Bank Fraud Reality: Experiences and Perspectives of U.S. Banks

1. 2010 FIBA ConferenceThe Bank Fraud Reality:Experiences and Perspectives of U.S. Banks Michael B. Benardo Cyber Fraud and Financial Crimes Section Chief Division of Supervision and Consumer Protection Federal Deposit Insurance Corporation

2. Outline • Phishing • Corporate Account Takeover Risks • Third Party Payment Processor Risks • Mobile Banking Risks

3. Phishing

4. Phishing • An e-mail that looks like it is from a legitimate source – PayPal, a financial institution, FDIC • The recipient provides personal or financial information, such as bank account or credit card numbers, passwords, date of birth, social security number • Financial loss and/or Identify theft

5. Phishing • Skyrocketed with significant increases since mid-1990’s – ignited by Internet and PCs • Criminals moved quickly to use newer technologies – provided easy access & anonymity

6. Typical Phishing e-mail • Urgent! • Use fear • More sophisticated than in the past

7. Phishing and Related Threats

8. Corporate Account Takeover Risks

9. Corporate Account Takeovers Recent Headlines: “Cybercrooks Stalk Small Businesses that Bank Online” “European Cyber-Gangs Target Small U.S. Firms” “Broad New Hacking Attack Detected”

10. Corporate Account Takeovers • Impacting Web-based payment origination services for business customers • Resulting from compromised banking software login credentials • Business customers • Municipalities • Churches and Religious Institutions

11. Corporate Account Takeovers • Fraudulent EFT transactions • Automated clearing house (ACH) • Wire transfers • Crimeware (malicious software) • Trojan horse programs • Key loggers • Other spoofing techniques

12. Corporate Account Takeovers • Awareness, education and collaboration • Financial institutions • Small businesses • Technology providers • Law enforcement agencies and banking regulators

13. Corporate Account Takeovers • SA-147-2009: Fraudulent Electronic Funds Transfers www.fdic.gov/news/news/specialalert/2009/sa09147.html • SA-185-2009: Fraudulent Work-at-Home Funds Transfer Agent Schemes www.fdic.gov/news/news/specialalert/2009/sa09185.html

14. Third PartyPayment Processor Risks

15. Payment Processor Relationships • High Risk Activities • Telemarketing • On-line merchants • Payment Types • Remotely Created Checks • ACH

16. Third Party Payment Processors • Risks • Strategic Risk • Credit Risk • Compliance Risk • Transaction Risk • Legal Risk • Reputation Risk • Financial institutions may be viewed as facilitating a payment processor’s or a merchant client’s fraudulent or unlawful activity

17. Third Party Payment Processors Processor Due Diligence & Underwriting • Policies and procedures • Background check of processor and merchant clients • Processor approval program that extends beyond credit risk management • Authenticate the processor’s business operations and assess the risk level

18. Third Party Payment Processors Ongoing Monitoring • Monitor higher rates of returns or charge backs • FFIEC BSA/AML Examination Manual urges financial institutions to assess and manage risk with respect to third-party payment processors • Risk management program should include procedures to monitor payment processor information (i.e., merchant data, transaction volume, charge back history)

19. Third Party Payment Processors Red Flags • Payment processors that use more than one financial institution to process merchant client payments • One or more of the relationships may be terminated as a result of suspicious activity • Payment processor’s merchant clients are inappropriately obtaining personal account information and using it to create unauthorized RCCs or ACH debits

20. Third Party Payment Processors When Fraudulent Activity is Suspected • File a Suspicious Activity Report • Require payment processor to cease processing for that specific merchant • Terminate financial institution’s relationship with the payment processor

21. Mobile Banking Risks

22. Mobile Banking • Banking: alerts, funds transfers, balance checking • Payments: payments at point of sale, domestic P2P, cross-border remittances • Prepaid on the phone

23. Mobile Banking • P2P initiatives introduced on mobile phone gaining traction in United States: • SMS texting – convenience may drive adoption • iPhone, Droid, smartphone Apps • “Bump” phones to exchange information

24. Mobile PaymentsHaiti Earthquake Donations • Bank agnostic payment – telecoms extending credit • Error resolution issues: • What happens if the $20 donation instruction you sent to Haiti appears as a $200 or even a $2,000 charge on your bill? • What if there is a disagreement about the error between you and your wireless carrier?

25. Mobile PaymentsHaiti Earthquake Donations • Who regulates transaction to protect consumer from identity theft, payment fraud and other payment risks? • Charity scams – FBI and other warnings

26. Mobile Banking/Payment Security Threats • Mobile malware and viruses • Secure access • BSA and AML – prepaid on the phone • Un-trusted applications • Authentication • Identity theft • Regulatory framework • Who owns the customer? Consumer protections?

27. Questions?

28. Thank you!