Tackling Check Fraud In Business
Written by Pamela Rauseo, Principal Advisor @ Ocean Bridge Solutions | Fostering Innovation & Empowering People and Organizations through Digital Transformation & Curated Partnerships with a Focus on Strategic Change Management
November 26, 2024
The Growing Threat of Check Fraud
Check fraud is a persistent and evolving threat that has seen significant growth in recent years, posing major risks to businesses of all sizes. The U.S. Financial Crimes Enforcement Network (FinCEN) and the American Bankers Association report that check fraud incidents surged by over 40% in 2023, underscoring the importance of vigilance. Businesses, especially during high-activity periods such as the holiday season, are particularly vulnerable to these types of financial crimes.
Understanding Why the Holidays Heighten Risk
The holiday season, while crucial for many businesses, also presents a heightened period of exposure to fraud. The combination of increased transaction volume, reduced staffing, and a rush to close financial tasks before year-end can create ideal conditions for fraudulent activities. Criminals often exploit these vulnerabilities, leading to increased cases of check alteration, counterfeit checks, and unauthorized check use.
The Cost of Inaction
Check fraud can have severe financial and operational repercussions. According to the Federal Reserve, check fraud losses in the U.S. amount to billions of dollars each year. For businesses, the direct financial impact can include lost revenue and fines, while the indirect costs may involve damaged vendor relationships, strained cash flow, and a tarnished reputation. More concerning, the process of recovery can be long and complicated, with some businesses taking months to reclaim lost funds.
Key Statistics
- Fraud Prevalence: According to the Association of Certified Fraud Examiners (ACFE) 2024 Report to the Nations, organizations lose approximately 5% of their annual revenue to fraud, with payment fraud being one of the top culprits.
- Invoice Fraud: Gartner research predicts that 74% of organizations experienced at least one case of invoice or vendor fraud in 2023, an alarming increase compared to 61% in 2020.
- Phishing Attacks: Phishing-related fraud increased by 65% in 2023, with finance departments being the primary target.
- Cost of Fraud: The average cost per incident of payment fraud surged to $1.5 million in 2023, encompassing direct financial losses and remediation costs.
Strategies for Mitigating Check Fraud
Businesses can take proactive measures to guard against check fraud, particularly during the holiday season. Here are key strategies to consider:
1. Adopt AP Automation
i. Automated systems reduce human errors and eliminate opportunities for fraudsters to exploit manual processes.
ii. Features like AI-driven anomaly detection and real-time monitoring can flag unusual activities, such as duplicate or altered invoices, before payments are made.
2. Implement Vendor Authentication Protocols
i. Enforce multi-level verification to validate new vendors and changes to existing vendor information, such as banking details.
ii. Regularly audit and cleanse the vendor master file to minimize exposure to fake or inactive vendors.
3. Strengthen Cybersecurity Measures
i. Adopt multi-factor authentication (MFA) for all financial systems.
ii. Conduct regular cybersecurity training to educate employees about phishing attacks and other scams targeting finance teams.
4. Use Virtual Credit Cards
i. Virtual cards generate unique, one-time-use card numbers for transactions, reducing exposure to unauthorized access.
ii. VCs also offer transaction-level visibility and controls, adding a layer of security.
iii. Virtual credit cards typically generate net new revenue by way of rebates for every dollar paid through one of these cards
5. Enhance Internal Controls and Segregation of Duties
i. Enforce a clear segregation of duties between invoice approvals, payment processing, and vendor management to reduce insider fraud risks.
ii. Introduce approval workflows in AP automation tools for added oversight.
6. Stay Updated with Industry Trends
i. Participate in industry forums and conferences to learn about evolving fraud tactics and solutions.
ii. Regularly review fraud detection reports and benchmarks specific to your industry.
Case in Point: Success Through Automation
One hospitality client leveraging AP automation achieved a 40% reduction in payment errors and flagged over $500,000 in potential fraud within the first year. By automating vendor verification and implementing machine-learning fraud detection, the company eliminated vulnerabilities that previously left them exposed.
Looking Ahead
The holidays should be a time for growth and opportunity, not a period marked by increased vulnerability to fraud. By taking advantage of modern solutions like AP automation and reinforcing internal practices, businesses can better protect themselves against check fraud and ensure financial stability as they move into the new year.
Stay Informed and Prepared
Stay proactive by subscribing to Bridge to Financial Innovation for ongoing insights, practical strategies, and the latest data to help your business navigate today’s financial challenges. Make sure to safeguard your operations not only during the holiday season but all year round.
If you’re ready to secure your financial processes and explore innovative fraud mitigation strategies, contact Ocean Bridge Solutions to schedule a consultation.