate, FTC-approved source. Many companies claim to give you a free credit report, but usually this involves buying something else to receive your "free" report. Buying something means you didn't get it for free.

As for online security, make sure a Web site is secure before you type in identifying information, particularly with bank and credit card sites. A Web site is secure if that little padlock shows up in the lower right corner of your browser (the upper right in Safari) and the URL begins with shttp or https. Keep your anti-virus and anti-spyware software running and updated. Beware those phishing scams, and keep your logins and passwords safe. Consider changing them on occasion.

Even when you follow these tips, fraudsters can find ways to get you. As soon as you realize you're being scammed or robbed, report it.

If you'd like to know more about fraud prevention, follow the links on the next page.


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  • Duffy, Michael. "By the Sign of the Crooked E." Time Magazine, Jan. 19, 2002. (Accessed May 21, 2008),8599,195268,00.html
  • Experian. "What is credit fraud?" 2008. (Accessed May 21, 2008)
  • FBI. "Common Fraud Schemes." (Accessed May 21, 2008)
  • Investopedia. "Boiler Room." (Accessed May 21, 2008)
  • Medicare. "Medicare Fraud, Detection and Prevention Tips." U.S. Department of Health & Human Services. March 27, 2008. (Accessed May 21, 2008)
  • National Consumer League. "Telemarketing Fraud Tips." (Accessed May 21, 2008)
  • Wells Fargo. "General Fraud Prevention Tips." 2008. (Accessed May 21, 2008)