The Rise of 2nd-Party Fraud in Emerging Markets: Brazil, Mexico, and Indonesia

In the evolving landscape of financial fraud, the rise of 2nd-party fraud is surging in emerging markets, posing a dangerous trend. Unlike traditional identity fraud or third-party attacks, 2nd-party fraud involves a deliberate compromise by someone who willingly provides their personal information to enable fraud, often in exchange for financial compensation. This fraud, sometimes referred to as “Orange Accounts” or “conta laranja” in Brazil, poses significant challenges for financial institutions globally, but especially in fast-growing markets like Brazil, Mexico, and Indonesia. This article explores the damage it causes and how banks and fintech companies can counter this growing threat.

Story: From Customers to Fraud Enablers – The Rise of 2nd-Party Fraud

In a small town outside São Paulo, João had long struggled to make ends meet. When approached by a stranger offering a quick buck in exchange for using his bank account for a couple of transactions, João didn’t think much of it. After all, he wasn’t “committing“ any crime—just allowing someone else to use his personal information. However, this was just the start of a much larger fraud scheme. João’s account soon became the hub for transferring stolen funds, which made him complicit in fraudulent activity. João’s experience is not unique, and his actions mirror those of millions of individuals worldwide who, knowingly or not, enable fraudsters by lending their identities or bank accounts.

The Scale of the Problem: 2nd-Party Fraud in Emerging Markets

2nd-party fraud is becoming increasingly common in countries like Brazil, Mexico, and Indonesia, where economic inequality, low financial literacy, and high digital adoption create fertile ground for fraudsters. In Brazil, “conta laranja“ is a widespread phenomenon. Fraudsters recruit individuals, often from lower-income groups, to lend their bank accounts for illicit activities. This trend is particularly alarming as these individuals may not even realize the full extent of the crimes being committed under their name.

A 2021 report from the Brazilian Federation of Banks (Febraban) revealed that fraud in the banking sector, including 2nd-party fraud (often referred to as “conta laranja” in Brazil), has been on the rise. Similarly, data from the Association of Mexican Banks (ABM) in 2022 highlights how phishing and fraud involving third parties account for a significant portion of online scams. In Indonesia, reports from the Indonesia Fintech Association indicate that fintech platforms are increasingly facing sophisticated fraud attempts, including cases of 2nd-party fraud, driven by the rapid growth of digital transactions.

Why is 2nd-Party Fraud Thriving?

Several factors contribute to the proliferation of 2nd-party fraud in emerging markets:

1. Economic Vulnerability: In Brazil, Mexico, and Indonesia, many citizens struggle to make a living, making it easier for fraudsters to exploit their financial desperation. Often, individuals see “selling“ their identities or accounts as a relatively low-risk way to earn quick money.

2. Digital Expansion: With the rapid rise of digital financial services, especially in emerging markets, the opportunities for fraud have increased exponentially. As more people gain access to banking services and digital wallets, fraudsters have more channels to exploit.

3. Low Financial Literacy: In countries like Indonesia and Mexico, where financial education programs are limited, many citizens are unaware of the long-term consequences of lending their identity or bank account to someone else. As a result, fraudsters can easily exploit them for financial crimes.

4. Weak Legal Deterrents: In many cases, individuals who engage in 2nd-party fraud face little to no legal repercussions. Without robust penalties, this type of fraud becomes more attractive to potential enablers.

The Financial Impact on Banks and Fintechs

The financial repercussions of 2nd-party fraud are significant, particularly for banks and fintech companies. Not only does this type of fraud lead to direct monetary losses, but it also erodes trust between financial institutions and their customers. For instance, fraud-related losses for financial institutions in Latin America were estimated at USD $1.5 billion in 2022. Furthermore, the indirect costs of fraud investigations increased manual reviews, and customer service time spent on resolving fraud disputes further compounds the problem.

As 2nd-party fraudsters evolve, so do their tactics. In Brazil, criminals have begun combining synthetic identity fraud with “conta laranja“ schemes, making it even harder for banks to distinguish between legitimate and fraudulent activity. In Mexico, fintech companies have reported that 1 in 5 new account openings shows suspicious patterns consistent with 2nd-party fraud.

The Path Forward: Tackling 2nd-Party Fraud

So, what can financial institutions do to fight this growing threat? The key lies in a multi-pronged approach that incorporates both technological and educational strategies. Here are several methods being employed by banks and fintechs in emerging markets:

1. Strengthening KYC Protocols: Know Your Customer (KYC) protocols must go beyond simple identity verification. Advanced technologies such as AI-powered fraud detection and behavioral analytics can flag accounts exhibiting unusual patterns or inconsistent data points. For instance, graph database technology can detect abnormal linkages between entities, helping to identify when multiple individuals share the same mobile number or address.

2. Education Campaigns: Financial literacy programs need to be ramped up to inform the public about the dangers and legal consequences of 2nd-party fraud. In Mexico, for example, BBVA Mexico launched a country-wide campaign in 2022 aimed at educating citizens on how their accounts can be exploited for fraud. Similar initiatives are being seen in Brazil and Indonesia, but more coordinated efforts between the private and public sectors are needed.

3. Multi-layered Fraud Detection: Employing a layered approach to fraud detection can help financial institutions better monitor for potential fraud. This includes monitoring digital footprints, linking accounts across financial services, and utilizing machine learning to flag suspicious patterns.

4. Collaboration Across Institutions: Financial institutions must collaborate to share intelligence on evolving fraud schemes. The Brazilian Federation of Banks has been working on a centralized database of flagged fraudulent accounts that can be accessed by member banks, providing a shared defense mechanism against 2nd-party fraud.

How 1datapipe Can Help

At 1datapipe, our AI-powered Secure ID & Fraud Score is uniquely positioned to help banks and fintech companies mitigate the risks associated with 2nd-party fraud. By detecting fraud before it even reaches the transactional stages, our solution can flag suspicious activity during the onboarding process, ensuring that bad actors are caught early. Our advanced AI algorithms analyze behavior patterns, verify identities, and detect abnormal linkages, reducing fraud attempts and protecting your organization.

Want to learn how 1datapipe can help protect your company from the rising tide of 2nd-party fraud? Reach out to our team today to find out how our Secure ID & Fraud Score can transform your fraud detection strategy. Are you ready to take the next step in fraud prevention?