Check and ACH Fraud: Prevent Payment Fraud Losses in your Business

September 2016

by Tom Snapke

As businesses face the real risk of payment fraud, a 2016 Association for Financial Professionals survey shed light on the nature and frequency:

• Almost three quarters of respondents were targets of attempted or actual fraud, while 42 percent reported increased fraud attempts.
• Fraudulent checks were used most often, followed by wire transfers, cards and ACH.
• Over one-third of the companies experienced a fraud loss over $250,000.

Tom Snapke, First Vice President and a Certified Treasury Professional at First State Bank, relays the story of a business customer that had a former employee create bogus payroll checks on its account. “Thankfully they were enrolled in Positive Pay and the system was able to recognize that the checks presented were fraudulent,” he says. “The checks totaled $35,000, which would have had a huge impact on our customer’s account and daily operations.”

Here are some additional ways to prevent check and ACH fraud.

Why are fraud losses on the rise?

Desktop publishing has made counterfeiting checks cheap and easy. The Internet has made it easy to commit fraud from international posts, often with organized rings in uncooperative counties. Cyber criminals can compromise large quantities of data with millions of potential victims for fraudulent checks with lottery scams, job postings and work-at-home opportunities. Faster check clearing has decreased the time it takes to identify and return checks.

What is your liability for check fraud?

Laws provide a negligence standard when determining loss liability, which means banks are not 100 percent responsible for the loss. Businesses have an obligation to inform the bank on a timely basis and limit the exposure. Your company must implement reasonable and adequate controls over bookkeeping processes, such as:

• Maintaining sufficient controls for check storage, issuance and reconciliation.
• Reviewing bank statements and reconciling accounts in a timely manner.
• Using standard fraud protection offerings such as Positive Pay.

What is ACH debit fraud?

ACH debit fraud is a transaction initiated or altered in an attempt to misdirect or misappropriate funds. Any ACH may debit post to your account, with no authorization, if fraud prevention measures aren’t in place. One critical element of this fraud is that account and routing numbers can be obtained from any check.

What are some fraud prevention tools?

Work with your bank to prevent the sizable risk of payment fraud. Some tools are:

• Positive Pay, which gives the ability to make pay or return decisions on checks presented against an account that doesn’t match. Check issuers provide a data file containing check amounts and numbers on a daily basis, and then receive a report detailing discrepant checks. Fraud is reduced through tighter controls and the ability to authorize payment or return the check prior to the return deadline. Protection can also be extended to the teller line itself. If a check is not in the company’s Positive Pay file, the presenter is asked to contact the check originator.
• ACH debit blocking service guards corporate accounts against unauthorized ACH debit transactions. Benefits include added security and fraud protection by eliminating outside access to your account, as well as staff spending less time reconciling and investigating debit transactions. Your company also can use filtering criteria, such as blocking all debits, blocking all over a certain dollar threshold, or blocking or allowing all except from specific originators.

How can you prevent check fraud?

Convert as many payments as possible to electronic delivery, while implementing fraud prevention tools. Use online reporting and services for faster reconcilement. Provide training to employees, along with segregated duties and a limited number of official signers. Update account and bank records as staff changes, and screen new employees. Control your check stock, while enforcing procedures. Use separate accounts for collection and disbursement activity and payroll and accounts payable disbursements, along with monitoring high-volume accounts and low-volume petty cash or emergency payments. Finally, know who you do business with, whether vendors, customers or maintenance staff.

Tom Snapke is a First Vice President and a Certified Treasury Professional (CTP) at First State Bank.  Reach Tom at 586-445-4849 or tsnapke@fsb.bank.