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Keep Your Community Financial Institution Safe From Fraud

12/3/19 – Larry Brown

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From greedy employees and hidden accounts, to the notorious wire transfer, commercial fraud has become a mainstay among nightly news agendas.  In 2017 alone, it was estimated that over $1 billion was lost in wire fraud attacks. It is critical that you do everything possible to mitigate potential losses, as your insurance will only go so far in recovering these assets. Smaller community financial institutions (“FI”) are especially vulnerable to fraud attacks as they lack the security infrastructure that national FI groups rely on, with employees performing less crossover in their oversight. Here are some of the biggest fraud threats that community FIs face on a daily basis.

Wire Transfer Fraud

Let’s be honest, not every one of your clients or employees is as a technological savant. Transfer scams are one of the primary scams impacting institutions and customers. From phishing attacks to the famous “Nigerian Prince” or “Lottery Winner”, transfer scams rely on wire transfers from unlucky victims. As a community FI, it is your responsibility to protect your institution and clients from these scams.  Unfortunately, even the strongest security measures are susceptible to the mercurial nature of scammers and their methods.

Internal Fraud

According to CNBC, US businesses lose at least $50 billion to internal fraud every year. FIs are by no means immune to internal fraud, especially smaller community FIs. Community FIs generally have multiple locations but have no ties to larger multinational FIs. This independence allows community FIs to lend directly to individuals in the community, enriching the cities and towns in which they reside. However, this independence is also a liability, as larger FIs have higher measures of oversight and insurance in their day-to-day operations. It has become increasingly harder to implement proper preventative internal controls in community FIs to respond to the ever emerging risk due to the resources available. This makes it even more important to have “back end” detective controls like an internal audit function to help identify error and fraud. Some fraud can be defeated before it occurs if employees know they are being audited on a frequent basis.  

Financial Institution Fraud

Financial institutions’ dependence on currency means the industry is exponentially vulnerable to fraud attacks. Community FIs, in particular, must be extremely vigilant, as common internal fraud, such as real estate and loan fraud, cost FIs an average of $192,000 in losses per case without considering the reputation risk impact. If any signs of potential fraud are observed, including missing source documents, payees on checks that don’t match entries in ledgers, or any signs of alteration in source documents, act with urgency. There may still be time to save tens of thousands of dollars in fraud expense and unlimited amount of costs when it comes to the reputation risk impact of an institution in the news involved in a fraud case.  

If your community FI has not had a risk assessment for potential fraud risks, you could be sitting on a potential time bomb. Encountering just a few occurrences of fraud and the reputation impact could easily impact your capital ratios of your FI to the point of closing its doors. Be intentional and proactive in your efforts to safeguard your financial institution.  Contact Larry Brown at VonLehman CPA & Advisory Firm to take your first steps towards the protection of your financial institution. We will work with your team to quickly determine and respond to the enterprise wide risk of your institution and ensure that your FI is free from potentially hazardous internal and external fraud.