The rising tide of bank fraud
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
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
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
"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
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
"The tone in the regulatory environment is changing,"
says Sydney Hicks, vice president at Sterling Commerce banking systems
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