Magazine article Security Management

Crimes of the Vault

Magazine article Security Management

Crimes of the Vault

Article excerpt


BANK FRAUD IS A TERM USED to describe a large and varied list of offenses, ranging from simple check forgeries to complex wire transfer schemes. But all these frauds have the same objective - to steal money from a financial institution.

Four of the five crimes commonly committed against banks involve fraud. The major categories of criminally instigated monetary losses to banks are robbery, credit card fraud, insider abuse, loan fraud, and check fraud. Not surprisingly, robbery receives the most attention from bank security departments and law enforcement agencies because of the physical danger involved. However, in terms of financial harm, robberies are on the bottom rung on the loss ladder.

Loss categories rank as follows:

* robbery - $60 million to $70 million

* credit card fraud - $1.2 billion

* inside abuse (defalcation) - $2.1 billion

* loan fraud - $6 billion to $7 billion

* check fraud - $7 billion to $10 billion These figures are industry estimates based on official reported figures and annual bank charge-off categories prorated nationally by asset size of the institutions.

As with any statistics, some people might argue with these figures. Certain crimes are clear-cut, such as robbery or credit card counterfeiting, while some are subject to interpretation. For example, a pattern of check losses may be a simple case of nonsufficient funds, a result of poor or inept bookkeeping, or deliberate check fraud.

The Bank Protection Act of 1968 (revised in 1972) placed the responsibility of security with each bank's board of directors and required all banks to have a security officer. The intent was to establish guidelines on security matters to promote security procedures and ensure loss prevention standards.

The act permitted banks to develop security plans to meet their own needs and internal structures. In many cases, physical security responsibilities are distinct from fraud loss prevention and investigation. Also, internal defalcations are often the responsibility of the internal audit section, and commercial loan fraud is the concern of the commercial loan department.

Despite these initiatives, fraud losses have skyrocketed over the past decade. The public and the business community have become more aware of the high cost and pervasiveness of fraud. The effects of fraud in the failure of some savings and loan institutions have also made people painfully aware of the frequency, significance, and devastating effects of fraudulent activity. Public perception of the causes of these failures has dictated further safeguards.

Various frauds committed against banks reveal well-established schemes, new variations of older patterns, and novel forms of abuse.

Check fraud. One of the oldest types of bank fraud is check fraud, which includes theft, counterfeiting, and kiting.

Stolen checks, particularly payroll checks, continue to be a significant problem. Theft through burglary or internal pilferage can result in their use over a wide geographic area. Thieves often sell stolen checks to fences who quickly distribute them or hold a number for months or even years.

An increase in the use and the quality of counterfeit checks has occurred, too. One recent scheme involved the negotiation of phony checks drawn on a Florida bank against an insurance company in Texas. These checks, in amounts of thousands of dollars, were made with excellent paper and printing.

Check-kiting schemes often have unique variations. Sophisticated kiters now use computers, which inform the criminals where and when to deposit checks. This technique has permitted more complex patterns that involve more banks. Enterprising thieves have even concocted variations such as deposits of bogus charge card slips to float funds as part of the scheme. The Expedited Funds Availability Act (commonly referred to as Regulation CC), which limits the holding period financial institutions can place on deposits, has contributed to making check kiting a major cause of check fraud losses. …

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