Fraud and deposits

Fraud in the deposit space is an underserved, often misunderstood area. Traditionally, fraud for financial institutions and retailers has been identity-related fraud where misuse of a third party’s identity leads to an unauthorized credit account. This credit account is then used to make purchases, cash advances, etc. until the line is depleted.

Deposit fraud is a different animal. For purposes of clarity, let’s make a distinction between two types of deposit-based fraud.

Deposit first-party fraud

This type of fraud occurs when an individual uses his or her own name, address and information to obtain an account or goods without any intention of repayment. First-party fraud can range from the hundreds to tens of thousands of dollars, but the key component is that the individual perpetrating the fraud is the true applicant and the information provided is true and valid.

Deposit new account fraud

This type of fraud occurs when perpetrators, often groups of fraudsters or fraud rings, open accounts using completely fictitious information, semi-fictitious information or “mules.” Mules are people who are recruited by a ring to commit fraud typically in exchange for a cash payment. Deposit new account fraud generally isn’t high dollar, but the volume of fraud accounts drives up processing costs and operational costs. These losses can often fall to the “cost of doing business” loss lines, with higher dollar outliers being the only evidence of the larger issue.

Unlike identity theft, deposit new account fraud is not a hot-button consumer topic or exciting media story. It often does not fall into an investigation bucket to be addressed by law enforcement due both to the low dollar amounts and the absence of “real” applicants. It is, however, a source of pain, an operational expense, and a large distraction for many banks and deposit institutions.

By its nature, deposit new account fraud is high-volume, low-dollar, “trade your name and possibly get arrested for less than $100” fraud. This is not to say that the criminals orchestrating schemes are not sophisticated. Fraud ring leaders running deposit new account fraud often deal with high volumes of applications, high volumes of applicant data, multiple email addresses, fake IDs, financial mules and debit/ATM cards for access. Let’s examine these components in more detail:

  • High volumes of applications: Deposit new account fraud is often profitable due to volume. Applicants are generally not “one and done” fraudsters. The payoff comes through multiple applications that may be made at multiple locations, and, if online, through multiple financial institutions.
  • Multiple email addresses: Email addresses are the new verification engines in the digital world. Applications by phone or online are made easier by either providing an email for pseudo-verification or for correspondence. Fraudsters may be managing dozens of email addresses as part of their scheme.
  • Fake IDs: customers with no credit file can meet an institution’s Know Your Customer requirements by presenting physical identification. New account desk representatives are expected or trained to verify physical identification. Fraudsters must manage which IDs are used for which accounts or purchases as the same ID is typically used multiple times.
  • Financial mules: These are individuals who are paid to perpetrate fraud. They are the account opening parties, the cash advance parties, the face to the crime. Mules are traditionally young student/college-aged individuals who are thin file/no file. Mules also can be recruited through the drug trade or in larger cities, the homeless. Ring leaders using mules must select individuals who are capable of opening an account and are willing to return the majority of the funds from the fraud to the handler. Mules are often used for multiple fraud attempts in a very short period of time.
  • Debit/ATM cards: This is the faceless channel. The ATM is the deposit product channel of choice for fraudsters. ATMs accept deposits, which is ideal for someone committing deposit new account fraud. Managing these deposits is often a science, as playing the timing game is critical to getting funds access.

So what are some tactics to managing deposit new account fraud? Often, combating deposit new account fraud comes down to deterring the fraudster’s application completely. Risk-based, trend-based funds availability can create controls that fraudsters cannot dodge. In these cases, account age, deposit amount, deposit channel (ATM, in-person, remote deposit) can drive “tiered availability,” allowing most valid customers to transact while restricting fraudsters from the “big score.”

Addressing both the applicant’s identity and the transactional risk can work to deter fraudsters from even attempting deposit new account fraud. Creating an environment that deters fraud is much more cost-effective than having an environment to recover from fraud.

Looking forward, some fraud-prevention techniques are evolving to better combat deposit new account fraud. This includes taking a broader “panorama” view of a new applicant’s behavior and looking at the relationship among all of the separate but related applicant data elements. Rather than providing a series of “snapshots,” this approach begins to predict an applicant’s risk based on the sheer volume of data element linkages that can be identified. Once integrated or layered into your existing fraud-prevention processes, this moves fraud identification toward an active, real-time function rather than a standard “bad account” matching process.

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