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Fraud Stinks!
Peggy Hart & Liz Kuonen, CTP
PNC Bank
Eighty four percent of business owners view fraud as a major concern in connection to their businesses’ finances (SunTrust and NSBA 2010 “Foil Fraud” Survey Key Findings) …and why wouldn’t they? The statistics are intimidating…
Seventy-three percent of organizations experienced attempted or actual payments fraud in 2009.
By far, the most prevalent form of that attempted or actual payments fraud was check fraud (9 out of 10 organizations), followed next by ACH debit fraud (25%) (2010 AFP, underwritten by J.P. Morgan).
Fraud can be internal, external, paper-based or electronic, and range from trivial to colossal losses. Small business owners can often find themselves at a higher risk for fraud due to their less sophisticated hiring practices and a general lack of checks and balances. “Fraud is the flip side of any payment transaction and can devastate a small business! Sixty percent of all fraud incidents within a business involve employees and the average fraud scheme goes undetected for 18 months”(Nancy Atkinson, Senior Analyst at Aite Group, LLC, Transaction Trends Magazine, 08/07).
There are many simple things an organization of any size can do to reduce the likelihood of fraud. Get started with protecting yourself today by running down our checklists below.
Considering the following internal practices can help reduce the risk of fraud to your organization while costing you very little...
- Facilitate Background Checks on Potential Employees: Lessen the probability of fraud before it even walks in the door.
- Keep Check Stock and Endorsement Stamps Locked up and Inaccessible to Employees: Why tempt them? It is easier than you think to get a check cleared - even without an authorized signature.
- Mandate Separation of Internal Financial Functions: Is the person in charge of your payables also in charge of reconciling your accounts or distributing payroll checks? Permitting this enables that individual the opportunity to cut additional checks, or initiate unauthorized disbursements to themselves. If you are low on staff, consider having your accountant perform these functions.
- Conduct Internal, Sporadic Audits of your Financial Functions: Has the individual in charge of receivables been posting payments appropriately? Is there any chance they have intercepted a check made out to the business and have rewritten it to themselves? Ensure your delinquent accounts actually are.
- Mandate a full Week’s Vacation: Internal fraud often goes undetected because the person in charge of book-keeping is the only one privy to the books and never takes vacation. Mandating that individual utilize at least a full week of vacation at some point throughout the year requires another individual to perform certain functions in the interim. A second set of eyes will often reveal questionable practices.
- Utilize some version of Online Banking and Reconcile Frequently: Most banks offer a version of online banking at no cost. The more frequently you view your accounts, the sooner you are to notice that something is not right - A check written to a party with which you are unfamiliar, or an electronic debit to the account that you did not authorize. Waiting for a paper statement to come in the mail puts you at a disadvantage legally in refuting those items, and allows any potential fraudster a large window of time with which to abuse your account.
Most business owners do not realize that banks are not obligated to compensate them for fraudulent losses. Banks often do absorb losses on behalf of their clients, but they do this upon their discretion and although they want to keep you as a client, they also want to protect themselves. You need to do the same. Commercial banks offer a large variety of fraud prevention products that enable you to do just that!
Having a conversation with your banker will go a long way in helping you protect what you have built. Bank-offered fraud solutions range in cost, sophistication, and appropriateness depending on your industry, and how you run your business. Scheduling a fraud “check up” with your Relationship Manager will ensure your business stays financially healthy. Several things to consider include:
- Account Structure: Do you maintain a separate disbursement and/or payroll account? If someone gains access to your check stock do they now have access to all of your operating funds? Do you keep the majority of your money in the same account that you receive incoming electronic transactions into? If outside parties have your account and routing number, consider moving funds out of that account shortly after they are deposited to ensure they can not be debited. Do you have too many accounts? Are you having difficulty keeping track of and reconciling your organization’s accounts? Consider consolidating them. Stagnant accounts are a fraudster’s favorite kind!
- Consider Moving towards Electronic Disbursements: Paying employees, vendors, and suppliers via ACH or wire, rather than check, reduces the risk of having your account information floating around in the public arena. Your account number and routing number should be considered “private” information, and yet is on the bottom of every check you write!
- Utilize Positive Pay Services in conjunction with Necessary Check Disbursements: Positive Pay ensures that every check presented for payment against your account matches exactly the checks you have issued by comparing date, dollar amount, check number and payee. You review and decision the payment for any check that has a discrepancy within any one of those four criteria.
- Discuss Debit Block or Electronic Payment Authorization: These services allow organizations to either completely block, or review and decision electronic debits being posted to their accounts.
- Universal Payment Identification Code: Rather than providing customers or trading partners with your account and routing number to receive incoming ACHs, consider providing them a UPIC (Universal Payment Identification Code). UPICs are used to mask sensitive account and routing information to trading partners, while encouraging the receipt of electronic payments as a viable receivables solution.
There are plenty of alternatives when it comes to containing and avoiding fraud losses. By tightening up your internal controls, improving your information systems, and placing fraud prevention tools into your business strategy, you can effectively combat fraud.
ADDITIONAL RESOURCES & ARTICLES
Association of Financial Professionals 2010 Fraud Report
http://www.afponline.org/pub/pdf/2010_Payments_Fraud_Survey.pdfPNC Bank
The Federal Trade Commission
Click in the search bar and type “payments fraud”
PNC Bank
Click on “Making & Collecting Payments” in the center of the page under the Small Business tab; or on “Treasury Management” under the Corporate & Institutional tab
Corporate Screening
Internet Crime Complaint Center
Fake Checks
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