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Organization: Santa Clarita Valley Sheriff's Station
Date: May 26, 2009
SCV Businesses Should Protect Themselves
An Ounce of Prevention or a Ton of Problems
How ACH Bank Fraud Can Hurt Your Business
By Sgt. AJ Rotella — City of Santa Clarita / Sheriff's Business Alliance

    The Automated Clearing House Network or more commonly known as "ACH" has experienced a new wave of bank fraud that has found some local Santa Clarita businesses to be unsuspecting victims. An ACH transaction is an interbank electronic funds transfer between your bank account and over 20,000 participating financial institutions that use this system to streamline payment processing. Commonly used in direct deposit of payroll and Social Security payments, many companies also use it for making their tax payments to the IRS or receiving their nightly credit card processor's deposits.

How does ACH fraud occur?
    ACH fraud can occur with little effort. An individual simply needs two pieces of information: your checking account number and your bank routing number. This information is used in various ways to initiate the fraud. In its simplest form, the perpetrator uses your bank account and routing numbers to initiate a payment for goods or to pay off debt by making a phone call and giving these numbers to the desired vendor. This same scenario could also occur with Web-based purchases.

How can you guard against ACH fraud?
    The easiest way to prevent ACH fraud is to put ACH blocks on your bank accounts. An ACH block allows the receiving party's bank to block all incoming ACH debits and/or credits prior to any transaction posting to that party's account. Although this block may not be possible for your business needs, you do have some other options. ACH receipt authorization allows business customers to notify their bank about businesses that are authorized to initiate an ACH debit. If the source of an ACH debit is not on the list of authorized users, the debit is rejected. This list can be very specific as to dates and dollar amounts, as well as recurring and one-time only uses. Another method is reverse positive pay, which allows business owners to review the incoming ACH debits and decide whether to accept or reject them. This decision, however, must be made the following day or the debits are rejected. Another option is to limit the ACH activity to one account and review it daily.

Where does ACH fraud occur?
    ACH fraud cases can occur in transactions between consumers and businesses or simply between consumers who target unprotected bank accounts. The target of the fraud could involve general operating accounts, claim accounts or your company's payroll account. In some fraud cases, claimants were using the information on loss payment checks to attempt the fraud. Former employees have also tried to use the payroll account to pay bills. In these most recent ACH fraud cases, companies are unsuspecting and rarely monitor ACH transactions, having failed to prevent the issue by simply placing ACH blocks on all of their accounts.

What can you do if you detect a fraudulent ACH transaction?
    If you detect a fraudulent ACH transaction, you have 60 days to notify your bank. If you have a corporate account, you only have two days for this notification. If you report the fraud within the allotted time frame, you will not be held responsible. Under ACH rules, the originating bank must reimburse the victim and the victim's bank and then try to recover the loss from its customer. In addition to the preventive measures discussed earlier, a key step in combating ACH fraud loss is to review and reconcile bank accounts on a timely basis. Corporate accounts must be reviewed daily. Preventative steps could be to limit the number of accounts that allow ACH transactions to one or very few.

Practices to Mitigate ACH Fraud
    To help prevent this fraud before it happens, the Sheriff's Department suggests that you utilize bank fraud prevention tools such as:
    • ACH Debit Blocks — electronic debits are rejected before posting to your account and returned to the originator
    • ACH Debit Filters — allows for greater flexibility to authorize a single, multiple, or recurring AC debit for the exact or maximum amount. Additional decision criteria could be to only accept ACH debits by the origination name or id number
    • File Total Validation Process (IVR) — ACH files are held in suspense at the bank until an authorized individual is able to validate item counts and total debit and credit amounts
    • Late ACH Return Block — ACH returns received past two business days are automatically rejected and returned to the receiving financial institution
    • Return Item Validation — ACH returns that are received timely, are immediately reviewed for the return reason and holds are placed on any pending or future payments
    • Bank Information Reporting ACH transactions originated are reconciled to bank detail on an intraday and prior day basis
    Remember, preventing crime in the City of Santa Clarita is EVERYONE's business! Although this fraud activity has only reached a few local businesses, we have seen the criminal element use more creative devices to take from our businesses. An ounce of prevention in fraud cases will keep your assets protected.
    For more information on Business Crime Prevention topics, please visit the City of Santa Clarita Sheriff's Business Alliance on the Internet at the following link: City of Santa Clarita - Sheriff's Business Alliance.
    This article was prepared with the assistance of Jeffery A. Dertz, CPA. Dertz is the Insurance Practice Partner at Blackman Kallick, 10 S. Riverside Plaza, 9th Floor, Chicago, IL 60606, 312-980-3224, jdertz@BlackmanKallick.com.

    If You See Something, Say Something! Report non-emergency crime anonymously by visiting the following link: Crime Tips or calling (661) 284-2-TIP / (661) 284-2847.

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