Infiltration of banks by fraud rings is on the rise, posing the potential for higher losses for both institutions and customers, according to Shirley Inscoe, director of financial services solutions at Concord, Mass.-based Memento, Inc.

“There’s always been insider fraud in financial institutions. But, what I’m hearing from all my banker friends is that it is growing and at levels they've never seen in the past,” she said on February 24 at the BAI TransPay Conference & Expo She spoke during a presentation entitled “Emerging Threats to Demand Deposit Accounts.”

“Fraud rings increasingly target financial institutions and they deliberately place people in those institutions,” Inscoe said, noting that the human resources department is a frequent target. “If they can get someone in human resources, that’s very helpful because then they can get their fraud ring friends hired into the bank or the credit union,” she said.

The fraud department itself is another target for infiltration. “If they can get someone in fraud prevention, then they understand what all the safeguards are and can circumvent them,” Inscoe said.

To address insider fraud, Inscoe suggested checking with Scottsdale, Ariz.-based Early Warning Services LLC, which keeps a database that financial institutions use to screen employees, including information on people who have provided data to fraud rings in the past. “It’s a good tool for bankers and credit unions,” Inscoe said.

Inscoe also encourages financial institutions to set up internal systems to monitor the activities of employees. Such systems can detect, for example, that an employee looked up 100 accounts and took no action on any of them. “That’s a big red flag,” Inscoe says.

Inscoe said insider fraud includes the sale of confidential customer data, leading to identity theft and fraudulent transactions, as well as manipulating the general ledger, fraudulent expense reports and stealing cash and equipment. Because of their concern for reputational risk, banks are reluctant to publicly discuss the issue, she added.

“Even people who work in the bank don't know how much insider fraud there is at a given financial institution,” she said. However, some idea of the magnitude of losses from insider fraud can be garnered from the annual Report to the Nation on Occupational Fraud and Abuse prepared by the Association of Certified Fraud Examiners, Inscoe said.

According to the 2008 report, banks and financial services companies were the most commonly victimized industry by fraud (15%), followed by government (12%) and healthcare (8%). The median loss for banks was $250,000 per case, according to the report.

(For more on payments fraud, see “Top Ten Fraud Threats in Payments” in the January/February 2009 issue of BAI Banking Strategies. Also, see “Emerging Threats in Account Fraud” in the August 27, 2008 issue of BAI Banking Strategies Retail Delivery Insights.)

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