Memento - Check Fraud Whitepaper


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WHITE PAPER

Check Fraud Why current solutions fail to address this costly and growing fraud problem —and what you can do about it.

Take a new approach to a perennial problem

Check fraud continues to trigger major losses at banks—and it’s growing. This Memento Check Fraud White Paper takes a close look at the reasons why current solutions are unable to address this unsolved problem. And it highlights Memento Check Fraud, a new approach to ending check fraud—one that’s more accurate, efficient, and able to address the full scope of this costly problem. Find out why check fraud doesn’t have to be a cost of doing business anymore.

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Table of Contents Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SHORTCOMINGS OF CURRENT SOLUTIONS. . . . . . . . . . . . . . . . . 5 AN OLD PROBLEM REQUIRES A NEW APPROACH . . . . . . . . . . . 10 THE VALUE OF ADDRESSING CHECK FRAUD. . . . . . . . . . . . . . . 14

WHITE PAPER / Check Fraud

introduction

It’s Time to Put Check Fraud on Permanent Hold Current fraud detection solutions fail to address the unique challenges posed by check fraud 1—a costly problem that has been around for decades, but remains unsolved. Banks and credit unions that employ check fraud detection solutions know their challenges and shortcomings all too well. Inaccurate detection analytics yield a large number of alerts, mostly false positives. Financial institutions committed to reducing check fraud losses have no choice but to review these alerts in a short time period, an approach that requires large, expensive teams of fraud analysts. For each fraud analyst, the alert disposition process means inefficient, day-afterday drudgery—pull check images, review transaction history, understand account risk by logging into and out of several systems. And all of these steps have to be accomplished in a pressure-packed few seconds or minutes per alert. With fraud analysts focused on individual items, banks rarely have the time or attention to understand and address known issues, like cross-channel fraud and collusive crime ring activity across multiple accounts. In fact, many institutions are doing little more than a completely manual review of checks, waiting for a better approach before they invest in a check fraud solution. Meanwhile, check fraud is growing by 5% every year, while check volumes are declining by 4.1%.

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Comprising the three major areas of check fraud—deposit fraud, “on us” fraud, and check kiting.

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Take a new approach to solving this perennial problem The time is right for a new and more effective alternative for detecting and stopping check fraud. Memento Check Fraud brings powerful capabilities to bear on the challenge of check fraud:

advanced analytics to reduce false positives a dramatically improved interface for rapid alert disposition r ich, aggregated account and transaction data to improve decision-making f orensic research tools to gain a comprehensive understanding of the fraud event

Later in this Memento Check Fraud White Paper, we’ll explore how this new approach helps institutions find more check fraud, more accurately, and more efficiently than current solutions. Make solving check fraud an urgent priority Despite the severity of the check fraud problem and related losses, a palpable sense of malaise characterizes the response of many financial institutions. Perhaps they assume that the declining popularity of checks will take care of the problem. In fact, check fraud is growing even as check volumes decline. Collusive gangs are behind new, more elaborate check fraud schemes that generate even larger losses. And check fraud is often used as one element in broader, crosschannel fraud schemes. The bottom line? Check fraud remains in the top three loss areas for most banks and credit unions. It’s a damaging, ongoing fraud challenge, one that causes record losses that continue to grow annually. In the latest available comprehensive survey of U.S. banks alone, check fraud resulted in over $1 billion in losses.2 Many financial institutions treat check fraud as a cost of doing business. Why? Because a new approach to systematically solving check fraud has not emerged in decades.

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2009 ABA Deposit Account Fraud Survey

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SHORTCOMINGS OF CURRENT SOLUTIONS

Current approaches to fighting check fraud have major shortcomings that allow check fraud to continue—and grow. While these solutions may catch instances of check fraud, they are by no means efficient or comprehensive. Ineffective, partial solutions for check fraud keep financial institutions and their customers vulnerable, and overlook new check fraud schemes, including collusive crime rings. Here we take a look at some of the weaknesses in current solutions that have enabled check fraud to flourish and losses to grow. Despite years of investment in fraud solutions, checks remain a favorite vehicle for fraudsters intent on stealing from financial institutions. As stated earlier, U.S. banks lose over $1 billion annually to check fraud, and other industry estimates put the amount as high as $15 billion. Regardless of the precise total, the trend is clear— losses are growing 5 percent per year. And that’s just the beginning. If check fraud is such a well-known and damaging problem—why hasn’t it been more effectively addressed? There are many reasons. Check fraud is a common, relatively simple type of fraud that doesn’t take an advanced degree in mathematics to perpetrate. The volume and sophistication of check fraud incidents is on the rise, while investments in solutions (and their capabilities) have not kept pace. And while more and more financial institutions are affected, poor categorization and accounting of check fraud-related losses mask the true extent of the problem, and suppress investment in addressing it. Current check fraud solutions aren’t doing enough But beyond these issues lurks one obvious point. Current solutions for combating check fraud were built in an earlier era, and are not capable of addressing this considerable challenge. They force financial institutions to combine rudimentary analytic techniques with large teams of fraud analysts, who review thousands of alerts inefficiently, searching for fraudulent checks. This manpower-intensive and timeconsuming approach makes combating check fraud an expensive proposition. It also frustrates analysts, who must disposition hundreds of alerts quickly, every day—but often lack the tools necessary to get a comprehensive understanding of an account and evidence of fraud. After all, schemes are often larger than simply one item. They can span multiple channels, payment methods and accounts. So analysts need a broad view, as well as more powerful forensic research capabilities.

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In short, if current solutions for protecting financial institutions from check fraud were doing their job, the problem would be under control, and wouldn’t be growing. But existing solutions fall short in critical ways: Sub-optimal detection: Inaccurate, inflexible solutions produce high false positive rates Legacy solutions fail to accurately identify fraudulent checks. As a result, high ratios of false positives to actionable alerts have become the norm, requiring large, expensive teams of analysts to review the alerts looking for fraudulent items. Furthermore, wading through high volumes of false positives can waste hours of an analyst’s day. Preoccupied by low-value tasks, analysts rarely have time to focus on deeper and broader analysis of the alerts that really matter—those that indicate high-risk losses, and those transactions that might be part of collusive counterfeit check schemes. Consider a bank that has implemented a legacy check fraud solution that typically produces 1,000 deposit fraud alerts per day. The bank’s goal is to review and act on the alerts within a 4-hour period to meet its operational standards and customer service goals. With a fraud analyst typically able to disposition about 10-12 alerts per hour, the bank would have to employ 20 to 25 fraud analysts to work through a day’s alert workload. At a cost of $75,000 per analyst, alert review and disposition would cost the bank more than $1.5 million per year in manpower alone. If annual check fraud losses for the institution are less than $1.5 million, it is very likely that the bank would simply accept the losses as a cost of doing business, leaving itself exposed to larger fraud events that could destroy its reputation and more. Fraud also evolves quickly, so any solution must be flexible, and capable of quickly adapting to ever-evolving fraud schemes. But current check fraud systems provide very little business user control over fraud detection—from simple tasks (i.e., adjusting thresholds on deposited items) to implementing new scenarios to thwart emerging schemes. This inflexible approach leaves control of the system in the hands of outside vendors and/or IT departments, resulting in detection solutions that are slow to evolve and expensive to adjust. Lack of control compounds the inaccuracy of current solutions, and results in even more false positives for review.

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Inefficiency: Alert disposition consumes too much time and energy On the surface, check fraud alert disposition is a well-defined process —analysts review alerts on check items and, based on research and judgment, make a decision to either pay, hold, or return the item being reviewed. But this decision must be made under significant time pressure. Given the high volume of alerts assigned to them, analysts usually have no more than a few minutes to make a pay/no pay decision. And in each case, analysts feel the pressure of making trade-offs between two choices—accept a fraudulent item and the bank takes a loss, or stop a legitimate item and suffer the wrath of an irate customer. With legacy check fraud detection systems, alert disposition is a slow, manual, error-prone process where analysts often have to make quick decisions based on incomplete information and analysis. Every second counts as analysts assemble the right information and make an appropriate pay/no-pay decision. It’s a constant challenge to clear the alert queue in a timely manner. Sometimes, banks will attempt to reduce analyst queues and workload by filtering the results produced by their check fraud detection applications. Even so, they still face a basic challenge—it takes far too long to disposition an item. Analysts spend too much time performing repetitive, administrative tasks and fighting fraud the hard way—via time-consuming juggling of data from multiple systems, and manually constructing the right context for evaluating an alert. They lack the tools to perform highvalue forensic research that can identify fraud completely. With only so many hours in the day available for alert disposition, bleary-eyed analysts work their assigned queues only until their primary (and regulatory) responsibilities are complete and the very highest priority items are cleared. Inevitably, fraud slips through the fingers of the time-constrained analysts. Meanwhile, loss-prevention managers must wrestle with improving analyst productivity and keeping turnover under control.

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Myopia: Limited systems fail to see the full scope of check fraud With their emphasis on items, current fraud-detection solutions often fail to see the full scope of the check fraud problem, which can encompass interconnected accounts, cross-channel activity, and collusive crime rings. With time at a premium, fraud analysts focus on the research necessary to disposition individual items, such as researching the item against a few key systems and limited data sources. They often miss opportunities to stop larger schemes involving high-risk customers and multiple accounts. And because existing solutions are so focused on check transactions, analysts remain blind to leveraged and complex fraud. If current methods of finding check fraud resemble the proverbial hunt for a needle in a haystack, they’re not even looking at all the haystacks. Consider the common case of an analyst working on an alert corresponding to a suspicious deposit on a new account. The analyst may research the item, place a hold on the deposit, and might even decide to recommend that the account be closed. What the analyst would easily miss is that this new account is one of a group of new accounts operated by a crime ring—opened online, linked by a common IP address used during the account opening process, and all nurtured to be used eventually as the vehicle for committing deposit fraud. Legacy solutions have no ability to include the risk of these linkages in their analysis, and would miss the fact that a series of suspiciously timed deposits across all of the accounts in question should be alerted as the start of a larger, leveraged, deposit account scheme. Check fraud is on the rise Check fraud isn’t going away, despite lower check volumes. It’s growing. Now is the time to look beyond current solutions and their obvious shortcomings. New approaches enable major improvements in accurate detection of check fraud— and dispel the notion that fighting check fraud has to be a time consuming, laborintensive, expensive effort. Check fraud and its associated losses shouldn’t be considered a cost of doing business. This perennial problem shouldn’t require small armies of analysts to keep the problem under control. It shouldn’t be one of your institution’s top loss areas. And check fraud certainly shouldn’t be allowed to keep growing.

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CHECK FRAUD STORIES

The losses vary. The schemes differ. But the bottom line is clear— check fraud is alive and well, and generating significant losses for institutions of all sizes, from small institutions combating new account fraud to large institutions with record “on us” losses. Here is just a sampling of recent check fraud stories in the news.

Man Charged with $7 Million Check Fraud

Developer Faces up to 8 Years in Check Fraud

The former head of a Bordentown, NJ car dealership was arrested yesterday on a federal indictment for allegedly defrauding area banks out of more than $7 million as part of a check kiting scheme, according to the U.S. Attorney’s Office.  (Trenton Times)

A jury Tuesday convicted the owner of a now-defunct Indianapolis real estate development company of kiting a $500,000 check to meet payroll. Christopher P. White, 52, the founder of Premier Properties USA, faced felony charges of check fraud, theft and fraud on a financial institution. The Marion Superior Court jury returned guilty verdicts on all counts after deliberating two hours. (Indianapolis Star)

Gang Members Among Arrests in Check-Cashing Scheme Depositing counterfeit checks and withdrawing the cash before banks discover they are fake is a common crime that happens several times a day in San Diego County. But having a street gang behind a conspiracy that caused a credit union to lose $500,000 could be a first in state history. State and federal law enforcement officials made that announcement yesterday morning with the arrests of 40 people in the check-cashing scheme, including some active members of the military. Twenty more people are being sought. Checks ranged from several thousand to tens of thousands of dollars, and the account holder would receive a commission of several hundred dollars. (Union Tribune) Montreal-Area Woman Charged in Bank-Fraud Scheme A 29-year-old Montreal-area woman faces 20 fraud-related charges in connection with a series of frauds committed at Ottawa-area banks last year. The suspect used aliases to open accounts and secure loans, police said. Police allege the suspect also wrote fraudulent cheques and stole the identities of three victims. The banks lost more than $175,000 in these frauds, police said. (Ottawa Citizen)

Maryland Man Gets 4 Years for Stolen Check Scheme The U.S. Attorney’s Office says a Silver Spring man has been sentenced to four years in prison for a nearly $300,000 stolen check scheme. U.S. Attorney Rod J. Rosenstein says 28-year-old Amadu Jalloh was sentenced Monday on bank fraud and aggravated identity theft charges. Prosecutors say six fraudulent accounts were opened to cash the checks, which totaled $295,453. The scheme involved at least 22 victims from Maryland and New Jersey. (The Gazette) It’s important to note that these are just cases that were prosecuted. Many more never see the inside of a courtroom or wind up in the newspaper. For the latest check fraud stories, go to Memento’s Bank Fraud Forum: www.bankfraudforum.com.

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AN OLD PROBLEM REQUIRES A NEW APPROACH

At Memento, we examined and analyzed the challenges of check fraud, then decided that we needed to take a fresh approach that draws on our extensive experience in enterprise fraud management: advanced analytics, data management and integration, and innovative case management. The result is Memento Check Fraud a more effective, more accurate, and more automated approach to detecting and managing check fraud. To see how effective a check fraud solution is, take a close look at how it aids and streamlines the daily work of analysts. Here we highlight the strengths that Memento Check Fraud brings to your efforts to protect your institution, and your customers, from check fraud: Accurate detection: Generating fewer false positives and staying flexible in the face of change Memento Check Fraud reduces false positive rates by applying new analytical techniques—embodied with key insights into retail and commercial check writing activity—to a rich set of data sources, including account transaction and reference data. How does richer data enable better analytics and ultimately reduce false positive rates? Consider “on us” check fraud. A typical approach to detecting “on us” fraud identifies check items whose serial numbers are out of sequence. Unfortunately, the order in which “on us” checks are presented for clearing depends on a vast variety of factors, and it is very common for the serial numbers of presented checks to be out of sequence. The inevitable result is a large number of false positives. Which out of sequence checks really matter? Perhaps those that are way out of sequence, or those that carry a low probability of belonging to one of the several check books that the customer may concurrently be using. What constitutes way out of sequence? How many checkbooks is the customer currently using? There are no absolute answers to these questions. Coarse rules, such as flag all checks whose serial number is 10 more or 10 less than the sequence number of the last check presented are broad generalizations that do not account for vast and distinct variations in each customer’s payment patterns and checkwriting behavior. For example, small business commercial accounts behave very differently from high net-worth consumer accounts.

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Memento Check Fraud leverages account transaction and reference data to dynamically create and update account context for every single account in your bank— whether it is a new consumer account opened online, or a well-established, trusted commercial account. With this dynamically updated account context as a guide, determining whether the serial number of a newly presented check is way out of sequence is easier. For any given account, Memento Check Fraud is able to accurately predict the expected serial number of the next check presented across the entire set of currently active checkbooks. All presented checks are risk scored based on full account context, and loss prevention teams are easily able to set normalized risk score thresholds (based on risk appetite and size of fraud teams) above which check fraud alerts are queued for disposition. As with the “on us” fraud example described above, Memento Check Fraud incorporates advanced analytics and data management to limit false positives in the areas of deposit fraud and check kiting. Memento complements the accuracy of the solution analytics with an empowering user interface that enables loss prevention professionals to easily adjust detection parameters or create fraud scenarios based on new and emerging patterns. Analysts can also prioritize and filter alert output based on risk score, expected loss and/or the capacity of the team to disposition a given quantity of alerts.

An easy-to-use interface puts disparate information in context for more accurate disposition.

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The result is a sharper focus on key areas where check fraud is more likely, including new and other high-risk accounts. The combination of accurate, flexible analytics ensures your team is finding real fraud, not working false positives—all while maintaining the agility to quickly respond as fraud evolves. Efficiency: Working faster and smarter when managing alerts For a fraud analyst, alert disposition is a well-defined task—research each alert in the queue, then use expertise and good judgment to make a pay/no pay decision. Legacy check fraud solutions offer little to no help during the research process. The key steps in researching the alert—pulling a check image, viewing transaction history, and assessing account and customer risk—often leave analysts jumping from one application to another, all while working against the clock to quickly disposition the alert. Memento Check Fraud brings together all relevant information seamlessly in one easy-to-use, highly visual interface. It provides a simpler, better method of integrating diverse data and empowering better, faster, more informed decisions. Contextual information helps build a holistic understanding of a potential fraud situation. And our solution supports any forensic research the analyst may want to do—in one integrated application.

Memento Check Fraud empowers analysts to work more efficiently and effectively.

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Thanks to aggregated data, your analysts get more information, presented more intelligently. They can easily see the cause of the alert, and quickly drill down into details (e.g., check images, transaction and account maintenance history) and notes from other analysts who may have investigated the account in the past. Powerful tools help them organize, manage and automatically link alerts, working their queues more efficiently. When additional steps are required, analysts can use the templates and extensive workflow built into the solution to quickly create internal and external communications without rekeying data, then file and store all documents electronically. A Broad View of Fraud: Catching more sophisticated, cross-channel schemes Most financial institutions have a patchwork of existing systems that often don’t communicate with each other leading to single-channel, siloed data. The result? Incomplete fraud detection. Memento’s check fraud solution enables a broader look by aggregating data from multiple channels, providing a holistic view of fraud at the transaction, account, and customer levels. The solution spots fraud that current solutions miss, such as cross-channel and collusive schemes. It scans all channels and related data for the warning signs of fraud and alerts your analysts so they can take action. And analysts can quickly view related alerts for a more accurate assessment of risk and more complete resolution of an alerted item.

A simple, high-value approach Memento Check Fraud is based on the award-winning Memento Security enterprise fraud management platform—which is already being used by top institutions to fight key types of fraud, from employee fraud to new account fraud. Memento solutions are offered as a Managed Service, enabling your institution to benefit from the latest fraud-fighting capabilities—all at a predictable cost. Plus, this solution delivery model speeds implementation and lets you start detecting more check fraud, more accurately—reducing losses and generating new value.

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The Value of Addressing Check Fraud

Your institution already has some type of check fraud solution in place. Why change? As we’ve highlighted, Memento Check Fraud offers significant advances in accuracy, automation, and effectiveness. The benefit is clear—this advanced solution can reduce the losses associated with check fraud. But Memento Check Fraud does more than reduce losses via better detection. Here are just some of the ways that it brings value to your organization. ACCURACY

Accurate detection lowers losses. As a more accurate solution, Memento Check Fraud helps you catch more fraud, earlier—mitigating the risk of losses before they escalate. Accurate detection focuses analysts on finding more fraud. Reducing false positives means your analysts are focused on the task of finding fraud, not working false positives. Greater flexibility ensures accurate detection of new fraud activity. With innovative data management and direct user control over how the system detects fraud, your loss prevention units can react quickly to ever-changing fraud attacks—helping prevent losses from new or modified schemes. EFFICIENCY

Greater efficiency reduces costs. Memento Check Fraud streamlines the fraud-fighting process, allowing your institution to do more with less. Stop fighting check fraud by hiring more analysts. Start empowering your team to tackle check fraud and other pressing issues—more efficiently and effectively. A BROAD VIEW OF FRAUD

Detecting high-risk schemes protects you from major losses. Collusive fraud and cross-channel schemes are more likely to generate larger financial losses and reputational damage. The solution helps connect what appear to be isolated fraud events into broader schemes so you can shut them down sooner and more completely. Faster implementation means faster results Memento lets you implement a more effective check fraud solution in weeks, not months or years. Our intuitive, easy-to-use software means analysts are more productive immediately. And we provide exceptional training and responsive support. Our Managed Service approach ensures that your solution evolves as fraud changes, while keeping costs predictable over time.

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Now Is the Time to Make Check Fraud History Your institution shouldn’t tolerate rising check fraud losses. Start protecting your institution and its customers from financial losses and reputational damage with Memento Check Fraud, a more accurate, more effective way to solve the perennial challenge of check fraud. Check fraud isn’t going away—it’s growing, and migrating to other channels. Are you ready? With Memento Check Fraud, you will be.

Contact us at (877) 371-0673 ext. 146 or at [email protected] today to find out more about how we can help you detect and stop check fraud more accurately and efficiently.

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