The rising tide of bank fraud
By Laura Bruce • Bankrate.com

While you're making sure your checking account has enough money in it to cover the bills or working to sock away some bucks in savings, crooks are diligently trying to siphon money out of your bank -- maybe out of your account -- and into their pockets.

Attempted deposit fraud at banks nationwide totaled $4.3 billion in 2001, almost double the $2.2 billion recorded in 1999, according to a study by the American Bankers Association.

Thanks to rapidly improving technology and training aimed at catching fraud, the actual amount of money lost to deposit fraud in 2001 is pegged at $700 million, up just a bit from 1999's $679 million.

The figures show that banks are doing a pretty good job of holding the line on actual losses, but attempts to defraud banks are skyrocketing, and that means banks have to devote more resources to the problem.

Everyone who has a bank account is victimized by deposit fraud, even if his or her personal account is never directly affected. Actual losses and the resources institutions have to devote toward battling the problem get passed on to all of us in higher fees or higher rates on loans, or lower rates on deposits.

"We have about 20 people who do nothing but full-time loss prevention by way of fraud detection," says Robert Young, loss prevention manager at Regions Bank in Birmingham, Ala.

The dupery duo
Young says there are two major categories when it comes to deposit fraud: straight deposit fraud and kiting.

"In straight deposit fraud, I have an account and decide to deposit checks that aren't good, maybe from a closed account, counterfeit or stolen. The object is for the bank to allow me to draw funds off the deposit before the bank realizes the deposit is no good.

"Kite fraud is where you move money between accounts on the float, and what makes it unique is the money rotates in a complete circular pattern. Write a check and deposit it into an account in another bank and then write a check off that account and it goes back into the very same account that the deposit left from -- from A to B and B back to A. It's confusing and hard to detect."

Traditionally, it's the large banks that get hit hardest by fraud. But the ABA survey shows that, as a category, the largest banks' share of losses is decreasing while community banks as a group are experiencing a substantial increase in losses.

"Historically, the large banks take the lion's share of the losses in absolute dollars," says Dick Clausen, senior vice president of liability and risk management at Bank of America in Concord, Calif., and a member of the ABA deposit account fraud committee.

"What's disturbing for small banks is the growth rate of 51 percent. In addition, the data says that new-account fraud represents one-third of the losses at community banks. It's the new accounts they're attracting where the fraud is happening. Thirty-two percent comes at new accounts (at small banks) as compared to 23 percent at mid-size and 18 percent at both regional and large banks."

New-account fraud encompasses accounts that are opened specifically for the purpose of defrauding the bank. The fraud usually takes place within just a couple months of the account being opened.

Big banks say the bad guys may be moving "downstream" because the big banks have deployed expensive fraud-detecting technology that makes it tougher to cheat the larger institutions.

Representatives of smaller banks say it's wrong to assume that small banks are easier targets.

"Large banks do have the monetary resources to commit to fraud detection. That's not to say community banks are without defenses," says Krista Shonk, regulatory specialist with America's Community Bankers.

"Many have chosen not to do check processing in-house. They use regional processing centers or the Federal Home Loan Banks processing system. They have the fraud detection capabilities that many large institutions have."

Marty Ramage, division vice president at The People's Bank in Tupelo, Miss., says his bank is constantly upgrading its fraud detection technology and teller training.

"There's no bank, regardless of size, that's vaccinated from fraud. In the last three or four years we've seen a marked increase in fraud. We've seen electronic fraud increase in the past year. Counterfeit checks have remained steady. A lot of the ones they're targeting are businesses that use facsimile signatures on their checks," Ramage says.

Companies that make fraud detection equipment and software are making smaller systems that are affordable to smaller banks. A lot of this is coming on the heels of the Patriot Act, which in part is aimed at reducing money laundering and the funneling of money to terrorist organizations. One way to do this is by requiring banks to do a better job of identifying people who want to open an account.

"The tone in the regulatory environment is changing," says Sydney Hicks, vice president at Sterling Commerce banking systems division.

Keeping up with the fraudsters
"Increasingly, banks are going to be looked at based on how they manage their operational risk. The Patriot Act forces that. Insurance companies will respond by altering their rates -- the costs of not taking action will be rising."

Tom Vleisides, senior vice president at Carreker, a company that develops fraud-detection technologies, says a lot of detection works on rules.

"What is normal activity for an account? This transaction is outside the norm, and it may have items that are obsolete or out of range dollar wise. That trigger allows the bank to extend a hold on the funds. Regulations say you need to have reason to believe these funds aren't good. The fact that they can extend the hold and wait for the system to clear the check and kick out the item lets them stop the losses.

"Fraud detection is a game of singles, doubles and triples. It's not a game of home runs," says Vleisides.

Customers shouldn't be sitting on the sidelines while banks and companies that create fraud-detecting technologies try to stay ahead of the game.

"I hope people pay attention to the fact that it's a team effort. Back-office loss prevention personnel, tellers and customers need to be aware of what's out there. A good customer will watch their statements and manage their finances well," according to Regions Bank's Robert Young.

Dick Clausen of Bank of America says customers need to be more careful to whom they give their personal information, but when they want to open a bank account they should expect to hand over more than a driver's license.

"Look closely at how a bank identifies you. If I can walk in there off the street and I'm not investigated -- a driver's license and that's as far as it goes -- maybe their authorization practices are weak. They should ask for several pieces of identification. I think you'll see banks get tougher. We're going to have to put stronger tools in place."

-- Posted: Dec. 3, 2002