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Fraud In The Payment System


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Title: Fraud In The Payment System

Fraud In The Payment System
  • What YOU Can Do About It

What is fraud?
  • Webster defines fraud as
  • a deliberate deception practiced so as to
    secure unfair or unlawful gain
  • OR
  • one who pretends to be what he or she is not, an

Some Fraud Statistics
  • FBI estimates check fraud to amount to 12 to 15
    billion annually
  • ABA study of total cases
  • ABA study of attempted check fraud
  • FBI predicts identity theft to cost financial
    institutions in excess of 8 billion by 2004 (it
    is the fastest growing white-collar crime)

1997 289,000 1999 447,000 2001 600,000
1999 - 2.2 billion 2001 4.3
Check Fraud
  • Check kiting
  • Counterfeiting
  • Forgery (endorsement or signature)
  • Paperhanging
  • 3rd party billing service
  • Alterations
  • Washing
  • Organized groups (gangs)

Who is Liable for Check Fraud?
  • UCC 3-103
  • Ordinary care the observance of reasonable
    commercial standards that prevail in the area in
    which the person is located with respect to
    business in which the person is engaged.
  • Does not require the financial institution to
    examine each item if failure to examine does not
    violate the institutions prescribed procedures
    and those procedures are commonly followed by
    other institutions in the area.

Who is Liable for Check Fraud?
  • UCC 3-405
  • Comparative negligence the risk would remain
    with the company (employer) if the bank exercised
    ordinary care in processing the check.
  • In brief, employers are responsible for the
    integrity of their employees.

Who is Liable for Check Fraud?
  • UCC 3-406
  • Contributory negligence the risk would remain
    with the company if it fails to safeguard checks
    from forgery or alteration (by a reasonable
    commercial standard) and that failure to
    safeguard contributes to the forgery or
  • In brief, the company could be responsible for
    the loss along with the financial institution.

Who is Liable for Check Fraud?
  • UCC 4-406
  • reasonable promptness a period of time in
    which the customer has the duty to discover and
    notify the bank of unauthorized signatures and/or
    alterations of checks on the account.
  • 30 days is the maximum limit.
  • Bank can establish a shorter time limit.
  • There is controversy over a shorter time limit.

Obligations Under UCC
  • Issuer - Examine bank statements with reasonable
  • Payee Employers responsible for fraudulent
    endorsements by employees
  • Depository bank Warranty of endorsement,
    signature authentication, information has not
    been altered, MICR encoding liability
  • Paying bank Return disputed items by the

Commercial Check Fraud Defenses
  • Positive pay
  • Restrictive endorsements
  • Secure check stock
  • Utilize ACH whenever possible
  • Prompt reconciliation of accounts
  • Payroll/purchase cards
  • Information verification software
  • Deposit only accounts

Consumer Check Fraud Defenses
  • Utilize direct deposit (ACH)
  • Utilize direct debits (ACH)
  • Timely reconciliation of accounts
  • Use reputable electronic bill payment services
  • Dont mail items from home by leaving them in
    your mailbox for the postman to retrieve

Electronic Fraud (PCs and ATMs)
  • Remote PC access
  • Skimming
  • Keystroke logging/memory programs

Who is Liable for Electronic Fraud?
  • Reg E Carries out the purposes of the
    Electronic Funds Transfer Act establishing the
    basic rights, liabilities and responsibilities of
    consumers using electronic funds transfer
  • UCC 4A Governs the payment method referred to
    as a wholesale wire transfer in the commercial

Electronic Fraud Defenses
  • Personal firewalls
  • Intrusion detection
  • E-mail encryption
  • Up-to-date anti-virus software
  • ATMs
  • Encryption standards
  • Security of personal identification number pads
  • ATM design

Electronic Fraud Defenses (cont.)
  • Protect your equipment
  • Protect your work area
  • Protect your password
  • Protect your files
  • Lock up storage media containing sensitive data
  • Back up data regularly
  • Report security violations religiously

Identity Theft
  • Shoulder surfing
  • Dumpster diving
  • Activating trashed credit card offers
  • Responding to spam messages with personal data
  • Interception of or stolen mail

Identity Theft Defenses
  • Adopt a need to know approach to individuals
    requesting personal information
  • Minimal information on your checks
  • Check financial information on your accounts on a
    regular basis
  • Obtain periodic copies of your credit report

Credit Card Fraud
  • Your trash is searched for discarded receipts or
    carbons and then used.
  • Dishonest clerk makes an extra imprint from your
    credit card and makes personal charges.
  • Call a long distance number in response to a free
    trip or bargain of some sort and provide your
    account number so you can be billed. You dont
    get a trip or a bargain and charges appear on
    your account you did not authorize.
  • Database hacking

Credit Card FraudDefenses Personal/Consumer
  • Sign your cards as soon as they arrive
  • Carry cards separate from your wallet
  • Keep a record of all your cards
  • Watch your card during in-person transactions
  • Void incorrect receipts
  • Destroy carbons
  • Save receipts to compare to billing statements
  • Report questionable charges promptly
  • Notify card companies in advance of a change in
  • Biometric technology
  • Out of wallet questions
  • Fingerprint identification
  • Voice recognition
  • Mimic tests

Credit Card FraudDefenses Corporate/Merchant
  • Use of Address Verification Service (AVS)
  • Verified by Visa
  • SecureCode from MasterCard
  • Proper acceptance procedure at point of sale
  • Visual inspection of card
  • Signature verification

Verified By VISA
14 Tips to Prevent Identity Theft
  • Tip 1.
  • Guard your social security number.

14 Tips to Prevent Identity Theft
  • Tip 2.
  • Monitor your credit report.

14 Tips to Prevent Identity Theft
  • Tip 3.
  • Shred all old bank and credit card statements.

14 Tips to Prevent Identity Theft
  • Tip 4.
  • Remove your name from the marketing lists of the
    three credit-reporting bureaus.

14 Tips to Prevent Identity Theft
  • Tip 5.
  • Add your name to the name-deletion lists of the
    Direct Marketing Associations Mail Preference
    Service and Telephone Preference Service.

14 Tips to Prevent Identity Theft
  • Tip 6.
  • Do not carry extra credit cards or other
    important identity documents except when needed.

14 Tips to Prevent Identity Theft
  • Tip 7.
  • Photocopy the contents of your wallet both

14 Tips to Prevent Identity Theft
  • Tip 8.
  • Do not mail bill payments and checks from home.

14 Tips to Prevent Identity Theft
  • Tip 9.
  • Do not print your social security number on your

14 Tips to Prevent Identity Theft
  • Tip 10.
  • Closely examine the charges on your credit card

14 Tips to Prevent Identity Theft
  • Tip 11.
  • Cancel unused credit card accounts.

14 Tips to Prevent Identity Theft
  • Tip 12.
  • Never give personal information over the phone
    unless you initiated the call.

14 Tips to Prevent Identity Theft
  • Tip 13.
  • Subscribe to a credit-report monitoring service.

Online References / Resources
  • (personal social security benefits)
  • (personal credit report)
  • (identity theft repair)
  • (recovery from fraud)

Online References / Resources
  • (UCC articles)
  • (Automated Clearinghouse ACH info)
  • basics
  • (VISA tips on fraud prevention)
  • (MasterCard tips on fraud prevention

Online References / Resources
  • (how to recover from identity theft by the
  • (tips on how not to be a victim of ATM fraud)

Print References / Resources
  • Identity Theft How to Protect Your Most Valuable
    Asset, Robert Hammond, Career Press, January 2003
  • The Computer and Internet Fraud Manual
  • Joseph T. Wells, Obsidian, July 2002
  • Corporate Check Fraud Protection
  • Clayton Gillette, A.S. Pratt Sons, March, 2000
  • Credit Card Check Fraud A Stop-Loss Manual
  • Larry Scwarts/Pearl Sax, Fraud Theft
    Information Bureau, 1998
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