Five Ways to Reduce the Risk of Payments Fraud

Each year, criminals steal billions of dollars through check, credit card and Automated Clearing House (ACH) fraud, ID theft and other forms of payment fraud. The crooks are getting smarter and they never stop plotting new ways to counter security measures.

The good news is that, at the same time, commercial banks and other financial services providers continue to launch new technologies to thwart these financial pirates. As a result, there are a number of strategies treasury managers can adopt to prevent criminals from raiding their companies’ coffers, particularly in two hot-spot areas: check and ACH fraud.

The strategies recommended below aren’t especially new, but some treasury departments have been slow to embrace them. Unfortunately, the classic psychology of “it won’t happen to me” has traditionally prevailed at many firms. Today, however, treasury managers need to realize that fraud is prevalent and prevention is cheaper than prosecution, which usually doesn’t recover lost cash. Simply put, fraud prevention must become a regular part of everyday treasury operations.

Here are five ways you can help transform your treasury department into a proactive, fraud-fighting machine:

1. Reconcile Accounts Daily

One of treasury’s main tasks includes managing cash inflows and outflows. Therefore, begin your fraud prevention program with daily account reconciliation.

There are two reconciliation methods. Partial reconcilement is where banks provide you with detailed information of all items debited from your accounts, including check numbers, paid dates and dollar amounts. Full reconcilement matches paid checks against your check register information and provides you with detailed reporting. In both cases, banks aim to correct any errors or improperly posted items before clients do.

The best way to receive this data is electronically, via direct data transmission or a Web site, so you can upload this information directly to your payables system. By automating this process, you’ll benefit from reduced man-hours spent on reconciliation, improved audit control, a time-saving interface to accounts payable and a tool for addressing unauthorized payments.

2. Use Positive Pay for Checks

Full bank account reconciliation also should include positive pay reconciliation, which enables your bank to identify authorized payments it should accept and unauthorized payments that require further scrutiny.

With positive pay, the bank matches check serial numbers and dollar amounts presented for payment against a company-provided issue file of checks written. (The company uploads this data to the bank at or before the time of distribution). The bank automatically identifies exception items and presents you with a report of these items, upon which you can make pay/no pay decisions.

For your convenience, some banks can transmit exception reports via voice, wireless or e-mail communication. Also, consider incorporating imaging technology with positive pay so you can view items in question and make appropriate pay/return decisions.

Payee positive pay goes a step further by automatically identifying checks with altered payee information. The bank compares characters on the item’s payee line with the same characters in a client’s check issue file. If the characters don’t match, the bank generates an exception item for your review and disposition, thus providing an additional layer of protection.

As part of your positive pay service, establish a maximum dollar limit on check payments. This way, you can identify checks exceeding the limit as exception items that need to be reviewed.

3. Adopt Positive Pay for ACH Payments, too

With the volume of anonymous, computer-assisted ACH fraud growing, banks now offer similar reconciliation services for electronic transactions. For instance, treasury managers can transmit to their bank a list of trading partners authorized to initiate ACH transactions against their account(s). The bank matches the identities of those attempting to credit or debit your company’s accounts against this list and kicks out exceptions for your review.

Fast action is particularly important in the corporate ACH environment, where you often have only 24 hours to identify and report fraud.

4. Keep Collection and Disbursement Duties Separate

Another fraud prevention strategy is to develop well-defined internal processes that separate major financial duties. In other words, no one person should be able to originate, approve and reconcile payments. This is important because a company’s own employees account for two-thirds of corporate fraud.

Thus, a corollary to this strategy is: Do all you can to hire dependable people. This includes performing thorough background checks on potential employees, including a credit report review. People who are bad with their own money tend to be bad with a company’s money.

5. Block Transactions Against Certain Accounts

Finally, ask your bank to block all payment transactions against accounts that you never want debited (e.g., payroll disbursement accounts). This strategy, effective against unauthorized ACH debit and check transactions, is cheaper than adding positive pay protection to those particular accounts. Additionally, you should employ ACH blocks on all non-ACH accounts.