Protecting Your Organization Against Check and ACH Fraud

Protecting Your
Organization Against Check
and ACH Fraud
March 6, 2013
Special Guest Presenter:
Paul McCormack, CFE
Connectics

Copyright © 2013 FraudResourceNet™ LLC

About Peter Goldmann, MSc., CFE



President and Founder of White Collar Crime 101

Publisher of White-Collar Crime Fighter
Developer of FraudAware® Anti-Fraud Training
Monthly Columnist, The Fraud Examiner,
ACFE Newsletter

 Member of Editorial Advisory Board, ACFE
 Author of “Fraud in the Markets”
Explains how fraud fueled the financial crisis.


About Jim Kaplan, MSc, CIA, CFE
 President and Founder of
AuditNet®, the global resource
for auditors
 Auditor, Web Site Guru,
Internet for Auditors Pioneer
Recipient of the IIA’s 2007
Bradford Cadmus Memorial
Award.
 Author of “The Auditor’s
Guide to Internet Resources”
2nd Edition

Paul McCormack, CFE
 17 years of fraud, litigation and

business consulting experience
 Worked directly with agents from
federal, state and local law
enforcement agencies including
the F.B.I., G.B.I., D.E.A., and the
Secret Service
 Previously managed check fraud
detection for SunTrust Banks


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5

Today’s Agenda
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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

The Auditor’s Role

 IPPF Standard 1210.A3
 Internal auditors must have
sufficient knowledge of…available
technology based audit techniques
to perform their assigned work


Fraud: The Big Picture
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)

Check & ACH Fraud Facts
 Checks continue to be the dominant
payment form targeted by fraudsters
 85 percent of companies surveyed
reported that checks were targeted
 The typical loss associated with payment
fraud is $19,200
 Most organizations do not automatically
change out affected bank accounts
associated with payments fraud
 Seventy-four percent of organizations
maintain separate accounts for different
payment methods and types
Source: 2012 AFP Payments Fraud and Control Survey

 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


 The most common reasons victim organizations are
financially responsible for the losses sustained from
ACH fraud include:
 Not reconciling accounts on a timely basis
 Not using ACH debit blocks or ACH debit filters
 ACH return not being timely
 Not using ACH positive pay



Polling Question 1

The majority of organizations targeted by ACH
fraudsters suffer a financial loss.
A. True
B. False


 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


(cont)
 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


(cont)
 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 Fraud Red Flags

 Checks are presented out-of-sequence
 Bank’s fraud department routinely calls to verify check

fraud suspects
 Vendors complain about missing check payments
 Canceled check endorsements are illegible or

inconsistent
 Payees appear to have been altered or do not appear to

be business-related


Check Fraud Red Flags

 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.


Case Study #1
 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.

Case Study #1 – Lessons
Learned
 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.


Polling Question 2
Writing checks against deposits that have not
cleared is a definition of
A.
B.
C.
D.

Check alterations
Closed account fraud
Kiting
Account takeover

E.


Case Study #2
 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
Continued …

Case Study #2 – Prevention
Lessons
 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

Polling Question 3
Choose all of the following that could be red
flags of check fraud:
A. Vendors complain about missing check payments
B. Canceled check endorsements are illegible or
inconsistent
C. Payee name contains a typo
D. Payees appear to have been altered or do not appear to
be business-related
A.


How ACH Fraud Occurs
 Very easily!
 Need two pieces of data – routing number and bank

account number = Corporate account ID theft
 Transaction is initiated by fraudster via an Originating

Depository Financial Institution (ODFI)
 ODFI “batches” transactions and delivered via a
clearing house to Receiving Depository Financial
Institution
 RDFI posts transactions
customer accounts
 Account holder is unaware
of transaction until ACH
debit appears in account

ACH Fraud Red Flags

 Accounts are experiencing a significant increase in

ACH debits (payroll accounts are especially
vulnerable)
 Unexplained ACH debits for small amounts from

unknown vendors
 Bank’s fraud department calls to confirm ACH

debits
 Accounting personnel are unable to reconcile all

debit activity in organization accounts

ACH Fraud Notification
 Consumers have 60 days to notify
their bank. Corporate accounts
have 2 days!
Important: It is crucial that all
accounts are reconciled on a daily
basis
 Banks routinely deny return
requests outside of the 2 day
window
 Banks will enter litigation to defend
their decision

Case Study #3 – ACH Fraud
 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.

Case Study #3 – Lesson
Learned
 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


Lessons
 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 unreconciled amounts


Lessons (continued)
 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

Lessons (continued)
 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

Lessons (continued)
 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


Polling Question 4
Commercial accounts have ______ days to
inform the bank of an ACH fraud
A.
B.
C.
D.

60
30
2
10
E.


Check & ACH Anti-Fraud Tools
 Positive pay and reverse positive pay
 Positive pay - Bank will only pay Checks & ACHs that you
provide
 Reverse positive pay – Bank sends list of Checks & ACHs
presented. Your staff reviews payment register to accept or
reject

 Check & ACH blocks – nothing can be debited
 Check & ACH filters – select list of ACH debits allowed
(approved companies)
 Signature verification – check signatures are reviewed by
bank (A service you must pay for to have specific checks
reviewed prior to payment).
 Dual control for online transactions – two levels of
approval
 Account alerts – flags unusual transactions

Fraud Prevention – Bank
Perspective
 Bank must authenticate user as being authorized to access
account and initiate transactions
 The customer must act in an abnormal manner to be flagged
 Transactions that are initiated are consistent with previous
transactions, or companies of a similar size
 Bank must do all of this while facilitating business for entire
customer base

 The bank and the corporate customer must work together
 What tools does your bank have to detect Check & ACH fraud?
 How will they notify you of suspected fraud?
 Has your bank “missed” Check & ACH fraud in the past?
Relying exclusively on your bank to prevent Check & ACH
fraud will result in fraud

Case Study #4 – ACH Fraud
 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:

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$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.

Lessons (continued)
 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.

Check & ACH Fraud
Prevention Wrap-Up
 Educate employees on ACH & Check fraud
 Reverse engineer Check and ACH fraud in the news
 Provide examples of fraudulent emails used to capture login
information - What to look for in a fake website

 Consider designating one computer for online
banking
 Robust anti-virus software that is up to date
 Frequent reviews of computer to ensure virus free

 Meet with your bank to understand Check & ACH
fraud detection and prevention capabilities

Check & ACH Fraud
Prevention Wrap Up
 Implement robust controls regarding the ordering,
receipt and storage of check stock
 Perform timely bank account reconciliations
 Mail all checks as soon as they are signed
 Enhance the “perception of detection”


Check & ACH Fraud
Prevention Wrap Up
 Segregate duties so that more than one employee is
involved in the issuance, recording and
reconciliation of payments
 Deploy an anonymous employee hotline
 Don’t rely upon your bank to uncover embezzlement
 Rotate employees involved in the payment process
frequently
 Mandate that employees use their allotted vacation

Polling Question 5
Choose all the following are effective prevention
measures against check and ACH fraud…
A. Implement robust controls regarding the ordering, receipt
and storage of check stock
B. Perform timely bank account reconciliations
C. Mail all checks as soon as they are signed
D. Enhance the “perception of detection”


Questions?
 Any Questions?
Don’t be Shy!


Thank You!

Website: http://www.fraudresourcenet.com
Jim Kaplan
FraudResourceNet™
800-385-1625
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet™
800-440-2261
pgoldmann@fraudresourcenet.com
Paul McCormack CFE
paulmccor2008@gmail.com

Protecting Your Organization Against Check and ACH Fraud

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