Skimming

There is a window of opportunity for thieves between the receipt of payment for goods or services and when that payment is recorded into an accounting system. Theft in this manner is called skimming. Despite the shift to electronic payments such a credit and debit cards it is still one of the most common forms of fraud.

The simplest way for an employee to skim is to simply take cash from a customer during the course of business and not record the transaction. Bars are particularly susceptible to this type of skimming because most business is conducted in cash. Bartenders are often left alone and bars are often kept dark, so it is easy not to notice if a bartender takes cash but doesn’t ring it up on the cash register. The bartender may also ring up a ‘No Sale” or other no-cash transaction for show.

If the person handling the money isn’t being watched then the only other way to discover skimming is by inventory. Any business that sells books or electronics or clothing need only compare the total receipts to the number of units in inventory. This won’t necessarily tell you who is doing the stealing but it will let you know the theft is happening. Depending on the size of inventory and how often it is checked, it may be a long time before any skimming is discovered.

Sales can also be understated. In this instance the transaction is recorded but the amount recorded is lower than the actual sale. The employee then pockets the difference.

The theft of checks through the mail are another method of stealing from businesses. When the opening of mail and recording of checks received is left to one individual, it is all too easy to slip the occasional check into a pocket.

A thief may only get away with this for a short time but even then the cost can be high.

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Gift Certificate Fraud

Gift certificate fraud has been on the rise for several years but gets surprisingly little attention even from the businesses most vulnerable. Fraudsters use stolen credit cards to buy gift certificates from small specialty stores to retail giants like Walmart and Amazon.com and every type of retailer in between.

The reason gift certificate fraud doesn’t always get the attention it deserves is that most people don’t see the point to the crime. Why would a thief who has gone to all the trouble of stealing a credit card, or even hundreds of credit cards, use it to buy something that can’t be exchanged for money? A $500 gift card from Ikea may get you some bookcases and a nice end table but you can’t get any cash from it, so the thinking goes.

Except fraudsters have figured out ways to turn gift certificates into cash. One is by selling them Scammers often offer the certificates at a discount. You can often find discounted gift certificates on such online venues as Ebay or Craigslist. It seems like a great deal for the unaware. If you can buy a $600 gift card for $300, you’ve just gotten a fifty per cent discount. That is, until you try to use the card and discover it has been cancelled because the credit card used to buy it was reported stolen.

Another way to turn gift certificates into cash is to buy valuable items to resell. Large ticket electronic items such as computers or big screen televisions are usually the preferred currency for experienced scammers but just about anything can be sold for a profit when you didn’t pay anything to begin with.

While retailers may wary of high dollar gift certificates, the temptation is to let the lower dollar ones. After all, a twenty-five dollar certificate seems innocent, doesn’t it? Except a fraudster with a hundred stolen credit cards can buy a hundred certificates. That adds up fast.

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The Search for the “Sweet Spot”

Cost effective fraud prevention can often be a balancing act. Businesses that deal in large numbers of transactions, such as insurance companies or online retailers, will try to automate as much of the system as possible.

In many insurance companies, for example, the majority of outpatient medical claims are never seen by a claims examiner. Data from a claim form is entered into a claims system and the claim then enters “auto-adjudication,” which is a fancy way of saying the computer decides if the claim is paid or not and how much. However, if certain criteria are met, the claim will be passed on to an actual person. There are many reasons for this. Sometimes this is because a claim is too complicated for the computer or the form was not filled out right.

Sometimes, however, it is because the computer has smelled something fishy. The computer is programmed to look for red flags. Some diagnosis codes or procedure codes are especially prone to be abused. There is also a dollar threshold. Any claim above a certain dollar amount will automatically be sent to a live person.

Retailers do the same thing. They set a dollar threshold and pass any order below that amount. The reason is simple. A ten, twenty-five, or even fifty dollar purchase may not be worth the time and effort it takes to investigate. The time it takes someone to call a bank or customer to verify that a purchase is legitimate costs the seller money in the form of that investigator’s salary. Time that could be put to better use. An investigation can easily cost more than the value of the purchase.

If a fraudster can learn that threshold amount, he can place order after order with little risk. Unless a fraudster has access to an insider’s knowledge (which happens), the only way to discover this “sweet spot” is trial an error.

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Positive Pay

Trends indicate we are on the cusp of a paperless world. Someday, perhaps quite soon, all financial transactions may be digital. Until that day arrives we still have to deal with paper. Business will still have to issue paper checks and one of the easiest forms of theft is altered check fraud.

Altered check fraud is exactly what the name suggests: tampering with a paper check to change the dollar amount or the payee. Forged endorsements are another way to divert funds from their intended recipient.

The best way to avoid altered check fraud is Positive Pay. Most banks offer a positive pay program. When a check is cut, a file is created and sent to the bank. This file should include the date, account number, check number, dollar amount and payee.  If any discrepancy is noted when the check is presented to the bank the check will not clear until the bank has contacted the issuer for approval.

There is a temptation to assume the bank is responsible for any losses resulting from altered check fraud. After all, if you find an unauthorized charge on your credit card, doesn’t the credit card company usually cover the bogus purchase (although not always without a fight)? Unfortunately, liability for losses resulting from checks that have been tampered with is something of a gray area. There are a number of reasons the bank might not assume liability. One example is negligence. In other words, if the customer didn’t do enough to prevent the fraud in the first place, the bank may not be liable. The National Check Fraud Center (www.ckfraud.org) gives a good overview but the bottom line is that you can never really be sure the loss will be covered until it happens and your bank decides to fight.

A usual, the best medicine is prevention.

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