Collaboration among competitors doesn't often make sense. But when it comes to fighting fraud and protecting the broader financial system, collaboration is a first line of defense.
Conventional wisdom suggests that check fraud should be in deep decline. After all, check usage has fallen somewhat in recent years. But check fraud remains a very real threat to credit unions and banks of all sizes. The 2011 American Bankers Association Deposit Account Fraud Survey Report revealed that, industry-wide, check fraud costs financial institutions nearly $900 million annually, with the leading causes being counterfeit checks, returned deposit items and forgeries. Sixty-eight percent of community institutions and 95% of mid-sized institutions are victimized each year.
In light of these disturbing figures, it is clear that all of us in the financial services industry share a common threat: fraudsters. This is important especially for small- and mid-sized institutions because they are particularly vulnerable to losses.
That vulnerability may have inadvertently increased last year following the implementation of the Dodd-Frank Act. Embedded in Dodd-Frank was a provision that amended Regulation CC to require banks make $200, rather than $100, available for withdrawal on the business day after deposit.
That provision of Dodd-Frank became effective in July 2011. In addition, in March 2011, the Federal Reserve Board proposed further changes to Regulation CC intended to expedite the availability of funds and the collection of checks.
While the Fed's changes have not yet been finalized, institutions are now “expected to comply” with Dodd-Frank, according to a Federal Reserve memo issued Aug. 15, 2011.
Although credit union executives support improved efficiencies in the payment systems, many have voiced concerns that the expedited availability of funds may leave them especially vulnerable because fraud losses could have a significant impact on the bottom line of smaller institutions.
How can credit unions protect themselves from fraud losses, while staying within the new expedited funds-availability requirements? It is vital that all credit union staffers – from tellers to top-executives – review the six types of exception holds currently allowed by Reg CC, which are:
- New accounts
- Large deposits
- Re-deposited checks
- Repeated overdrafts
- Emergency situations
- Reasonable cause to doubt collectability
While most of these exception hold situations can be determined solely by the depositing institution, reasonable cause to doubt collectability can best be determined through sharing information with the paying institution.
By sharing information through a collaborative network, credit unions can be in a better position to meet the regulatory requirements for exception holds by sharing “the existence of facts that would cause a well-grounded belief in the mind of a reasonable person” that the check is uncollectible.
With 95% of mid-sized institutions being victimized by check fraud, credit unions must be proactive in protecting themselves. Today, it is common to find fraudsters working together across multiple channels and business lines.
They work in sophisticated rings, establishing what appear to be credible relationships across a network of institutions and across various lines of business. When they do attack, they exploit numerous channels including check, ACH, wire, online bill payment, cards and online account-to-account transfers.
In other words, fraudsters appear to support the value of collaboration in committing their crimes. If the credit union community intends to outpace today's bad guys, then it must also come together and collaborate through the effective use of today's cutting edge technologies. Only by doing so can we collectively create a safer and more secure financial system.
Lou Anne Alexander is chief market development officer for Early Warning Services LLC in Scottsdale, Ariz.
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