Fraud prevention best practices to protect businesses and deter the risk of fraudulent activity

In 2022, the Association of Financial Professionals (AFP) Fraud and Control Survey reported that 71% of organizations were victims of payment fraud in 2021. Checks (66%) and ACH debits (37%) were the payment methods most frequently impacted by fraudulent activity. According to the Association of Certified Fraud Examiners (AFCE), a typical business enterprise will lose approximately 5% of its annual revenue to fraud, with a median loss from a single fraud case costing a business an average of $250,000. Even worse, the study found that small businesses (fewer than 100 employees) were more susceptible to fraud than larger businesses, with an average loss of $2,650 per incident.

A financial fraud event can devastate a business: loss of monetary funds, reputational damage, increased time and cost to resolve, and even legal consequences. A typical fraud occurrence can go undetected for up to 12 months, making it crucial for businesses to be proactive rather than reactive in mitigating and combatting fraud before it occurs. Financial fraud continues to remain on the rise and poses a significant risk for businesses, making fraud prevention a critical component to the survival of any business. The most common (and practical) fraud prevention tools are Positive Pay, ACH Block and Filters, and internal controls.

Positive Pay

Positive Pay is a fraud prevention service provided by financial institutions that protects organizations against forged, altered, and counterfeit checks and unauthorized electronic ACH transactions. Positive Pay is available for both ACH and check payments. The way Positive Pay works is that a business provides a data list of checks and/or ACH items that have been issued. The data can include check number, dollar amount, account number, date, and payee name. This information is then compared against a list of items attempting to clear the business account, and any suspicious items that do not match are flagged as potentially fraudulent. The business will then be alerted and able to choose whether to pay or reject the items.

ACH Blocks and Filters

In addition to ACH Positive Pay, ACH Blocks and Filters are used by businesses to prevent unauthorized or fraudulent ACH activity and transactions. An ACH Block prohibits all ACH credit and debit transactions from posting to or from an account. If a business has a block, all transactions in or out would be blocked.

An alternative to a full ACH block would be establishing ACH Filters, which allow businesses to set rules for certain authorized ACH transactions. For example, perhaps a business wants to block all transactions but allows a specific vendor to debit their account up to a specified amount. The business could set up a filter for that business.

ACH Blocks and Filters are practical tools for preventing fraud. Still, ACH Blocks and Filters must be part of a comprehensive fraud prevention strategy that includes other measures, such as internal controls like dual authorization and bank account monitoring.

Internal Controls

Fraud tools are best paired with effective internal fraud prevention controls. Fraud controls are measures that businesses can put in place to prevent and deter fraudulent activity. Preventive controls are measures that are put in place to prevent fraud from occurring in the first place. They include internal controls such as dual authorization, segregation of duties, and establishing assigned and differentiated roles in treasury portals. These controls are intended to make fraud difficult by limiting access to sensitive information and financial transactions and creating a culture of integrity and accountability.

Dual Authorization

Dual authorization is a security measure that requires two or more individuals to approve a financial transaction before it is processed/released. Having two or more approvers makes fraudulent or unauthorized transactions more likely to be prevented.

Segregation of duties

Segregation of duties is an essential internal control that helps businesses prevent financial fraud. Assigning different responsibilities for financial transactions to different employees ensures that no single individual has too much control over any process. Segregation of duties can make it more difficult for an individual to commit fraud, as multiple checks and balances exist. Additionally, it helps ensure that any suspicious activity is more likely to be detected, as different employees will have different perspectives on financial transactions.

User Roles and Permissions

User roles and permissions are critical for managing the treasury portal and payment system access. They determine which users have access to certain features and functions within the system and can help prevent unauthorized or fraudulent activity.

With key prevention tools and best practices, businesses can mitigate their fraud exposure and improve detection rates of fraudulent activity.

How We Can Help

When implementing fraud prevention services, it is vital to have a team of experienced treasury management consultants with expertise in cash management and working capital strategy. Our team of treasury consultants are all Certified Treasury Professionals (CTP) accredited by the Association of Financial Professionals (AFP). Tru Treasury was formed to help build and develop a comprehensive treasury management program for credit unions to generate additional fee and deposit revenue, attract new prospective business members, and deepen existing business relationships. To learn more, visit us at trutreasury.com.

 

Sources:

 J.P. Morgan, 2022. 2022 AFP Payments Fraud and Control Report Key Highlights, Association for Financial Professionals

Association of Certified Fraud Examiners, Inc., 2022. Report to the Nations: 2022 Global Study on Occupational Fraud and Abuse

Tanya Olson

Tanya Olson

Tanya is a Certified Treasury Professional with a master’s in Administration and Leadership. She has over 11 years of experience in the financial industry, specializing in treasury management sales ... Web: https://www.trutreasury.com Details