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Don’t Give Fraud the Green Light Mitigating Fraud in Your Credit Union 2012 NCUA Credit Union Workshops.

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Presentation on theme: "Don’t Give Fraud the Green Light Mitigating Fraud in Your Credit Union 2012 NCUA Credit Union Workshops."— Presentation transcript:

1 Don’t Give Fraud the Green Light Mitigating Fraud in Your Credit Union 2012 NCUA Credit Union Workshops

2 Agenda Items Fraud Losses Frequency & Severity Mitigation Steps Managing Fraud Case Studies Best Practices Resources Credit Union Protection Resource Center Risk Management Consultants

3 Determine Your Credit Union’s Risk Appetite Fraud Losses – Identify, Measure & Control Claims Frequency & Severity Basic Loss Mitigation Measure Exposure Loss Control Techniques

4 Fraud Losses – Frequency & Severity Incurred Losses, Claim Count Claim Dollars

5 Basic Loss Mitigation Steps Recognize Exposure Determine Impact, Frequency & Severity 5 Techniques 1 Identify 2 Measure 3 Control

6 Measure Risk/Exposure Matrix High Frequency Low Severity Plastic card losses Deposit losses High Frequency High Severity Subprime lending Low Frequency Low Severity Teller shortages Courtesy pay Low Frequency High Severity Employee dishonesty Wire transfer fraud Severity Frequency

7 AVOID Avoid the exposure Ex: Only perform in person wire transfer requests LOSS PREVENTION Prevent and/or reduce frequency Ex: Well trained employees and good written procedures LOSS REDUCTION Reduce severity ($ loss) Ex: Place a dollar limit on non face to face requests SEGREGATION Segregate or spread exposure Ex: Have more than one employee involved in the process TRANSFER Transfer some of the risk to another entity Ex: Buying insurance Loss Control Techniques

8 High Frequency Low Severity LOSS PREVENTION High Frequency High Severity AVOID Low Frequency Low Severity RETAIN or ASSUME Low Frequency High Severity TRANSFER or REDUCTION Severity Frequency

9 Well Trained Employees Are Critical Managing Fraud Wire Transfers Fraudulent Deposits Lending Employee Dishonesty

10 Brainstorming Case study break out groups –Wire Transfer –Fraudulent Deposit –Lending –Employee Dishonesty Create a role play situation to combat fraud –From your group; choose a note taker, narrator, appropriate Credit Union employee(s) and a Credit Union member if applicable to case study

11 Wire Transfers

12 Wire Transfer Case Study $183,000 loss December 8, 2010: Fraudster contacted credit union by phone to request $183,000 advance against member’s Home Equity Line of Credit (HELOC) –Fraudster was able to answer basic security questions (member name, address, social security number, birth date, etc.) –Funds transferred to deposit account December 8, 2010: Signed fax request received to wire $183,000 to Sumitomo Bank in Japan –Verified signature Performed callback verification to phone number on member’s account but number was changed shortly before the wire transfer request

13 Wire Transfer Case Study Discussion

14 Wire Transfer Loss Controls Prohibit phone requests for advances against member HELOCs A monetary threshold could be established for this purpose

15 Wire Transfer Loss Controls Adopt a written wire transfer agreement with member specifying agreed upon security procedure for verifying the authenticity of wire requests Allows the credit union to shift liability for unauthorized wires to the member if the member’s negligence contributed to the compromise of the security procedure provided: -The security procedure is a commercially reasonable security procedure; -The credit union proves it acted in good faith; and -In compliance with the security procedure set forth in the wire transfer agreement

16 Wire Transfer Loss Controls In the absence of a written wire transfer agreement, require members to request large dollar wires in-person at a branch office A monetary threshold could be established for this purpose Callback verification to member using phone number on record Check member’s account to confirm phone number was not changed within last 30 days Use strong out-of-wallet questions to confirm member’s identity during callback

17 Wire Transfer Loss Controls Callback verifications are losing their effectiveness as a means of verifying the authenticity of wire transfer requests –Fraudsters are controlling callback phone numbers Phone hijacking Contacting credit union to have member phone number changed –Fraudsters build profiles on their victims to answer even the strongest security questions

18 Wire/HELOC Fraud In the News… January 25, 2011 article from CNNMoney.com Tobechi Onwuhara stole a confirmed $44 million in less than three years –FBI believes the total may be anywhere from $80 million to $100 million –“He preferred credit union HELOCs: They were “soft targets” Source: CNNMoney.com

19 Fraudulent Deposits

20 Fraudulent Deposit Case Study $20,700 loss –New account fraud Account details –Opened May 24, 2011 (savings and checking) –Debit card issued Loss details –Member deposited 7 checks totaling $22,000 at foreign ATMs during the period of June , 2011 Date of DepositCheck Amount 6/9/2011$900 6/10/2011$2,500 6/13/2011$3,100 6/13/2011$3,000 6/15/2011$4,000 6/16/2011$3,200 6/16/2011$4,000

21 Fraudulent Deposit Case Study No holds placed on deposits Funds withdrawn via ATMs and in-person at credit union shared branches Checks returned unpaid – “Account Closed”

22 Fraudulent Deposit Discussion

23 Fraudulent Deposit Loss Controls New member identification –Government issued photo ID –Should not rely solely on photo ID as a means to verify a new member’s identity Fake ID kits

24 Fraudulent Deposit Loss Controls Screening tools for new accounts –Assists in verifying identity of new members Identity verification/fraud service (e.g., Early Warning’s IDENTITY CHEK and FIS’ FraudFinder) Verifies social security number and address

25 Fraudulent Deposit Loss Controls –FIS ChexSystems Identifies account abuse reported by financial institutions Use for approving checking accounts and ATM/debit cards –Credit Bureau Report Evaluate creditworthiness in approving checking accounts and ATM/debit cards Assists in identifying “high-risk” members Assists in verifying new member’s identity Signature card should notify the new member a credit report may be obtained

26 Fraudulent Deposit Loss Controls Most fraudulent deposit schemes are perpetrated on newer accounts within the first 6 to 12 months Focus check holds on newer accounts for the first 6 months or until account becomes established –Reg CC allows extended holds on new accounts during the first 30 days of account opening –Use regular and/or extended holds after new account period expires Flag new accounts on the system –Assists tellers in identifying new accounts

27 Fraudulent Deposit Loss Controls Use longer holds on deposits to savings accounts –Subject to state law –Subject to Regulation Ds transfer limitations for savings accounts Automatic holds on ATM deposits –2 business day holds on deposits to proprietary ATMs –5 business day holds on deposits to nonproprietary ATMs Shared branching –Establish probationary period before new members can use shared branching –Impose check holds on deposits made at shared branches in accordance with the shared branch network’s rules

28 Lending

29 Lending Case Study A credit union receives an inquiry call on membership eligibility (call received through the call center) –Potential member asks the following questions: What documentation is required for opening a new account? Does the credit union verify ChexSystems on new accounts? Is there a waiting period for obtaining a loan?

30 Lending Case Study Potential member then visits a branch office to open an account Credit union employee obtains credit report, completes an Office of Foreign Asset Control (OFAC) check and opens the account The member immediately applies for an unsecured loan –The beacon score on the credit report is 737 To provide excellent member service, the credit union uses auto approval for all consumer lending. (They credit union uses risk-based pricing)

31 Lending Case Study The loan is approved and the member wires the loan proceeds to an account they control at another financial institution No loan payments are received and the unsecured loan becomes delinquent The collection staff identifies that the credit report was for a deceased individual The credit union charges-off the unsecured loan

32 Lending Discussion

33 Lending Loss Controls  Alert all employees with the ability to open accounts of suspicious inquiry calls  Ask questions of members opening accounts in person without being too invasive  Look for identity theft red flags contained in the credit bureau reports  Ensure no credit freeze is in place  Scrutinize new loan request immediately following account opening

34 Lending Loss Controls  Review a sample of new loan requests  Inspect auto approval loans for signs of fraudulent activity  Multiple loans using the same or similar names  Duplicate social security numbers on application  Misspellings or inaccurate information (ex. Street instead of Road)  Ensure those processing wires are looking at the source of funds  Watch for first payment default loans

35 Employee Dishonesty

36 Employee Dishonesty Case Study The credit union Supervisory Committee Chairman notifies the Branch Manager that he will be in the credit union at 8 AM the next day to conduct a quarterly verification of all cash supplies. A $30,000 cash shortage is discovered when counting the vault cash

37 Employee Dishonesty Case Study The Branch Manager states: –Cash deliveries are accepted and bulk verification of sealed plastic bags are performed by her (the branch manager) –Dual control is used when verifying cash deliveries (counting individual bills) –Vault cash is under dual control (two employees are required to be present when vault cash is accessed)

38 Employee Dishonesty Discussion

39  Implement forced dual control for receipt of currency shipments  Implement forced dual control of vault  Ensure when cash is counted both employees remain with the cash at all times  All “surprise” cash audits should be a surprise  The auditor should count the cash Employee Dishonesty Loss Controls

40  Mandate employee time-off  Annual complete and comprehensive fraud policy  Provide fraud training for employees and volunteers  Emphasize fraud prevention and a comfortable whistleblower policy  Perform Bondability verification and background checks Employee Dishonesty Loss Controls

41 Session Summary Credit unions of all asset sizes are exposed Loss controls must be implemented Fraud prevention can help your credit union avoid/reduce losses Powerful temptation for some… especially in today’s economy It just doesn’t just happen to other credit unions, all are at risk

42 CUNA Mutual Group Resources Risk Management Consultants Credit Union Protection Resource –2012 Webinar Series & on-demand webinars –Risk Alerts –On-line self assessments

43 Risk Management Consultants NM OK TX AR LA KY VA TN NC MS AL GA SC FL CA NV AZ MO UT CO KS NE SD ND IA MN WY MT ID OH IN IL MI WI ME NH VT MA CT NJ MD PA WV D.C. RI DE AK HI OR WA NY Central – Davidson - WI Eckes – MN Otsuka – IL Stolzer – MO Roossien-MI East – Bouvier – MA Open – MD Lovingood – NC Molina – NJ Petrone – ME Pilch – PA South – McDuffie – FL McNeary – TX (Houston) Law – GA West – Davis – CA (Central) Terauchi – CA – (Northern) Bowman – UT Conner - OR Regional Managers - Joette Colletts – PA Larry Forwood - CA

44 Risk Management Services Robbery Burglary Hazard Liability ATM Security Business Continuity Fiduciary Liability Forgery/Fraudulent Deposit Due Diligence Plastic Cards Employment Practices E-Commerce Data & Network Security Funds Transfer ACH Lending (all areas) Internal Dishonesty Internal Controls

45 Thank You Credit Union Protection Risk Management CUNA Mutual Group

46 This presentation was created by the CUNA Mutual Group based on our experience in the credit union and insurance market. It is intended to be used only as a guide, not as legal advice. Any examples provided have been simplified to give you an overview of the importance of selecting appropriate coverage limits, insuring- to-value and implementing loss prevention techniques. No coverage is provided by this presentation/ publication, nor does it replace any provisions of any insurance policy or bond. Coverage may vary or may not be available in some states. Please read the actual policy for specific coverage, terms, conditions, and exclusions. For general information, please contact our company Sales Executive. Insurance products offered to credit unions, including the Fidelity Bond, is underwritten by CUMIS Insurance Society, Inc., a member of CUNA Mutual Group. CUNA Mutual Group Proprietary and Confidential. Further Reproduction, Adaptation, or Distribution Prohibited. © CUNA Mutual Group, All Rights Reserved. CUP-FRAUD-0112


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