Financial Fraud Is financial fraud on the rise?

1. Financial FraudIs financial fraud on the rise? November 18, 2009

2. OVERVIEW OF TOPICS WHAT IS THE FRAUD TRIANGLE? The economy is down, is fraud on the rise? Classifying Internal Fraud WHAT IS OCCURING ? WHAT IS THE TREND? FRAUD GRAPHS TOP TEN FRAUD THREATS RECENT FRAUD LOSSES RECENT REGULATORY FOCUS Why Is Fraud Getting Easier for Criminals? WHAT CAN WE DO TO PREVENT FRAUD? Helpful Web Sites

3. WHAT IS THE FRAUD TRIANGLE? Opportunity FRAUD Pressure/ Motivation Rationalization

4. The economy is down, is fraud on the rise? • Mortgage Crime–Mortgage Fraud in the United States rose 45% in Q2 2008 compared to Q2 2007, according to the Mortgage Asset Research Institute. • Cybercrime–-Wide-ranging online fraud is skyrocketing as fraudsters take advantage of the financial services turmoil: • Phishing attacks were up at least 40% in 2008. Attacks in June alone rose 117% compared to a year earlier. • Money Mule schemes to launder money through unsuspecting victims rose by more than 500% from August to October, 2008. • 90% of all phishing attacks target financial services customers, according to the Anti-Phishing Working Group. • Symantec estimates $7 billion worth of stolen goods are traded annually via the internet underground economy. Researchers found everything from stolen credit card information to DDA details—including account credentials as well as balance information!

5. The economy is down, is fraud on the rise? • Industry experts also warn of an uptick in fraud, professional, organized attacks are increasing, and identity fraud will continue to be one of the fastest growing crimes for the next 5 to 10 years.  • The risk of internal fraud is also rising, thanks to the weak economy. • People are going to be more tempted to steal inside data, to sell it or use it for their own purposes. • Insider threat will be more prevalent than in the past, there will be more desperate players out there. • Hardened criminals (violent crime offenders) are new entrants in Fraud, lesser prison sentences or slap on the wrist or walk away from prosecution.

6. Classifying Internal Fraud • .  In the financial services world, we tend to focus on four areas: • Theft from the institution • Theft from customers • Theft of customer information • Collusion • We see each is complex and contains many unique forms of fraud.  • Let’s classify internal fraud: • Theft from the institution — This certainly includes real property and intellectual property, but more typically it involves money.  • Stealing cash and stealing from the G/L both move money from the control of the institution to the control of the employee.  • Lesser included offenses are G/L manipulation, which in itself has many schemes, and falsifying reports.  • Self dealing includes fee refunds to your own account or to accounts of other parties close to you. (Even when smaller fees or no fees were levied).  • Virtually every loan fraud involves stealing from the bank. 

7. Classifying Internal Fraud • Theft from customers — This seems pretty straight forward, but can involve pretty imaginative schemes . • round robin movement of funds to cover the theft • misrepresentation and abuse of position • inactive/dormant accounts • escheatment candidates (what customer is going to complain?) • utilizing customer accounts as a conduit for other frauds. • Theft of Customer information — With the heightened awareness of identity theft as a growing societal problem, this particular form of internal fraud can have serious reputational consequences.  • This fraud can range from collecting information on-line • Stealing reports or even generating custom reports, to stealing files.  • Data loss has a thriving black market for this information, and employees may view this as a “safer” fraud to commit. • Data is not controlled as tightly as money.

8. Classifying Internal Fraud • Collusion — internal collusion is always a possibility.  • Multiple combinations of bank employees’ involvement in a scheme. • more damaging is collusion with third parties. • range from willful disregard or neglecting to place a hold • ignoring a money laundering scheme,, providing monitoring strategy • aiding and abetting in the perpetration of a scheme. • Circumventing controls and procedures can be: • a simple processing error claimed later

9. WHAT IS OCCURING ? • Fraud impacts all financial institutions. • Large sources of capital attract fraudsters and thieves intent on stealing the money, wherever it is- Orlando or New York, Riyadh or Wisconsin. • Fraudsters are targeting financial institutions globally. • The size and scale of the fraud problem is increasing. • The comprehensive report for 2008 Deposit Account Fraud Survey put together by the American Banker’s report indicates that the threats and challenges facing loss-prevention groups is increasing.

10. WHAT IS THE TREND? • Financial institutions are faced with increased losses:: • The FDIC lists over 8,000 banks in the U.S. This means that the average institution loses $125,000 per year to Deposit Account Fraud. This strikes me as extremely low given the amount of fraud committed in the United States. Large, super-regional banks could easily incur this level of loss each day. • According to a Javelin Strategy and Research study, identity fraud losses were $45 billion in 2007. New account fraud losses on checking and savings accounts opened with the intent to commit fraud were $1.92 billion. This estimate doesn’t even count existing deposit accounts. • Check Fraud – Losses at least $815 million more than Twelve times the $65 million in Bank robberies annually. • The total dollar loss from all referred cases of fraud was $198.44 million with a median dollar loss of $724.00 per complaint

11. WHAT IS THE TREND? • Fraud was by far the most reported offense, comprising 44.9% of referred complaints. • Non delivered merchandise and/or payment accounted for 19.0% of complaints. • Check fraud made up 4.9% of complaints. • Credit/debit card fraud, computer fraud, confidence fraud, and financial institutions fraud round out the top seven categories of complaints referred to law enforcement during the year. • Of those individuals who reported a dollar loss, the highest median losses were found among Nigerian letter fraud ($5,100), check fraud ($3,744), and other investment fraud ($2,695) complainants.

12. WHAT IS THE TREND? • The fact is that internal fraud is extremely difficult to estimate. • One reason is that financial institutions have a vested interest in making sure these events never end up in the public realm. • Imagine your CEO being interviewed and stating - “our employee was stealing your money, but don’t worry, we caught him after 5 years”

13. BUSINESS SECTOR FRAUD Source: KECU 2009 Report

14. Bank Fraud Source: KECU 2009 Report

15. FRAUD RESOURCES (% of increase) Source: KECU 2009 Report

16. TOP TEN FRAUD THREATS Cross Channel Fraud - Online, ACH, check, debit, wire — more channels mean more opportunities for fraud. Identity Theft - Identity theft keeps growing, thanks to high-profile data breaches from retailers, universities, hospitals, and the government. On-Us Check Fraud - Check volumes are declining, but check fraud is on the rise. One major reason is business-to-business payments. New Account Fraud- The ABA’s most recent Deposit Account Fraud Survey attributes 26% of both fraud losses and cases to new accounts. Credit Card Bust-Out - Credit card bust-out is hard to spot, since it starts with legitimate customers who then max cards to their limit, fence the purchases, recycle funds, and more. ACH Fraud - ACH fraud will continue to be a growing threat, both from an origination and receiving bank perspective. With the advent of check conversion, fraud became an inherent part of the ACH network. Deposit or Payments Fraud -Whether deposits and payments are made via check or ACH, there is a period of time before transactions can be verified. Debit Card Fraud - Debit card fraud has increased dramatically in recent years-thanks to counterfeit cards, compromised PINs, and new scams. Online Account Takeover - Fraudsters can gain access to online credentials through a wide variety of mechanisms. Organized Fraud Rings - Organized crime is the most difficult fraud to detect and stop, primarily because it is sophisticated and well-planned.

17. RECENT FRAUD NEWS Current Year 2009

18. RECENT REGULATORY FOCUS • The FDIC’s Division of Supervision and Consumer Protection has been proactive in notifying financial institutions awareness of fraud schemes. • Special Alert’s from FDIC vary from Counterfeit Check Fraud to Work at Home Schemes. • From September to November 2009, 42 Special Alerts were issued by the FDIC, 51% more than for the same period in 2008. • The FDIC has also been targeted in fraudulent schemes

19. Why Is Fraud Getting Easier for Criminals? • Sheer volume • 49.1 billion checks issued annually • 30 billion electronic payments initiated annually • Technology • Inexpensive software that creates reproductions of documents, including checks • Laser printers • Banks’ compliance with Reg CC to make funds available • Within one day for certain types of checks • Two days for checks drawn on a local bank • No longer than five days for non-local deposits • Banks’ compliance with Reg CC to return checks • Within 24 hours of settlement items must be identified (by client) and returned (by FI) to the Bank of first deposit • Banks’ compliance with NACHA Rules and Regulations for unauthorized entries return • 60 days to recuperate electronic fraud from consumer transactions • Only 24 hours to return a fraudulent item from a business to business transaction

20. WHAT CAN WE DO TO PREVENT FRAUD? • Background checks (financial and criminal) • Reference checks • Ethical Tone at the Top • Ethics Training / Education • Employee account review • Whistleblower hotlines • Create an anti-fraud environment • Internal controls and internal audits • Internal lending policies for employees should NOT be loosened • Establish regular fraud detection procedures during internal audits • Surprise audits of branches and cash • IT access appropriate for employee’s job / position • Minimum vacation requirements

21. WHAT CAN WE DO TO PREVENT FRAUD? #1 – Use online services for New Account Verification #2 – Use ACH Blocks and Filters #3 – Encourage, use Positive Pay Services #4 – Institute “Post No Checks” #5 – Perform daily transaction review #6 – Due Diligence on service providers

22. Helpful Web Sites U.S. Secret Service http://www.ustreas.gov F.B.I. http://www.fbi.gov Comptroller of the Currency - Check fraud: A Guide to Avoiding Losses http://www.occ.treas.gov National Check Fraud Center www.ckfraud.org NACHA, The Electronic Payments Association – www.nacha.org Eastpay, Regional Non-profit organization on electronic payments -www.eastpay.org FDIC Risk Management Manual of Examination Policies - Bank Secrecy Actwww.ffiec.gov/bsa_aml_infobase/documents/FDIC_DOCs/BSA_Manual.pdf;FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manualwww.ffiec.gov/bsa_aml_infobase/default.htm andFFIEC Identity Theft Red Flags – Interagency Final Regulations and Guidelineswww.fdic.gov/news/news/financial/2007/fil07100.pdf

23. Is fraud really increasing? Answer: YES, given the down economy, fraud is increasing. Questions?

24. Thank You Wilfredo (Willy) B.Jauregui Director, Florida Practice Leader wjauregui@accumepartners.com 305-746-5883 (C) 954-938-5670 (O) 954-938-5570 (F) Accume Partners 6600 North Andrews Avenue, Suite 278 Ft. Lauderdale, FL 33309