Payment fraud widespread, companies say

Payment fraud widespread, companies say The problem is most prevalent at large corporations, and it usually involves checks. (Aren't checks going away?)
By Megan Johnston
April 14, 2008
Most companies won't ever see fraud on the scale of that at Société Générale, where rogue trader Jerome Kerviel has been accused of racking up $7.2 billion in losses for the firm. But fraud is still a persistent problem for most companies, according to a recent study by the Association for Financial Professionals. Among the organizations polled, 71% experienced attempted or actual payments fraud in 2007, according to the AFP Payments Fraud and Control Survey, which surveyed 552 corporate treasury and finance professionals in January. This year's findings are virtually unchanged over last year's, in which 72% reported attempted or actual payments fraud. Fraud appears to be more widespread among large organizations, or those with revenue of more than $1 billion. Eighty percent of big companies reported fraud incidents, compared with 58% of smaller organizations, or those with revenue of less than $1 billion. Moreover, among the respondents that said their companies had been victims of fraud, 30% reported increased incidents of fraud in 2007 compared with 2006. “Fraud that is incurred is not only whether you or the bank loses money, but the staff time and expense of your following up,” said Arlene Chapman, AFP's senior consultant in technical services and one of the study's authors. But sometimes the company's employees are responsible for bilking the firm. Internal fraud, perpetrated by an employee, for example, was responsible for financial losses at two out of five organizations. “In the past, we had a former employee attempt to use payroll account information from the bottom of his check to make electronic bill payments to cover his bills after he was no longer employed with us,” reported one survey respondent. In the case of both internal and external fraud, almost all the instances (94%) reported by the organizations consisted of check fraud. Among companies that reported more fraud in 2007, 90% said that checks were the cause, vs. 71% in 2006. And that's despite the fact that overall check volume decreased by an annual average of 6.4% between 2003 and 2007, according to the Federal Reserve. But companies are increasingly arming themselves with fraud-prevention tactics, the survey found. A vast majority (88%) of companies have taken steps like distributing the responsibility for payments entry and payments approval among different employees. Moreover, 87% of companies are using anti-fraud technology provided by their banks, such as tokens, digital certificates and smart cards. One fraud-prevention system that is gaining in popularity, said Ms. Chapman, is the Universal Payment Identification Code, or UPIC, which masks a company's bank account number for electronic payments. A UPIC looks like a standard bank account number but can only be used for certain electronic payment methods, so it “enables people to pay you without your giving out the actual account number,” Ms. Chapman said. According to the Electronic Payments Network, UPIC payments increased 730% in 2006, to a record $4.7 billion, up from $571 million in 2005. These are the most recent years for which data are available. “With the doing-more-for-less environment we're in now,” Ms. Chapman said, “it pays to use as many fraud-control procedures as possible, so you don't have to use time and effort following up."