Financial Institutions

Financial institutions have come under increasing pressures that test their ability to maintain a profitable bottom line. From a seemingly inexorable increase in violent and nonviolent crime, to a flurry of new legislation drafted and implemented in the wake of the September 11th tragedies, banks, savings and loan organizations and credit unions all have their plates very full with cost containment and curtailing losses.

Minimizing losses due to criminal activities is a full time job for security officers and their organizations. Although the majority of their time in the past has been spent in investigative and recovery activities, that trend has shifted in recent years to include a more proactive stance of loss prevention. There are two main types of criminal activities that confront financial institutions: Fraud and Robbery.

Both fraud and robbery account for a significant amount of losses on an annual basis. Both also require significant, albeit different, efforts to investigate and solve crimes. And though they utilize different strategies to minimize the likelihood of criminal actions, there is a common tactic that serves to both deter and solve fraud and robbery crimes: closed circuit television (CCTV) surveillance and recording. With the advent of the newest digital video recorder systems such as the models offered by FocusMicro, Inc., crimes are getting solved faster and with greater surety. And the criminals know it.

The Shift In Fraud

The amount of money that financial institutions lose to fraudulent transactions continues to grow on an annual basis, but the overall nature of financial institution fraud has changed in characteristics over the past decade. In the late 1980’s and early 1990’s, more than half of all the fraud reported was related to insider abuse. Since then however technological advances, increases in criminal sophistication and the availability of personal information on the internet has resulted in a dramatic shift to external check fraud schemes. Most check fraud occurs within several well know genres:

• On-us checks with forged makers' signatures
• Non-on-us checks cashed with forged endorsements
• Non-on-us deposited checks returned by the paying bank
• Kiting schemes, floating worthless checks between accounts at different banks
• Counterfeit checks

It is important for financial institutions to categorize and understand their check fraud losses so that they may adopt the best strategies to discourage or prevent the transactions from occurring.

There are more than $1.3 million in fraudulent checks returned each day, seven days a week. The most recent statistics from the FBI report that check fraud in 2001 nearly reached $20 billion, a significant upswing from the $12 billion to $16 billion that was reported in the 1998 – 1999 time frame.

There are several contributing items that have spurred the increase in check fraud crimes. Some of them are ‘good things’ that have had negative consequences for financial institutions. Others are simply the evolution of criminal activities.

• Regulation CC put needed controls on the financial industry to govern the availability of check funds and the collection of checks. The unanticipated backlash of these controls was that criminals now had an identified window of opportunity for funds availability, permitting an increase in kiting schemes. Forty five percent of returned checks are due to closed accounts or stop payments.
• The explosion of the internet has also witnessed a similar surge in identity theft, resulting in more forged signatures, forged transfer of ownerships, new account fraud and account theft.
• Technology itself, while offering many advances to prevent and solve crimes has also had the negative effect of putting sophisticated tools in the hands of criminals. As a result, there has been large increase in counterfeit documents and the losses that they generate. Counterfeits are also accounting for the largest single cost per incident.

The sad truth of the matter is that thieves know that banks, especially the larger ones, cannot afford to investigate every fraudulent transaction. The same is true of law enforcement agencies, with some organizations in larger cities setting a specific threshold dollar amount. As long as thieves stay ‘below the radar’, they run only a nominal risk of being caught and prosecuted.