Webinar series from FraudResourceNet LLC on Preventing and Detecting Fraud in a High Crime Climate. Recordings of these Webinars are available for purchase from our Website
This Webinar focused on the subject in the title
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Introduction Fraud Statistics Auditor’s Role in Fraud Detection Check & ACH Fraud Statistics Main Types of Check Fraud Red Flags of Check Fraud How ACH Fraud Occurs Red Flags of ACH Fraud Detecting Check and ACH Fraud Prevention/Control Measures Conclusion Questions
According to major accounting firms, professional fraud examiners and law enforcement:
Fraud jumps significantly during tough economic times
Business losses due to fraud increased 20% in last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. (Kroll 2010/2011 Global Fraud Report)
Average cost to for each incident of fraud is $160,000 (ACFE) Of Financial Statement fraud: $2 million
Approx. 60% of corporate fraud committed by insiders (PwC)
Approx. 50% of employees who commit fraud have been with their employers for over 5 years (ACFE)
Electronic check conversion services continue to experience a very low incidence of fraud (2%), making this service a good choice in helping minimize instances of check fraud.
17% of organizations that were targets of ACH fraud during 2011 suffered a financial loss as a result of such fraud
Positive pay, ACH filters and daily reconciliations are among the methods used to identify exception items that may include fraudulent transactions as well as errors and other rejects due to administrative issues
Source: 2012 AFP Payments Fraud and Control Survey
Alterations – Chemicals remove or alter the original information inscribed on a check (for example, the payee, the amount etc).
Counterfeit – Check was never issued by the organization, it is a copy (the quality can vary significantly). Check is negotiated and ultimately debited against the organization’s account
Forged Endorsements / Signatures – Checks are stolen and then endorsed by someone other than the payee that the organization intended to receive the funds. An employee can also steal blank checks and forge official signature
Closed account fraud – Checks written against accounts that are closed and contain no funds
Kiting - Kiting of funds involves writing checks against deposits that have not cleared. Money appears in two accounts - temporarily
Account takeover – Cyber-fraudster typically steals banking credentials by planting “malware” on target user’s computer. Almost immediately, wires, ACHs and occasionally checks are created. Once the money leaves the account it is laundered through a series of transactions making recovery of the funds all but impossible.
Check contains misspellings, typos, and grammatical errors, or doesn't have a watermark.
Routing transit number (RTN) or ABA number at bottom of the check doesn't accurately include the two sets of numbers on the upper right corner next to the check number. (The RTN or ABA number is the nine-digit code on the bottom of the check).
First three numbers indicate the state and district office of the issuer. These numbers don't coincide on altered checks.
Kathleen Prince, the former bookkeeper / accountant for the Inner Circle Foster Family Agency received a sentence of 41 months for taking $708,924 from her employer for her personal use.
Prince made checks payable to herself as well as her creditors. She used the funds to pay her personal credit card bills, cell phone bills, and her mortgage. She also used to proceeds from the fraud to pay for a vacation to Hawaii.
To conceal the fraud from the board of directors, Prince altered the agency's accounting records and misrepresented the organization's health to board of directors.
Check fraud is prevalent in all types of organizations. Charitable organizations are particularly vulnerable as they are unable, or unwilling to invest in additional controls or oversight to prevent it.
If board of directors allows a bookkeeper to control multiple elements of payment process, recording and reconciliation process, the probability that fraud will take place rises dramatically.
Karen Febles, a former a New York bank employee was charged with stealing $1.8 million from a retired employee of the bank while tasked with managing his personal and professional finances. Between 2007 and 2011, Febles allegedly altered checks for higher amounts that had previously been signed by the account holder
Febles purchased a Range Rover with $52,720 in cash, a Mercedes-Benz with $34,650 in cash, spent approximately $45,000 on vacation cruises, more than $100,000 on real estate, more than $20,000 on other car payments and more than $20,000 on personal expenses
In addition to monitoring employee activities, all organizations should have software in place that monitors customer as well as employee account activity. Employees often mistakenly believe that they can use their personal bank accounts to conduct fraud unobserved.
Febles spent considerable funds on cars, vacations and real estate. It is possible that a fellow employee may have suspected that Febles was committing fraud.
Key: If you have not done so already, deploy an anonymous hotline that employees can use to report concerns regarding employees, vendors and customers.
Failure to implement Segregation of Duties can be costly
Mary Harris, a former treasury analyst for Central Parking Corporation, pleaded guilty to her role in an $1.9 million embezzlement.
Harris admitted that in her position she had access to organization bank accounts and the Automated Clearing House (“ACH”) system. Harris processed approximately 200 ACH transactions that deposited funds in her own bank account or the bank accounts of her relatives.
Harris concealed the fraud by making accounting entries in Central Parking’s accounting ledger and creating false emails to support the entries.
A fraudster only needs two pieces of data - your bank’s routing number and the account number
Payroll accounts are often the destination for fraudulent ACH transactions as the routing number and account number is widely circulated
If your organization’s bank accounts see a significant increase in ACH debits, fraudsters may be testing your ability to detect fraudulent transactions before unleashing a number of debits
Don’t ignore calls from your bank’s fraud department. They have considerable “behind the scenes” information regarding what a fraudulent ACH debit looks like
If you cannot reconcile all debit activity in your organization’s accounts, look for reasons for the un-reconciled amounts
Companies only have 2 days to notify their bank of a fraudulent ACH. Notify them immediately once detected
Given the short time period within which your organization is required to notify the bank, all accounts should be reconciled on a daily basis. Failure to do so will in automatic denial of any fraud claims made
Banks will often pursue litigation to defend their decision to deny the fraud claim
Since employees most often unwittingly provide fraudsters with the information they need to commit ACH fraud (bank account number & routing number), educate your employees on the dangers of ACH fraud. Helpful: Your bank will likely be able to provide examples of fraudulent phishing emails that criminals have used in the past
Pay attention to ACH fraud cases in the news. Consider whether a similar fraud could take place at your organization?
Designate one computer for all online banking transactions including ACH and wire
Ensure that all of your organization’s computers have robust anti-virus software installed that is kept up to date automatically (no manual intervention to accept update)
Task your organization’s IT department with conducting frequent reviews of the computer designated for online banking to ensure that it remains virus free
To avoid complacency as well as the threat of employee fraud, rotate responsibility for ACH transactions every 6 months
Patricia K. Smith, former controller for Baierl Acura, pleaded guilty to taking $10.2 million from the dealership over a 7 year period. Smith moved money from dealership's business accounts to her personal account using over 800 Automated Clearing Housing (ACH) transfers. Smith used the proceeds to fund:
$1.8 million billed to American Express for private jet charters $44,500 Super Bowl XLV $32,500 for a luncheon for six people prepared by Ina Garten $5,000 for "The Vatican Package," which included Mass in
Papal Audience $2,500 for a Phantom of the Opera experience, including
costume fitting, wig fitting, an escort onstage during the Hannibal Opera sequence, and four seats for the performance.
A bookkeeper or controller should never be trusted without verification place in to ensure that they are performing their job. Their work should periodically be reviewed by their manager on at least a monthly basis. From time to time, consider engaging a CPA to conduct a review or audit of their work.
Assuming that your organization's bank will detect and prevent embezzlement is a risky assumption. In the bank's defense, since Smith was an authorized user of the ACH system, it is difficult for the bank to uncover unusual activity in a sea of regular business transactions.