Originally published at: https://www.sourcesecurity.com/insights/network-operator-fraud-remains-biggest-threat-co-1636521699-ga.1636525723.html?utm_source=Insights%20-%20Expert%20commentary&utm_medium=Feed&utm_campaign=RSS%20Feeds
As anti-fraud company Revector marks 20 years of operating, CEO and Founder Andy Gent believes that telecommunications fraud is still not high enough on the corporate agenda for network operators – this should be a significant concern to shareholders.
In 2001, Revector was launched to combat specific fraudulent activity against mobile network operators. The company’s management expected the business to have a shelf life of no more than five years – such as the belief that mobile operators would quickly get a grip on network fraud and reduce it to zero.
Twenty years later frauds continue to persist – costing shareholders, networks, and Governments billions in lost revenue annually.
Revenue through mobile service
According to Andy Gent, fraudsters are, at heart, business people, exploiting an opportunity for money. Gent explains how this relates to network fraud thus, “Mobile service providers generate revenues in two ways – by having their subscribers that pay the company to access the networks they run and associated services such as voice calls, text messages, and data usage. The second – known as termination revenue – involves transporting calls from other networks.”
Revenues from termination are shared between all networks that help deliver the call
Revenues from termination are shared between all networks that help deliver the call, as Gent outlines: “Imagine a call from the UK to Australia. This will pass through several service providers that will each take a small percentage of the call revenues for passing on the call.”
“Telecommunications companies establish relationships with others around predictable calling patterns. For example, BT may know that they need one million minutes of calls to South Africa per month. They, therefore, establish a relationship with a South African telecommunications company to provide this.”
Trading termination minutes
The issue comes when the unexpected happens, for example, an earthquake in Cape Town. Now UK residents with relatives in Cape Town suddenly demand a lot more telephone time. BT needs more minutes than it has. It is unlikely that its partner in South Africa can provide these – they are facing the same issue due to the increased volume of calls in and out of the country – so it will look to the open market for the minutes it needs.
Gent continues, “Termination minutes are traded in the same way as other commodities. Exchanges combine minutes from multiple sources, bundle these together and sell them. The issue is where these minutes come from. The bundles may well include “white” routes – premium minutes provided by legitimate telecommunications companies. However, many will include so-called “grey” routes.”
A simple but effective fraud
Grey routes are not provided by the telecommunications companies but by third parties or through fraudulent means. Typically, the “grey” routes come at a lower cost than the “white” routes, but some telecommunications service providers may not know this or care about it.
The natural pressure on cost means some telecommunications companies end up using “grey” route minutes. The threats to network providers’ revenues come from these “grey” routes. A primary risk is SIM Box fraud.
SIM Box fraud
SIM Box fraud occurs where there is a differential price between the cost of routing a call in a country and the cost of terminating a call, as Gent outlines below: “Imagine a network is offering a promotion with free calls to others on the same network. At the same time, the value of terminating a call to that network’s customers is $0.05 per call.”
One single SIM card being used in this way can generate $3000 per month and there are hundreds of cards in each SIM box
“If someone can procure SIM cards with the promotion, these can be loaded into a SIM Box – a device that can house hundreds of SIM cards in racks and be connected to the internet – to terminate calls. The owner of the SIM box can then offer to terminate calls for $0.03 per call. The cost to the SIM box owner is close to zero – the local minutes they are using to terminate calls are bundled with the SIM deal. The $0.03 per call is pure profit after the SIM cards and SIM boxes have been purchased.”
While this sounds like a complicated scam it can be lucrative. One single SIM card being used in this way can generate $3000 per month and there are hundreds of cards in each SIM box.
Loss of termination revenues
Service providers can quickly find a large proportion of revenues lost to SIM boxes. Gent has seen “up to 90 percent of termination revenues being lost.”
“The nature of SIM box fraud is transitory: fraudsters will pick the countries with the strongest opportunity to generate revenues quickly, sweep in and terminate calls for a month or two before the operator notices the revenue drop and takes action.”
Is it illegal?
If this practice sounds entrepreneurial rather than illegal, it is probably because it seems like a victimless crime. However, mobile network operators have paid millions if not billions for the ability to operate networks and generate termination revenues. A reduction in this revenue will mean less investment into next-generation networks or customer service.
For the consumer, illegal termination often means poor quality calls with a lack of services such as caller line identification (CLI). But perhaps the most concerning issue is where the proceeds of crime go, as Gent outlines. “Often these SIM box frauds are run by criminal gangs using the process to launder money or finance organised crime or people trafficking.”
“With widespread restrictions on the number of SIM cards that can be sold to one person, the only way to procure enough SIM cards is via criminal activity. Gangs bribe or coerce network operation staff into supplying SIM cards by the thousand, generating millions in illicit revenues.”
Other telecommunications fraud
Threat to operator termination revenues comes from OTT service providers that have an eye on termination revenues
Another threat to operator termination revenues comes from Over-the-Top (OTT) service providers that have an eye on termination revenues as well as competing with telecommunications service providers for a share of the voice and messaging market.
While most telecommunications companies see Voice over IP (or OTT) as fair competition, in recent years several new OTT service providers have grown extremely quickly. WhatsApp, for example, was incorporated in 2009 and acquired by Facebook just five years later for almost $20 billion.
The business models of these companies vary. Some focus on the “freemium” approach where the initial service is free but add-ons become chargeable.
OTT app fraud
However, recently some OTT players are looking to terminate revenue to monetise their business models. These operators have been offering competitive termination rates by hijacking a traditional call made from one telephone number to another and terminating it within an OTT app, as Gent explains, “We are seeing OTT apps intercepting traditional telephone calls and delivering them within a user’s app.”
“The call starts as a dialled telephone call, but the user receives it within an OTT app. If OTT players can achieve this, they can generate termination revenues at zero cost – other than to the traditional operator.”
Using an app to make calls
“Of course, if the recipient of the call believes the caller has used an app to call them, they are more likely to use this method of communication in the future – and less likely to dial a number directly. For the OTT players, termination acts as a marketing tool as well as a revenue stream.”
According to Gent, one OTT service provider has gone as far as including a setting within their app that states “receive regular incoming calls within the app when possible”. This is defaulted to “on” when the app is downloaded. Only the most technologically savvy users would even know it was there.
Combatting the fraud against networks
Networks are less worried about losing revenue to fraud and more about grabbing as many subscribers as possible”
Why do networks not do more to combat fraud? The reality, according to Gent, is a combination of priorities and ignorance. He comments, “Most mobile network operators are large but still relatively young companies – typically built around customer acquisition.”
“Networks are less worried about losing revenue to fraud and more about grabbing as many subscribers as possible. This has led to a mindset where whatever the questions the answer is always more marketing promotions.” A small number of innovators around the world continue to fight these frauds directly, but the fraudsters simply move on to the next victim and, when the anti-fraud measures are relaxed, the fraudsters return.
An opportunity for the future
As mobile networks mature and become more commoditised, Gent believes the issues around combatting fraud will become a wider concern.
“If you had told me in 2001 that fraud would still be an issue in 2021, I would have been shocked. Yet operators are still losing significant revenues to criminals. Addressing this needs to remain a priority for the industry, not just to ensure networks have the revenues to build and maintain robust networks but also to ensure that criminal behaviour that this kind of illicit activity funds is reduced. This is not just an issue for network operators but also for wider society.”