Top Trends in ACH Fraud: What You Need to Know About Payroll Fraud, ACH Kiting and Solutions to Fight These Threats

Payroll fraud, kiting - these are among the latest threats to Automated Clearing House (ACH) payments, which are gaining extra attention from fraudsters.  There will be 25 billion ACH transactions occurring annually by 2010, estimates NACHA, the electronics payment association. Many of these transactions will be check conversions at merchants, including Wal-Mart, Target and large supermarket chains.  With these numbers growing every year, ACH fraud is also growing, says Michael Thomas, Executive-in-Charge of the Financial Institution Group at Crowe-Horwath. Criminals are finding it more enticing "to follow the money," Thomas says.

This article reviews the latest ACH fraud trends - and what institutions should be doing to protect themselves.

How ACH Fraud Happens

Before ACH did check conversion, there was very little fraud, because most transactions were driven by relationship, notes Nancy Atkinson, wholesale banking senior analyst at the Aite Group. "So when a corporation had to get an individual's permission to credit, much less debit their account, the banks knew the corporation, and they knew they could depend on the corporation to stand behind its transactions if a debit or credit came into question by a consumer."

On the business side, the companies using ACH set up accounts that would either only accept ACH credits or issue them. As ACH has expanded past the payroll, social security payment or repetitive bill-pay solution, moving into mainstream transactions that can be used for almost any kind of payment and check replacement truncation - fraud risk has grown. "This includes at point of sale or on the web or over the phone," Atkinson says. "You've lost the controls that used to exist, and those direct relationships that used to exist. Banks used to have controls on how big a transaction a business can make and how much coverage it has to have over the two-day period it takes for that transaction to settle."

One way ACH fraud can occur: Companies can get hooked into a legitimate bank ACH network and then send out fictitious changes, like telling checking accounts they've agreed to pay a small amount to a charity. "By the time the customers get a copy of these transactions and they protest the withdrawal, by that point the bank is stuck with all the returns, because the sham operator of the fraud has withdrawn all the money and left," Thomas says.

The good news is that type of ACH fraud had been the most common type of fraud over the years, but NACHA and a number of financial institutions have been doing a much better up front job in determining who they will let become an ACH customer. So this specific type of fraud, while still occurring, has slowed down a lot, Thomas notes.

Other fraud threats, alas, have grown.

ACH Risk #1: Payroll Fraud
ACH Risk #2: Kiting

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ACH Kiting