FINANCIAL MANAGEMENT/Banking on security
Today government bank accounts are under attack from an unprecedented number of sources. Financial managers are finding that protecting against internal and external crime to reduce exposure to fraud losses is critical. And, as criminals become increasingly sophisticated, the tools used to protect bank accounts must keep pace with technological advances.
The two most common types of payment fraud are check and automated clearinghouse (ACH). While checks as a form of payment are declining, many forms of electronic payments are growing at double-digit rates, according to a study conducted by the Federal Reserve Bank Retail Payments Office in 2004. The speed, reliability and confidentiality of electronic payments are helping drive the shift in payment patterns, yet the advances have a downside.
Technology, for instance, has brought desktop publishing, high-quality scanning devices, “image scraping,” which allows criminals to capture government agency logos from Web sites, and counterfeit identification. Also, financial institutions now can exchange images of checks instead of physical checks, which can defeat physical security features.
Checks, however, remain the most widely used payment method, as well as the most frequent subject of fraud. Meanwhile, recent changes in the Uniform Commercial Code have banks and customers sharing responsibility for losses, which means government organizations could be liable.
Types of check fraud include counterfeit checks, altered checks, unauthorized drafts and stolen checks. To prevent check fraud, organizations should:
Adopt strict internal controls
According to the FBI, the majority of fraud continues to be committed by employees who exploit breakdowns in an organization’s internal controls. Effectively using internal controls is the first and best defense. Segregation of disbursement and reconciliation duties, and dual control over check stock are just a few examples.
Promptly reconcile accounts
Account activity should be reviewed daily, and statements should be reconciled as soon as they are received.
Take advantage of bank products
A strong partnership with a financial institution is a key defense. Banks offer several products, including positive pay account reconciliation and paper debit block.
Each year, more organizations are adopting automated clearinghouse (ACH) transactions. However, as ACH transactions continue to increase, organizations are facing a new payment scam: ACH debit fraud. Types of ACH fraud include unauthorized ACH debit and credit transactions, and duplicate ACH transactions. ACH rules require that unauthorized ACH transactions attributed to an account be returned within 24 hours, making the recovery of funds easier.
As with check fraud, an organization should separate disbursement and reconciliation duties, and promptly reconcile accounts. Local governments also can use bank products, including ACH block, ACH filter and ACH positive pay. Other options include using controlled disbursement accounts, migrating payroll functions from check-based systems to direct deposit and payroll card-based systems, and increasing use of purchasing cards for small value payments and other electronic payment methods for large value payments.
Sidden is vice president of government banking for Kansas City, Mo.-based UMVB Bank. Simmons is president and CEO of Dallas-based SWACHA.
