Bank Fraud Protection

By Lucia Adeola, Senait Tekie, Aminata Kargbo, Kelsey Wiegand, Terry Kim, Kerri Farrell

March 16, 2020

9 min read

What is Bank Fraud

Bank fraud is a type of white-collar crime generally charged at the federal level due to the victims being national financial institutions. It is a criminal charge that has perpetrators facing many penalties and several years in prison.

To understand what exactly is bank fraud, we must first define it. Bank fraud is defined as using methods such as deceit and forgery to steal money & assets from a bank, financial institutions such as credit unions, Federal Reserve banks, the FDIC, mortgage lending agencies, and other loan agencies, or bank's customers.

The goal of the fraudster is to defraud the financial institution by collecting assets, money, securities, credits, and or properties from the institution. This is achieved through forgery and using false information or identity theft. The laws regarding bank fraud are fairly broad and varies from jurisdiction, however the underlying factor is that bank fraud must involve some kind of scheme as opposed to bank robbery or bank theft.

Types of Bank Fraud

There are many different types of bank fraud, but the most common types are as listed.

Common Types of Bank Fraud Include

Forgery: When an individual changes or alters the name, amount, or information on the face of a check.
Fraudulent loans: Use of false information or pretense to obtain a loan or loan application.
Bank impersonation: When a person creates a fake financial institution or website with the aim to lure people to depositing money.
Stolen checks: When a person opens a fake bank account and deposits money into this fake bank account. It generally occurs with the employees of a financial institution using customers information to create fake bank accounts, since they have access to such.
Internet bank fraud: Similar to bank impersonation, creating a fake website with the goal of luring people to deposit money.

What is Bank Fraud Protection

Protecting public funds is a very high priority for all governments. The Uniform Commercial Code (UCC) sets and defines the tasks of counter-parties in business and banking transactions. The UCC states that, in some situations, liability and monetary loss in a fraudulent deal is divided between the counter-parties in a deal based on each party's due negligence and diligence. Subsequently, to decrease liability in the event of a fraudulent operation, it is vital to have appropriate control in place.

Advances in technology have deduct the effectiveness of traditional fraud protection methods and have even permitted new forms of fraud. For example, in the past, masses governments relied upon physical security qualities embedded in check stock to safeguard cheque frauds. These includes watermarks, unique colors, and graphical designs. Advanced replication technology and far-off deposit arrest have reduced the efficiency of these physical procedures to protect fraud.

The banking industry has established the following fraud protection tools:

Positive pay is a kind of account reconciliation service that is provided by the bank. In positive pay, a bank compares cheques that it receives for payment in contradiction of the record of the cheques dispensed by the Government. If the bank obtains a check that does not match the information (that is amount, check number, and date) in the Government's record, it identifies it as an omission item (i.e., a non-conforming positive pay item). Payee positive pay is an improved positive pay service that entails the validation of the payee name in addition to authorizing the date, check number and amount.
ACH blocks and filters end any attempt by an outside entity to process an ACH transfer and eliminate funds from a checking account without previous authorization. ACH blocks prevent all payments from accounts. ACH filters also prevent disbursements that do not match a list of pre-authorized businesses or identification numbers.
ACH filters involve: (a) giving prior permission to certain approved business partners to draw upon the account. (b) creating an approval process for awaiting ACH transmissions. (c) setting maximum dollar limits on ACH debit transactions.
Reconciliation tools let governments excerpt information from their bank or have information sent from their bank that supports the Government in presenting the period-end reconciliation of bank accounts. The bank may also provide a tool that completes a full reconciliation of the account and makes detailed statements of reconciled items.
Intra-day access permits a government to see bank account transactions that occur numerous times throughout the business day. The information may be retrieved through online systems offered by the bank, as well as through other means including fax, email, and direct transmission of data from the bank to the Government's computer systems.
Universal Payment Identification Codes (UPIC) may be used instead of the Government's bank account numbers so that the Government's account numbers are not revealed.

Penalties of Bank Fraud

Bank fraud is a serious crime that is treated like many other federal offenses. Although exact penalties are different according to the case, factors such as the specific facts of the crime, how much money had been stolen, and the technique used, all play a role in sentencing defendants guilty of bank fraud. The U.S. Code § 1344 states that for all bank fraud cases, there is a maximum fine of $1,000,000 and/ or a prison sentence of up to 30 years. I will review a couple cases and their sentencing below.

Case 1: Beginning in 2005, Real Estate Agent, Timothy R. Bradley and Mortgage Broker, Martha E. Ednie joined forces and obtained fraudulent mortgage loans. The mortgage loans appeared to be more expensive to the banks making the loans but cheaper to the individuals interested in buying the homes. They attracted many customers by promising cash back at closing and excellent sources of rental income. Both parties were sentenced to 30 months in prison for ammassing $1.5 million in bank fraud.

Case 2: In April of 2005, Rosa E. Castrillon-Sanchez, of Puerto Rico, falsely claimed to be a beneficiary for a trust for a large amount of money that was frozen at a local Puerto Rico bank. With the help of a few individuals, Castrillon-Sanchez would ask that individuals provide her with a large sum of money or take out personal loans to assist in releasing the funds, promising full repayment once the trust was unfrozen. Castrillon-Sanchez convinced over 90 individuals to loan her over $5,000,000 in cash. Castrillon-Sanchez pled guilty on Dec. 13, 2013 and was sentenced to 159 months in prison, 3 years of supervised release and ordered to pay $5,000,000 in restitution to victims of her scheme

Who are the Usual Victims

Generally, anyone can fall victim to bank fraud. Sometimes, fraudsters will target certain demographic groups (such as the elderly or children), if they are easier to scam.

However, luckily for consumers, many banks will refund victims, depending on the circumstance.

Article: BBC News - Scam Victims to be Refunded by Banks

In this real-life example, an individual named Alex Luke was scammed, and lost over $200,000 from her bank account. Some of the money was traced back and retuned to Alex, but her bank, Santander, refused to refund all the money. But after two years of fighting, she got the bank to reimburse the rest of her money.

Video: 5 News - Scam Victims to be Refunded by Banks

In this example, one couple got a call from a scammer, pretending to be from their bank. The scammer then convinced them to hand over their bank account information. This is known as push payment fraud. Luckily for the couple, their bank reimbursed them.

Consumers who are not aware of certain scams, such as robocalls, may be more likely to fall victim to bank fraud. Therefore, it's important to take preventative measures to ensure the security and safety of ones savings.

Bank Fraud Prevention: Consumers

Although there is nothing that can 100% guarantee that one will not be a victim of bank fraud, there are many and plenty of precautionary measures that consumers can take in an effort to reduce the risk of becoming a victim of it.

Some things that consumers can do to help prevent becoming a victim of bank fraud is using strong and unique passwords as well as changing them periodically, enabling two-factor authentication, updating software, backing up your information regularly, checking your account activity regularly, using anti-virus protection software, firewalls, and spyware blockers, writing checks in blue/black ink, checking for secure connections, and being aware of your surroundings at ATMS. All of these precautionary measures will help consumers prevent the risk of becoming a victim of fraud.

Bank Fraud Prevention: Banks

Some of the most common forms of bank fraud include fraudulent uses of checks to obtain cash or other assets, check knitting, which is writing a check, knowing the account does not have sufficient funds to cover it, and taking advantage of the fact that the bank will provide the money anyway, forgery, where someone modifies a check before presenting it to the bank, or theft. These four methods of bank fraud are hard to catch, but can be prevented, which is why it is important that the bank and its employees are aware and trained.

Some ways to avoid these kinds of frauds is for banks to require multi-factor authentication in order to make sure transactions are true and the numbers are correct. The banks can also monitor all transactions; they can set daily limits for people to withdraw and they can try to avoid check knitting by double checking people’s accounts and make sure there is enough money in them before granting the extra cash. There are also new technologies that banks can use in order to make sure checks are legitimate before handing out cash in return.