Identity theft has the distinction of being one of the fastest growing categories of white-collar crime, with a projected compound annual growth rate of 32% over the next four years. Though consumers are usually thought to be its main victims, mutual fund companies and other financial services firms also pay for the crime.

Last year, Americans reported more than 500,000 cases of identity theft, defined as "the act of acquiring an individual's private information without consent and then using the acquired identity to commit fraudulent transactions." Celent Communications projects there will be more than 1.5 million cases by the end of 2005.

According to Celent's recent report, "Identity Theft and Its Effect on the Financial Services Industry," financial institutions in the U.S. can expect identity theft-related costs to total more than $8 billion by 2005, compared to $2.4 billion in 2000. In addition to substantial direct monetary damages, companies have indirect costs, such as employee training, computer security and potential loss of reputation, according to the report.

Disappearing Funds

Although securities fraud makes up a small percentage of identity theft losses, mutual fund companies should not assume that they are not vulnerable. Celent analyst Sang Lee offered a plausible theft scenario that begins with an enterprising criminal going through a mutual fund company customer's garbage and finding an account statement: "These people could call in and get all your essential data. They could potentially hijack that account.

"They could say, We've recently moved. We need to change the mailing address. Please send it to XYZ address from now on.' Then they could easily take the money out. You wouldn't know what happened, because with mutual fund account statements, if you don't get it one month you're not going to miss it," he added.

Unethical information brokers, private investigators and asset search firms sometimes practice this same "pretext calling." Pretending to be the customer, information brokers can gather confidential information, such as account balances, social security numbers and driver's license numbers, and sell it to anyone who is willing to pay for the information. "The Internet has led to proliferation of these services," the report stated. Lee sees mutual fund companies as likely victims of information brokers or other criminals who are trying to obtain customer information.

Financial institutions themselves contribute to the growth of identity theft by using information brokers to gather information on delinquent debtors. Additionally, sharing confidential customer information with affiliates and third-party marketing firms increases the potential for fraud, the report said.

The Internet presents another potential vulnerability for fund companies: institutional identity theft. A criminal could set up a Web site very similar to a mutual fund company's Web site to prey on customers who are less Internet-savvy. "On the first page they may ask for your account information," Lee said. "Once you give them that, they can turn around and sell that information or use it for their own benefit."

An Educated Consumer

Consumers have to be made aware of what can be done to protect themselves from identity theft and mutual fund companies, in Lee's opinion, should be active in educating them. "Financial institutions need to spend more time educating their customers because it's really in their interest to do so," Lee said.

Another step fund companies can take is to train customer service employee to recognize suspicious calls and pass them on to more experienced representatives. Call centers are a major source of "data leakage," the report said.

Rather than force victims of identity fraud to make multiple calls to different departments, fund companies should set up one office that can handle all of their concerns. "This is an area where financial institutions can make a huge difference. Victims will always remember who helped them during their time of financial and credit crisis," the report said.

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