Preventing small business fraud: Essential tips and tools

Fraud is on the rise, and the tactics are not only changing every day, but are more difficult to spot and even harder to prevent. According to a March 2024 report from‡ The Association of Certified Fraud Examiners, businesses in the United States will lose an average of $1.5 million per fraud case. That, combined with the finding that fraud cases are typically not detected until after 12 months, explains why fraud remains a top concern for small business owners.

From loans and billing to payroll and checks, small businesses can encounter fraud that varies in scale and type. With the risks so far-reaching, businesses must remain vigilant in all aspects of their operations to protect themselves and their customers. This requires a proactive approach to identify vulnerabilities and offer solutions to help prevent potential issues.

Types of fraud

Before businesses can take steps and enact policies to help prevent fraud, they must first understand the different types at play. While fraud attempts are quickly evolving, below are the most frequently encountered types of fraud we've seen in small businesses.

• Check fraud - Still the most common type of fraud, check fraud occurs when a scammer steals a check, perhaps out of the mail, acquires a business's banking information and prints fraudulent checks.
• Check tampering - Unlike check fraud, which involves printing fake checks, check tampering occurs when a scammer steals a check, whitewashes it, changes the payee and then cashes the original check.
• Phishing/business email fraud - Often tied to vendor billing, business email fraud occurs when someone poses as a trusted vendor and emails a company notifying them of a change in bank routing information. Any new wires sent using the "new" routing information go to the scammer rather than the intended recipient.
• Payroll fraud - Similar to vendor billing, payroll fraud occurs when someone poses as an employee and emails the payroll department that their direct deposit information changed, directing future paychecks to a fraudulent account rather than the employee's.
• Tools to prevent fraud

Fraud presents a risk to all banks and clients, and there are tools and safeguards available for both sides to better prevent fraud and mitigate the risks that come should there be a breach. Some of these tools are simple additions to your deposit and treasury services. Ask your banker for more details if you don't already have these set up for your business accounts.

Positive pay

The positive pay system is a bank feature that adds another checkpoint for business owners to ensure payments are both valid and approved. There are several types of positive pay, including:

• Check Positive Pay - This adds a layer of protection for paper checks. Upon issuing a check, the client sends the bank the check issue information, so there is a record of check number, date and dollar amount. An upgraded version of this is called Payee Positive Pay, which adds payee name to the information collected to better protect against whitewashing.
• Reverse Positive Pay - Every check received by the bank from the client is posted for an approver to review and decide whether it is legitimate and should be paid. This ensures all information, including the payee, is valid.
• ACH Positive Pay (ACH filter service) - This service flags electronic transactions on a website for client review, allowing an approver to add the payee to a qualified list for future debits. In addition, clients can add specific parameters around transactions, such as vendors, amount, frequency, etc., and if anything falls outside them, they will be sent for review and approval.

Credit card monitoring

Credit card monitoring services offer protection by flagging potential fraud in real-time. This could include notifying you of suspicious transactions, foreign purchases and attempted logins.

Lockbox services

Using a lockbox service can help prevent internal fraud and reduce the risk for mail fraud. For this service, businesses direct payments to a bank-maintained lockbox instead of a business address. The bank then picks up the checks, processes them and reports back to the client for review. This helps prevent checks from being accessed by unauthorized individuals and helps documents all received payments.

Electronic payments

Paper debit block is for companies doing all transactions electronically. When this is in place, the bank prevents any paper item from clearing the account, so any transaction that is not electronic will automatically be rejected. This helps prevent check fraud and check tampering from scammers who may have obtained sensitive business information.

The value of a personal banking relationship

The common thread of all fraud prevention tools is dual control-added layers of security and checkpoints within your organization and bank. While all of these tools offer ways to protect your business from scammers, perhaps the best advice when it comes to preventing fraud is to build a strong relationship with your banker and get to know them on a personal and professional level.

Not only does a close relationship enable your banker to know your business inside and out, it also makes it easier to identify potential red flags, such as out-of-the-ordinary spending patterns, unusual emails or other forms of communication.

Fraud is a very real risk. Regular check-ins, employee education and training, and moving exclusively to electronic payments, which offer more control to spot discrepancies and recover payments, are proactive ways businesses can work alongside their bankers to prevent fraud before it happens.

If you have concerns about how to prevent fraud, your banker can help equip your business with the tools it needs for this ever-evolving problem.

Check the UMB Privacy and Security Center to learn more about risk-mitigation best practices and view security alerts.

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