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Why Financial Fraud Continues to Rise
by Julie Conroy McNelly, VP of Product Solutions
As new technologies for processing financial transactions are implemented, ACH and check fraud continue to rise at an alarming rate. In fact, recent findings by Financial Insights show that ACH fraud rose 62.5% last year to $65 million, and the 2004 American Banking Association’s Deposit Fraud Survey found check fraud attempts grew approximately 20% in just a two year span.
Part of this growth can be attributed to the age old problem of risk management practices lagging slightly behind technology and industry innovation. This gap will continue to exist as long as innovation advances and risk management tools are required to provide a return on investment – the rapid rise in ACH fraud since the introduction of WEB and TEL codes are a case in point. Imagine trying to justify the business case for anti-phishing software in 2000. While it would have shown good foresight, business cases for risk management investment generally require an existing point of pain for justification.
Another factor contributing to the rising fraud problem is much more within the control of government officials and policy makers. Today, law enforcement has very limited bandwidth to investigate and prosecute financial fraud. This has resulted in a vicious cycle, whereby criminals, recognizing the relative lack of consequences for financial fraud, have greatly accelerated activity in this space. Organized crime from Nigeria to Russia, along with home-grown criminals in the U.S., have all recognized the opportunity for easy money. This increase in activity has compounded the demands on an already overtaxed law enforcement body. The end result is the continued growth of fraud, which has downstream implications for financial institutions (FI), merchants and consumers alike.
Even if a criminal is caught perpetrating fraud by an FI and the supporting documentation is turned over to law enforcement, the chances of that criminal doing any jail time are very low. Many law enforcement agencies have stated dollar thresholds, below which they will not investigate financial fraud. In fact, the FBI has its minimum dollar threshold of $100,000 posted on its website (http://www.fbi.gov/libref/factsfigure/wcc.htm). A would-be fraudster need only do a little bit of homework in order to discover the relative lack of potential consequences for breaking the law.
This gap in the ability to detect and prosecute fraud was noted as far back as 1996. In the FBI Law Enforcement Bulletin "Check Fraud: A Sophisticated Criminal Enterprise" from that year, the author noted that "the technological improvements that have fueled the growth in check fraud schemes have made it difficult for law enforcement to combat the problem." Since then, the volume of check fraud incidents has increased dramatically. According to the Nilson Report, in 2003, check fraud exceeded $20 billion, up from $12 billion in 1996 and $5 billion in 1993.
In the last two years, many bankers have indicated that this trend has continued, if not accelerated. While the average dollar value of losses is decreasing, the number of losses is increasing, leading to both a gross increase in fraud losses and losses as a percentage of total deposits.
This ten-year problem is not without a solution. Amidst the uproar over the rise of identity theft and highly publicized data breaches over the last year, many members of Congress have responded with numerous bills that address how the industry handles sensitive consumer data. While this will likely have some affect on data security, it will not stamp out the root cause of the issue, which is the sheer number of fraudsters outstripping the demands placed upon law enforcement to deal with them.
Until a better balance can be achieved, we will continue to experience an increased presence of organized criminal elements perpetrating check and ACH fraud. Rather than just focusing on the downstream effects of the problem, policy makers need to focus on the root cause – there is currently no disincentive to commit these crimes. Until that disincentive is in place, fraud numbers are likely to continue to rise.
Early Warning Systems Boilerplate (formerly PPS)
For over a decade, Early Warning Services, LLC (formerly Primary Payment
Systems) has been an industry pioneer by facilitating cooperation and
information sharing among financial services organizations as a
best-practice means to help prevent fraud losses and safeguard the financial
assets of those organizations and the consumers they serve. A suite of
services delivers this intelligence to where it is needed most resulting in
billions of dollars in loss avoidance each year.
For more information, please visit www.early-warning.com.
First published on BankersOnline.com 8/07/06
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