Common Types of Fraud in the Financial Industry

This is particularly true for anyone working in the financial industry, whether you are an accountant, banker, bookkeeper, financial advisor, or any role where you are responsible for managing your client’s income or financial records. We’ve compiled a list of the most common types of fraud that may impact your small business or accounting clients to make sure you have the knowledge needed to fish out any phishy clients!

Traditional Payroll Fraud

Traditional payroll fraud occurs when a fraudster provides fake or stolen information in the onboarding process, generally taking the form of a shell company that was not filed with the Secretary of State, or that just recently been filed. In situations like these, the listed owner typically has a history of similar fraudulent activity, business addresses don’t match when you search them, and phone and email are recently created to match the fraudster.

Account Takeover

Account takeover is a type of identity fraud that occurs when a fraudster provides stolen information for a legitimate business to onboard payroll. The business’ address, owner name, Social Security Number, etc., are correct and match the actual small business owner, but the email is from a public domain like Gmail or Yahoo, and the phone number doesn’t tie to anyone at the company. A lot of these fraud cases originate overseas, and they tend to only interact over email or phone.

Theft

Unfortunately, sometimes fraud attempts are perpetuated by valid businesses. These can be harder to spot since the culprits have legitimate employees, online reviews, business phones, and brick-and-mortar locations. In these situations, clients seek to capitalize on the ACH window for bank processing, running payroll so that the credits go out to employee accounts. However, on the back end, debits will fail when the financier go to withdraw the money from the account. This is typically demonstrated in the form of first payroll runs or as ‘bust-out fraud’ where the clients will run a few successful payrolls before running a payroll for which the debit is returned by the bank.

Check Kiting

Check kiting is the fraudulent use of a financial instrument to obtain additional unauthorized credit. Kiting generally takes form in two ways: issuing or altering a check or bank draft for which there are insufficient funds or misrepresenting the value of a financial instrument to extend credit obligations or increase financial leverage. This is particularly common in banking because it often takes banks longer to determine if a check is incorrect than it does for someone to withdraw against the account. For example, the fraudster can write themselves a check from bank account A for $1000, even though they only have $100 in that account, then deposit it into bank account B. They can then withdraw that money from bank account B and spend it before the bank can even verify that the $1000 was in account A to begin with. Banks can keep an eye out for specific red flags, including bank accounts with large numbers of checks deposited each day and many checks withdrawn from the same account.

Cyber Fraud

Cyber fraud is one of the more common types of fraud and is the one that you hear about most often in the media. Cyber fraud consists of virtual attacks against a valid client. Cyber-attacks can be generated in a variety of ways, including phishing schemes that install malware onto a client’s computer which allows fraudsters access to the client’s email and personal information. This becomes dangerous for small business owners with regards to payroll, as someone can gain access to their payroll account and change the bank account or employee information to redirect funds. Alternatively, the fraudster could also use this information to contact the client’s accountant or trusted advisor with a request to add a new employee or contractor, supplying their bank account information without the client realizing it.

Bottom Line

If you work in the financial industry, it’s unfortunately likely that you’ve come across at least one of these situations in your business’ history. It’s always good to re-familiarize yourself with the types of fraud that may impact your client’s business, especially if you are responsible for sensitive financial information. By keeping yourself one step ahead of the fraudster, you’ll be more prepared to step in and take action in a worst-case scenario.