Counterfeit Check Fraud:

Transcription

1 Counterfeit Check Fraud: A Persistent Industry Challenge Early Warning Introduces a Collaborative Intelligence Solution

2 Early Warning is owned by Bank of America, BB&T, Capital One, JPMorgan Chase, PNC, U.S. Bank, and Wells Fargo. Early Warning provides risk management solutions to a diverse network of 2,300 financial institutions, government entities and payment companies, enabling businesses and consumers to transact securely and conveniently. Early Warning s unique business model facilitates a data exchange system based on collaborative, shared intelligence. For 25 years, the company has worked with organizations of all sizes to advance collaborative risk management and fraud prevention. Please visit Check fraud - it not only won t go away, but it is morphing to keep pace with consumers digital banking habits. David Barnhardt of Early Warning talks about this persistent fraud threat and how banking institutions should respond to it. Although the number of checks written by consumers has decreased significantly, the reverse is true about dollars lost to check fraud, says Barnhardt, Vice President of Product Management, Payment Solutions. We observe a 29 percent increase in fraud dollars [lost to check fraud] year over year, Barnhardt says. Yes, checks are declining - caveat: for small dollars - [but] check fraud is still ever-present, and we still see check fraud losses continue to rise. In an interview about counterfeit checks and fraud, Barnhardt discusses: Counterfeit is one of the oldest frauds, and it s been around since people have been writing checks. It s really easy to counterfeit checks, and, unfortunately, a lot of folks in the world fall victim to advance-fee scams, lottery scams, and dating scams. Why check fraud won t go away; National financial impact of counterfeit checks; New tools to help detect and respond to fraud. Barnhardt oversees development and management of deposit and payment solutions. He joined Early Warning in 2014, bringing with him 13 years of executive experience in bank fraud and risk management. During his career, he has done extensive work in mitigating deposit, debit, e-commerce, and internal fraud. He has also done significant work in link analysis and collusive ring investigation. Fewer Checks, More Check Fraud TOM FIELD: David, people say check usage is declining, yet check fraud doesn t seem to be going away. Talk to me about the problems with checks and especially with counterfeit checks and fraud. DAVID BARNHARDT: It s interesting. Whenever you say checks are declining, they are, to a degree. Online payments, such as ADP and other money transfer services, have really reduced the actual number of checks written for $300 or less. But even with that decline, Early Warning has still observed a 29-percent increase in fraud dollars year over year. Counterfeit is one of the oldest frauds, and it s been around since people have been writing

3 David Barnhardt When people say, Checks are declining, yes, checks are declining - caveat - for small dollars. Check fraud is still ever present, however, and we still see check fraud losses continuing to rise. checks. It s really easy to counterfeit checks, and, unfortunately, a lot of folks in the world fall victim to advance-fee scams, lottery scams, and dating scams. The 419 scam, a scheme that combines impersonation fraud coupled with an advance fee racket and was first popularized by Nigerian-based scammers (419 refers to the section of the Nigerian Criminal Code concerning fraud), has just evolved itself tremendously. But when you look at the amount of monies associated with those particular checks and how much these checks have been written for, obviously it doesn t fall into the $300 or less bucket. When people say, Checks are declining. Yes, checks are declining - caveat - for small dollars. Check fraud is still ever present, however, and we still see check fraud losses continuing to rise. Most Popular Counterfeit Check Scams FIELD: Give us an industry perspective on that. What do you see as being the big-dollar losses you associate with counterfeit checks and with some of the scams? What are some of the popular scams that you re seeing? BARNHARDT: The American Bankers Association does a financial study year over year,

4 The most recent ABA study identified that financial industry loss and loss avoidance, due to demand deposit account fraud, cost over $14 billion, as of Of that amount, $648 million was due to check fraud loss. Approximately $155 million, or 24 percent, of those losses were as a result of counterfeit. where it looks at check-related losses and what those losses come from, whether it be counterfeit, stolen, NSF, overdraft, etc. The most recent ABA study identified that financial industry loss and loss avoidance, due to demand deposit account fraud, cost over $14 billion, as of Of that amount, $648 million was due to check fraud loss. Approximately $155 million, or 24 percent, of those losses were as a result of counterfeit. Over the last few years, counterfeit fraud has consistently been the leading demand deposit account fraud that s been reported by the ABA, and when the ABA looks at it as a loss per account, you re looking at roughly 41 cents loss per account across the measured financial institutions that are surveyed. Forty-one cents per DVA (Debt Valuation Adjustment) is a significant amount of money, and that is all attributed to counterfeit checks. These types of counterfeit scams, like advance fee, really seem to be the Achilles heel in the industry, for a fraud professional trying to detect who s actually negotiating these items. The shocking point around 419 scams, for example, is people like your mom, your dad, your aunt, your kids, anybody who has access to the Internet - to ebay, Facebook, Twitter, Instagram - are susceptible to the scams out there. Fraudsters solicit folks, often by doing phone scams. Also, dating websites have popped up tenfold over the past few years, and there are so many fake profiles. Fraudsters find these people who are looking for love, and play on their good intentions. How a Typical Check Fraud Scam Works Essentially, the way the scam works is after some brief correspondence - really it doesn t matter what type of interaction this is, whether it s romance or looking for a job or selling an article online - these folks are typically mailed the check and told some hard luck story about negotiating the check. The fraudster asks them to send X number of funds back, but: Hey, just for your willingness to help me, I ll let you keep 10 percent, or whatever the case may be. Then the unsuspecting victims, who traditionally are very good customers of the bank, will actually deposit the check. Most of the time they re given some funds availability or next-day availability, and they go into the banking center, or they go online to either withdraw the funds and take it to the money transfer service, or they ll go into their online banking and electronically remit funds to the imposter unknowingly. Then after the check is returned, the customer calls the bank not understanding what happened, and then they re informed that they actually accepted a counterfeit check. Normal people have gotten wind and have been a bit educated through a lot of public-service announcements

5 by the government and lots of online press about this topic. I know a lot of the online retailers or a lot of the online transfer companies or face-to-face transfer companies will educate consumers not to do a transaction unless they know the individual they re doing business with. online banking account to get the funds back out themselves through ACH, ETP, bill pay, or even wire. Then the victim, on seeing a returned deposit item or discovering their account is upside down, calls and asks the bank why their wire transaction was returned, and they have to be educated that it was actually a check. So the digital age has not quelled the counterfeit check scam but I ll share one quick example of how fraudsters have actually evolved it. evolved their process. As more and more banks allow for mobile deposits, the fraudster realizes: I don t have to mail a check and beg them to deposit it. I ll just get them to give me their online banking credentials. So once the unsuspecting victim gives over their online banking credentials, the fraudster will go in, log in as that customer on their phone, and actually add their challenge questions or any security questions, so that it s a new device. The fraudster then takes a picture of the counterfeit check they just made and tells the victim they actually wired money into their account, which is a lie. Then the fraudster actually goes into the How Online Banking Facilitates Fraud FIELD: David, you anticipated my next question because we see so many people now, not just banking online but moving to mobile payments, person-to-person, and even digital currencies. Do you see this migration impacting the whole counterfeit check problem? BARNHARDT: Yes. More and more payments are going electronic, because we, obviously, are in an electronic age. However, large

6 [O]ne quick example of how fraudsters have actually evolved their process. As more and more banks allow for mobile deposits, the fraudster realizes: I don t have to mail a check and beg them to deposit it. I ll just get them to give me their online banking credentials. dollar deposits still typically occur via paper. People still get checks for various reasons. Some companies actually still pay their employees in payroll checks. Bonus checks are sometimes remitted. The U.S. Treasury sends out tax checks in paper, so you know check fraud is ever present. People use electronic channels to move money. Unfortunately, as in that example I provided you, fraud has adapted to the process. Fraudsters are using electronic money movement to their advantage, and now they re using mobile deposits to really streamline their process. They no longer have to pay FedEx or the UPS overnight shipping costs to send checks out to unsuspecting victims. They can sit there in their counterfeit check chop shop, gain access to the unsuspecting victim s account, take a picture, continually check the balance, and then once it s credited, they ll send the money out themselves. FIELD: Talk to us about Early Warning, your solution, and how it has been developed to fight this problem. BARNHARDT: Early Warning has an advisory committee that is made up of our members banks, and we discuss trends in our annual advisory committee meetings, what the threats are at those institutions, and how Early Warning and its data assets can be used to help them reduce risk or fraud that they re experiencing. Counterfeit checks have always been at the top of the list, year over year. The problem really wasn t going away, and, in some cases and institutions, it was actually getting worse. Typically counterfeit check fraud is something that s perpetrated by existing, well-tenured customers of the bank who have never, essentially, had an RDI, or returned deposit item, or had any NSFs. As I said, good people with direct deposits create the biggest challenge for them. Being that counterfeit check detection was ranked No. 1 one across all of our contributors, we worked to develop an industry product that detects one of the most elusive fraud types of the industry. And what I mean by elusive is, you can do behavioral analyses on your customers, and you can find any check that s outside of the range they normally deposit. A lot of those systems can help, and they can hurt, especially around tax time. People make deposits of tax checks and bonus checks from work or whatever the case may be, and typically those filters and those strategies will create a lot of alerts, and it s really hard to keep up with it. We wanted to build an industry solution that could have pinpoint accuracy, something that would not create thousands upon thousands of alerts, unless they took thousands upon thousands of suspect counterfeits, and we built this solution out of our unique ability to see what s going on in the financial ecosystem and create a report or create a product

7 We re not looking at just a single bank s list. As I start to see counterfeit checks in the industry, I can inform banks on their first acceptance of that item, instead of their fifth acceptance of that item. that allows the banks to strategically have conversations with customers to educate them. Again, these are unsuspecting victims, not hardened criminals. So we give the banks the ability to take time to educate, as well as protect the funds where a counterfeit check has been deposited. Why Early Warning Is Best for Banks FIELD: David, give me a sense of the competitive landscape. How does the Early Warning solution compare to other solutions within your space? BARNHARDT: Our solution benefits from all our bank contributions across the U.S. If you think about our position as a trusted custodian in the industry, we are at the center of a financial ecosystem. Banks typically have internal lists or solutions that assist them in detecting this type of fraud, and they typically have high false positives. That requires them to do a lot of images and is very time consuming. However, we are across the industry, and we re very comprehensive in the data we have. We re not looking at just a single bank s list. As I start to see counterfeit checks in the industry, I can inform banks on their first acceptance of that item, instead of on their fifth acceptance of that item. Not to be a cliché, but we re able to essentially provide that early warning to the banks when they take an item from a good customer and don t see a need to place a hold. We may come back and tell that bank that is a suspect counterfeit. They can place the hold and be on a conversation with the customer because typically that customer has provided all their personal information to a fraudster, so more than likely an impending identity theft is going to be coming down the pike. Other services in the industry, I ve heard, are very small in scale. They don t have the granular detail of the deposits or returns that are the warning bells, nor do they have the same fraud rate or item return rate that we have. When you re building something like a solution to the counterfeit problem, having the largest amount of data in the industry, as far as deposits and returns, is a significant advantage. One bank by itself, might build counterfeit solutions, but you re only as good as the data you saw at your institution. We ve been able to build a solution that looks across the industry, and it provides all of our subscribers and our inquirers that early warning about the item they re taking is susceptible to returning for counterfeit.

8 FIELD: That s really insightful. One last question: If you could sum it up and offer financial institutions one piece of advice on how they could immediately reduce their risk from counterfeit checks, what would you advise them? BARNHARDT: We ve been actually having that conversation with a lot of our inquirers and contributors, and we ve had a tremendous response to our counterfeit notification products. A lot of our banks have told us: Hey, we ran this for two days, and essentially we ve made back what we were going to pay for this service because we found items that we would have never alerted upon. We ve had a lot of good new stories with people who were victims of fraud, elderly folks who were giving away a lot of their life savings to fraudsters, so the education part is out there if banks are interested. We have a very effective solution, and compared with what else is out there in the market, I would guarantee that Early Warning s the biggest bang for the buck, the highest return rate, the lowest false positives, and that just goes back to our position in the industry and the trusted custodian model, and the amount of data that we see. Hear the entire interview:

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