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Cheque Fraud Partnering Session & Mitigating Fraud, Bank Offered Solutions Hosted by: Global Transaction Solutions June 23rd, 2007.

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Presentation on theme: "Cheque Fraud Partnering Session & Mitigating Fraud, Bank Offered Solutions Hosted by: Global Transaction Solutions June 23rd, 2007."— Presentation transcript:

1 Cheque Fraud Partnering Session & Mitigating Fraud, Bank Offered Solutions Hosted by: Global Transaction Solutions June 23rd, 2007.

2 CAUBO Fraud Prevention and Risk Management June 23rd, The Basics of Cash Management Cheque fraud prevention Mitigating Fraud, Bank Offered Solutions Questions & Answers Introductions & Agenda

3 CAUBO Fraud Prevention and Risk Management June 23rd, Cash Management Solutions Information & Control Solutions Enables your business to assign varying levels of online permissions and authorities to individual users and allow them to monitor and manage financial transactions in their current account, helping them to operate their business more efficiently and mitigate risk effectively Disbursement Solutions Enable your business to more efficiently manage corporate payments and increase control over the timing of payments Supplier Payments Payroll Money Flows Out Collection Solutions Provides your business with greater certainty around the timing of deposits and allows you to accelerate cash inflows through increased efficiencies & alternate payment options Money Flows In Customer payments Company

4 CAUBO Fraud Prevention and Risk Management June 23rd, What is Cheque Fraud? Fraud on the front Counterfeit - A fake cheque that has been completely reproduced or copied to resemble a legitimate or authentic cheque. Altered - An unauthorized change to an original and legitimate cheque, such as the payee, sum payable, and date or cheque number. The alterations are made prior to being presented for negotiation. Forged Drawer/Maker– The payer signature on the front of the cheque is not the legitimate signature (forged) of the account owner/signing officer. Fraud on the back Forged Endorsement - A forged payee signature on the reverse of the item (person cashing the cheque)

5 CAUBO Fraud Prevention and Risk Management June 23rd, The Eighties Fraud threat technically unsophisticated, unorganized and locally focused Fraud threat limited to credit cards and “bad” cheques Limited use of technology to detect and prevent fraud Limited budgets applied to fraud effort 2000… Fraudulent activity is controlled by organized criminal groups using highly sophisticated technology Fraud goes global All delivery channels and products subject to fraud The full fraud value chain is managed under the direction of a single executive Prevention/detection centralized Technology spend is culturally ingrained Benchmarking with leading US financial institutions Development of fraud detection model to target high risk transactions State of the art technology to detect fraud is deployed The Nineties Fraud threat becoming more sophisticated and organized criminal groups emerging in Canada Debit cards and ATMs become increasingly vulnerable Prevention and detection effort is regionalized in business silos with increased technology Evolution of Fraud

6 CAUBO Fraud Prevention and Risk Management June 23rd, Cheque Fraud Evolution Stolen cheque stock with forged signatures Counterfeit cheques Altered amounts/payees Forged and improper endorsements How cheques are compromised? Theft from the mail and couriers Internal employee theft or selling of account information Dumpster diving

7 CAUBO Fraud Prevention and Risk Management June 23rd, Responsibility for Prevention The Issuer The Receiver The Bank Cheque Fraud Detection Partnership

8 CAUBO Fraud Prevention and Risk Management June 23rd, The Numbers Individual items can be small to multi million. Growth rate is believed to be over 40% year over year. 62% of 1000 Canadian Corporations surveyed have experienced cheque fraud. * Cost to Canadian business is between $1B and $2B annually. * Per capita fraud in the GTA is approximately $41.00 per person – equivalent to US ratios. * One US study – company employees commit 82% of all fraud – 1/3 by management and 3 of 4 go undetected. * 1997 Nielsen Report

9 CAUBO Fraud Prevention and Risk Management June 23rd, Impact of Cheque Fraud in Canada 5,000 cheque fraud attempts annually totalling $300MM* Some frauds are over $1 million One RBC client had 10 incidents totalling >$2 million in 6 months Business cheques are a favourite target – acceptability As senior clients implement protective procedures, fraudsters move down market Northbound migration of cheque fraud techniques * Extrapolated from RBC experience

10 CAUBO Fraud Prevention and Risk Management June 23rd, What does cheque fraud mean to business clients ? Time/expense of investigations and risk mitigation Repeated reconciliation, Investigation, police report, tracing documents Costs per occurrence can run to 4- figures before the write-off Affidavits; new accounts required, new cheques to be printed Governance issues for larger clients Shareholder/board oversight for larger clients Expanded audit scope = longer time = higher fees

11 CAUBO Fraud Prevention and Risk Management June 23rd, Cheques issued Reconciliation is complicated Complicity investigation risks staff morale Risk to Vendor relationship Cheques deposited: Revenue risk: Reluctant to accept any cheque Loss risk: Bank may return cheque after fraudster obtains goods What does cheque fraud mean to business clients?

12 CAUBO Fraud Prevention and Risk Management June 23rd, How does Cheque Fraud work? Pick a bank… some weakness shown in the past, does not pursue police action Pick a company… good reputation = high acceptability Test the waters… Try a small cheque Full counterfeit Raise the amount Alter the payee Try some big ones…or a really big one

13 CAUBO Fraud Prevention and Risk Management June 23rd, Impact of Technology Scanner technology Excellent scanners at any computer store Printer technology High quality laser and inkjet printers Digital image enhancement software Photoshop © Barriers to entry Hardly any… price for scanner, printer, software together <$2,000

14 CAUBO Fraud Prevention and Risk Management June 23rd, Companies Segregated responsibilities Risk assessment Secure cheque stock, unissued and paid Separate accounts for high-value Maximize use of bank’s verification tools Otherwise, self-verify Bank Mitigation tools Positive Pay reconciliation tool Payee Name Match Self-verification tools Existing Web availability of both MICR-line and images High-volume MICR-line option Cheque Fraud Image Partnership

15 CAUBO Fraud Prevention and Risk Management June 23rd, National Fraud Detection Group (NFDG) NFDG is located in Toronto and operates 24/7 They look after the prevention, detection, and investigation of fraud for client card, cheques, online banking, and branch transactions. Look for unusual transaction activity on a client’s account.

16 CAUBO Fraud Prevention and Risk Management June 23rd, NFDG ~ Cheque Fraud Team Within NFDG, there is a department that specializes in Cheque Fraud. The Cheque Fraud department has 4 teams: Kiting, Altered, Counterfeit and Endorsements With use of system technologies, fraud detection rules, and the experience of each team member, they are responsible to detect and prevent losses due to fraudulent US and CDN RBC cheques. Detection may occur at point of presentment or after in form of a post review. Important to remember, NFDG will only see select items after it has been presented for payment.

17 CAUBO Fraud Prevention and Risk Management June 23rd, RBC Mitigating Risk Solutions Review Positive Pay Cheque Matching Payee Name Match Cheque Imaging Electronic Balance & Transaction Reporting Electronic Payments

18 CAUBO Fraud Prevention and Risk Management June 23rd, Positive Pay Cheque Matching Daily reconciliation of all cleared cheques is one of the best defences to protect against cheque fraud. Positive Pay is a reconciliation tool that shifts the onus for daily reconciliation to your financial institution. An input file of cheques needs to be sent to bank when cheques are issued. Any exception items need to be reviewed and decisioned on a daily basis. Some banks offer automatic returns on any exception items.

19 CAUBO Fraud Prevention and Risk Management June 23rd, Payee Name Match Payee Name Match helps provides the best possible protection against 'fraud on the face’ of negotiated cheques. Tighten Operational Risk Control Payee Name Match helps clients meet more stringent control and governance requirements often required by regulators*, auditors, etc. For US-owned firms, Sarbanes-Oxley is the regulatory driver. Similar Canadian legislation is expected in the near future.

20 CAUBO Fraud Prevention and Risk Management June 23rd, Payee Name Match Protect Vendor/Supplier Relationship We have seen in cases where Payee Name Match had identified the payee name fraud, and replacement cheques issued before the beneficiaries knew that the cheques had been stolen Save Time, Expense And Aggravation Handling an altered cheque becomes routine. Saves the time, expense, and aggravation of investigating an item after the fraudster received value or funds. Your current processes for MICR-line fraud detection (Positive Pay), in-house cheque reconciliation, and stop payments are unchanged.

21 CAUBO Fraud Prevention and Risk Management June 23rd, How does Payee Match work? Cheques must meet new CPA Guidelines and must be OCR- compliant. Customer sends Issued Item information to bank at time of issuance Payee Name and full Payee Address, as printed on the cheque The image is captured when the cheque is delivered into bank clearing. Optical Character Recognition (OCR) is used to digitize payee name and address The cheque information is compared to issued item information Exception cheques are presented for customer decisioning Items are “paid” if not decisioned option to “return” if not decisioned

22 CAUBO Fraud Prevention and Risk Management June 23rd, Payee Name Line Match

23 CAUBO Fraud Prevention and Risk Management June 23rd, Account Imaging Services With the implementation of the new CPA Standards, banks can now provide access to high quality digital images of items processed through your accounts. Access to images of cheques and deposits is convenient, saves time, allows you to provide better service to your customers, and can help minimize the risk associated with cheque fraud. Images also provides an economical option to long term cheque storage, and for business continuity purposes. Account Images can be delivered in the following formats: Daily access via online reporting system. Delivery via regularly scheduled CD Rom’s (monthly, bi-weekly, etc.). Daily access via downloaded image file (must have an image archive system to manage images).

24 CAUBO Fraud Prevention and Risk Management June 23rd, Balance Reporting Services Balance & Transactions Services can also be an effective way to help protect against cheque fraud. Often these tools are delivered via an Internet channel, and provide ongoing access to all activity through your bank accounts. Very often these tools have some type of built in export functionality to allow you to complete your own bank reconciliation on a daily basis. This is often the most cost effective way to complete a bank reconciliation as long as it can be completed every business day.

25 CAUBO Fraud Prevention and Risk Management June 23rd, Functionality Standard Internet Banking Dedicated Cash Management Platform Ability to assign user permissions NoYes Establish payment approval rules for multiple signing officers NoYes Export balance & transaction information to aid in automated reconciliation Possibly, but often very limited functionality Yes Reporting for accounts held at different financial institutions. NoYes Ability to add other services into platform (such as Wire Payments, etc, ACH Direct Deposits or Direct Payments) NoYes Internet Banking vs. Cash Management Platform

26 CAUBO Fraud Prevention and Risk Management June 23rd, Electronic Payments The best overall option available to protect yourself against cheque fraud is to move as many cheques to electronic payments as much as possible. An electronic payment system: Can be significantly more cost effective than cheque issuance. Can save time, speed up reconciliation, and provide better control over outgoing cash flows. We have seen some clients use an electronic payment system to negotiated better trade discounts with large suppliers because of their ability to pay on any specific date. Types of electronic payments: Financial EDI Payments (Corporate Payments) ACH Direct Deposits (Primarily Retail Payments in Canada, but can also be used for Corporate/Retail Payments into the US. Wire Payments

27 CAUBO Fraud Prevention and Risk Management June 23rd, Electronic Payment Solution ROYAL BANK OF CANADA 123 ANY TOWN ANY CITY Other Banks Single Payment File Remittance details sent to Receiver $$$$Payments$$$$ Trading Partners Accounting System

28 CAUBO Fraud Prevention and Risk Management June 23rd, Considerations when Implementing Electronic Payments Strategy Set Clear Goals about where you want to be with electronic payments in 6 months, 12 months, etc. Review existing controls/processes for cheque issuance and ensure they are replicated or enhanced with electronic payments. Develop marketing tools to gain buy-in from vendors, and determine who the tools will be sent to. Consider setting specific transaction limits on an individual vendor basis for added controls. Lock down access to fields of vendor database that hold bank account information, or segregate information for added controls. Convert cheques written to suppliers out of Province and to US destinations first.

29 CAUBO Fraud Prevention and Risk Management June 23rd, Questions?


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