Fraud In The Payment System

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Fraud In The Payment System

• What YOU Can Do About It

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What is fraud?

• Webster defines fraud as
• a deliberate deception practiced so as to
  secure unfair or unlawful gain
• OR
• one who pretends to be what he or she is not, an
  impostor

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Some Fraud Statistics

• FBI estimates check fraud to amount to 12 to 15
  billion annually
• ABA study of total cases
• ABA study of attempted check fraud
• FBI predicts identity theft to cost financial
  institutions in excess of 8 billion by 2004 (it
  is the fastest growing white-collar crime)

1997 289,000 1999 447,000 2001 600,000
1999 - 2.2 billion 2001 4.3
billion
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Check Fraud

• Check kiting
• Counterfeiting
• Forgery (endorsement or signature)
• Paperhanging
• 3rd party billing service
• Alterations
• Washing
• Organized groups (gangs)

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Who is Liable for Check Fraud?

• UCC 3-103
• Ordinary care the observance of reasonable
  commercial standards that prevail in the area in
  which the person is located with respect to
  business in which the person is engaged.
• Does not require the financial institution to
  examine each item if failure to examine does not
  violate the institutions prescribed procedures
  and those procedures are commonly followed by
  other institutions in the area.

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Who is Liable for Check Fraud?

• UCC 3-405
• Comparative negligence the risk would remain
  with the company (employer) if the bank exercised
  ordinary care in processing the check.
• In brief, employers are responsible for the
  integrity of their employees.

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Who is Liable for Check Fraud?

• UCC 3-406
• Contributory negligence the risk would remain
  with the company if it fails to safeguard checks
  from forgery or alteration (by a reasonable
  commercial standard) and that failure to
  safeguard contributes to the forgery or
  alteration.
• In brief, the company could be responsible for
  the loss along with the financial institution.

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Who is Liable for Check Fraud?

• UCC 4-406
• reasonable promptness a period of time in
  which the customer has the duty to discover and
  notify the bank of unauthorized signatures and/or
  alterations of checks on the account.
• 30 days is the maximum limit.
• Bank can establish a shorter time limit.
• There is controversy over a shorter time limit.

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Obligations Under UCC

• Issuer - Examine bank statements with reasonable
  promptness
• Payee Employers responsible for fraudulent
  endorsements by employees
• Depository bank Warranty of endorsement,
  signature authentication, information has not
  been altered, MICR encoding liability
• Paying bank Return disputed items by the
  deadline

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Commercial Check Fraud Defenses

• Positive pay
• Restrictive endorsements
• Secure check stock
• Utilize ACH whenever possible
• Prompt reconciliation of accounts
• Payroll/purchase cards
• Information verification software
• Deposit only accounts

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Consumer Check Fraud Defenses

• Utilize direct deposit (ACH)
• Utilize direct debits (ACH)
• Timely reconciliation of accounts
• Use reputable electronic bill payment services
• Dont mail items from home by leaving them in
  your mailbox for the postman to retrieve

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Electronic Fraud (PCs and ATMs)

• Remote PC access
• Skimming
• Keystroke logging/memory programs

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Who is Liable for Electronic Fraud?

• Reg E Carries out the purposes of the
  Electronic Funds Transfer Act establishing the
  basic rights, liabilities and responsibilities of
  consumers using electronic funds transfer
  services
• UCC 4A Governs the payment method referred to
  as a wholesale wire transfer in the commercial
  community

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Electronic Fraud Defenses

• Personal firewalls
• Intrusion detection
• E-mail encryption
• Up-to-date anti-virus software
• ATMs
• Encryption standards
• Security of personal identification number pads
• ATM design

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Electronic Fraud Defenses (cont.)

• Protect your equipment
• Protect your work area
• Protect your password
• Protect your files
• Lock up storage media containing sensitive data
• Back up data regularly
• Report security violations religiously

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Identity Theft

• Shoulder surfing
• Dumpster diving
• Activating trashed credit card offers
• Responding to spam messages with personal data
• Interception of or stolen mail

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Identity Theft Defenses

• Adopt a need to know approach to individuals
  requesting personal information
• Minimal information on your checks
• Check financial information on your accounts on a
  regular basis
• Obtain periodic copies of your credit report

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Credit Card Fraud

• Your trash is searched for discarded receipts or
  carbons and then used.
• Dishonest clerk makes an extra imprint from your
  credit card and makes personal charges.
• Call a long distance number in response to a free
  trip or bargain of some sort and provide your
  account number so you can be billed. You dont
  get a trip or a bargain and charges appear on
  your account you did not authorize.
• Database hacking

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Credit Card FraudDefenses Personal/Consumer

• Sign your cards as soon as they arrive
• Carry cards separate from your wallet
• Keep a record of all your cards
• Watch your card during in-person transactions
• Void incorrect receipts
• Destroy carbons
• Save receipts to compare to billing statements
• Report questionable charges promptly
• Notify card companies in advance of a change in
  address
• Biometric technology
• Out of wallet questions
• Fingerprint identification
• Voice recognition
• Mimic tests

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Credit Card FraudDefenses Corporate/Merchant

• Use of Address Verification Service (AVS)
• Verified by Visa
• SecureCode from MasterCard
• Proper acceptance procedure at point of sale
• Visual inspection of card
• Signature verification

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Verified By VISA
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SecureCode
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14 Tips to Prevent Identity Theft

• Tip 1.
• Guard your social security number.

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14 Tips to Prevent Identity Theft

• Tip 2.
• Monitor your credit report.

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14 Tips to Prevent Identity Theft

• Tip 3.
• Shred all old bank and credit card statements.

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14 Tips to Prevent Identity Theft

• Tip 4.
• Remove your name from the marketing lists of the
  three credit-reporting bureaus.

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14 Tips to Prevent Identity Theft

• Tip 5.
• Add your name to the name-deletion lists of the
  Direct Marketing Associations Mail Preference
  Service and Telephone Preference Service.

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14 Tips to Prevent Identity Theft

• Tip 6.
• Do not carry extra credit cards or other
  important identity documents except when needed.

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14 Tips to Prevent Identity Theft

• Tip 7.
• Photocopy the contents of your wallet both
  sides.

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14 Tips to Prevent Identity Theft

• Tip 8.
• Do not mail bill payments and checks from home.

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14 Tips to Prevent Identity Theft

• Tip 9.
• Do not print your social security number on your
  checks.

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14 Tips to Prevent Identity Theft

• Tip 10.
• Closely examine the charges on your credit card
  statements.

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14 Tips to Prevent Identity Theft

• Tip 11.
• Cancel unused credit card accounts.

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14 Tips to Prevent Identity Theft

• Tip 12.
• Never give personal information over the phone
  unless you initiated the call.

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14 Tips to Prevent Identity Theft

• Tip 13.
• Subscribe to a credit-report monitoring service.

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Online References / Resources

• www.socialsecurity.gov/mystatement
• (personal social security benefits)
• www.freecreditreport.com/index.asp?sc14891001
• (personal credit report)
• www.myidfix.com
• (identity theft repair)
• www.indentity_theft_fraud.org
• (recovery from fraud)

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Online References / Resources

• www.law.cornell.edu/uniform/ucc.html
• (UCC articles)
• www.nacha.org
• (Automated Clearinghouse ACH info)
• www.usa.visa.com/business/merchants/fraud basics
  index.html
• (VISA tips on fraud prevention)
• www.mastercard.com/education/fraud/
• (MasterCard tips on fraud prevention

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Online References / Resources

• www.ftc.gov/bcp/conline/pubs/credit/idtheft.pdf
• (how to recover from identity theft by the
  FTC)
• www.fraudinvestigator.co.za/atm_fraud.htm
• (tips on how not to be a victim of ATM fraud)

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Print References / Resources

• Identity Theft How to Protect Your Most Valuable
  Asset, Robert Hammond, Career Press, January 2003
• The Computer and Internet Fraud Manual
• Joseph T. Wells, Obsidian, July 2002
• Corporate Check Fraud Protection
• Clayton Gillette, A.S. Pratt Sons, March, 2000
• Credit Card Check Fraud A Stop-Loss Manual
• Larry Scwarts/Pearl Sax, Fraud Theft
  Information Bureau, 1998