Financial Transactions and Fraud Schemes Part 2 Flashcards
What type of malware is most commonly associated with identity theft, and what does it do?
Spyware, which collects and reports information about a computer user without their knowledge or consent.
Why should individuals avoid using public Wi-Fi networks for sensitive activities?
Public Wi-Fi networks are often unsecured and can be easily exploited by fraudsters to intercept sensitive information.
What is a data breach, and how is stolen information typically used?
A data breach occurs when personal information of a company’s customers is compromised, and the stolen information is often sold on illegal trading websites.
Who are considered malicious insiders, and what role do they play in identity theft?
Malicious insiders include employees, business associates, relatives, and friends who have access to sensitive information and may steal it for their own identity theft schemes or sell it to criminals.
What are the benefits of using biometric authentication?
Biometric authentication, such as fingerprints or voice recognition, provides a higher level of security as it is unique to the individual and difficult to replicate.
What should individuals do with their physical mail to prevent identity theft?
Secure physical mailboxes with a lock, check mail regularly, instruct the post office to suspend mail during vacations, and shred all sensitive documents.
Why is it important not to reuse passwords across different websites or accounts?
Reusing passwords increases the risk of multiple accounts being compromised if one password is stolen.
What should businesses do with personal information once it is no longer necessary?
Businesses should not retain personal information longer than necessary and should properly dispose of it according to an information-handling policy.
Why is encryption important for businesses handling personal information?
Encryption protects personal information stored by the company or sent to third parties, ensuring that unauthorized parties cannot access the data even if it is intercepted.
What steps should businesses take to secure their physical and electronic records?
Businesses should use locks, access codes, keep physical documents in locked rooms or cabinets, and secure all computer networks with strong cybersecurity measures.
What is the first action a victim of identity theft should take?
File a police report with local law enforcement authorities and keep a copy of the report.
How can businesses restrict employees’ access to sensitive information?
By limiting access to only those employees who need the information to perform their jobs and using network-security tools to monitor access.
Why should victims of identity theft contact credit reporting agencies?
To have a security alert or freeze placed on credit reports, preventing further unauthorized activity.
What should victims do with their bank and credit card accounts after discovering identity theft?
Report unauthorized charges, cancel affected cards, get replacements, and change account numbers or close affected accounts.
What actions should be taken regarding unauthorized checks?
Put a stop payment on all lost or stolen checks and report the issue to the bank.
What is embezzlement, and how does it differ from other forms of theft?
Embezzlement is the wrongful conversion of entrusted property, where the perpetrator had lawful possession initially.
Describe false accounting entry schemes in financial institution fraud.
False accounting entries involve employees debiting the general ledger to credit their own accounts or cover up theft from customer accounts.
Explain how suspense account schemes are used in financial institution fraud.
Suspense account schemes involve fictitious entries to temporarily hold funds, later cleared by increasingly large fictitious debits, akin to a lapping scheme.
How do unauthorized withdrawals differ from other embezzlement schemes?
Unauthorized withdrawals involve employees directly taking funds from customer accounts without attempting to conceal the theft in the bank’s records.
What are some types of suspense accounts typically used in financial institutions?
Examples include loans in process, interdepartmental transfers, currency in transit, refunds on insufficient funds charges, and due from banks.
Discuss the risk associated with false or unauthorized transfers from internal accounts in financial institutions.
This involves substituting personal accounts for internal accounts in transactions, potentially leading to financial losses for the institution.
What characterizes unauthorized disbursement of funds to outsiders in financial institution fraud?
Employees abuse their authority to approve fraudulent instruments or disburse funds without proper authorization, often for personal gain.
Explain the concept of paying personal expenses from bank funds in financial institution fraud.
This involves using bank resources to pay personal bills, often disguised as legitimate bank expenses.
Describe the theft of physical property as a form of embezzlement in financial institutions.
Employees or contractors steal office equipment, building materials, or furnishings from the bank premises.
What risks are associated with moving money from customers’ dormant accounts in financial institution fraud?
Dormant accounts are vulnerable as transactions may go unnoticed; perpetrators may exploit these accounts by creating fictitious transactions to move funds.
What measures can financial institutions implement to prevent false accounting entry schemes?
Implement strict controls over general ledger adjustments and reconcile accounts regularly.
How can financial institutions detect unauthorized withdrawals from customer accounts early?
Implement monitoring systems that flag unusual account activity or withdrawals outside typical customer behavior patterns.
Discuss the importance of dual control and manual overrides for handling dormant accounts in financial institutions.
Dual control ensures multiple approvals are required for transactions, reducing the risk of unauthorized transfers from dormant accounts.
What actions should financial institutions take upon detecting embezzlement or suspicious transactions?
Immediately suspend involved employees, conduct a thorough internal investigation, and report findings to regulatory authorities.
Why is employee training crucial in preventing and detecting embezzlement schemes in financial institutions?
Training enhances awareness among employees about fraud risks, encourages reporting suspicious activities, and reinforces compliance with internal controls.
What are some common red flags in source documents that may indicate embezzlement?
Missing documents, unusual check sequences, and discrepancies between payees on checks and the general ledger entries are common red flags.
What is the primary characteristic of embezzlement in financial institutions?
Embezzlement involves the wrongful conversion of entrusted property, often from customer accounts or general ledgers.
How do fraudsters typically utilize suspense accounts in financial institution fraud?
Fraudsters may use suspense accounts to temporarily hide fictitious transactions or misappropriated funds.
What are some suspicious items in financial statements that might indicate large-scale embezzlement?
An abnormal increase in past due accounts receivables or discrepancies in reconciling items could indicate large-scale embezzlement.
How can financial institutions detect small-scale embezzlement schemes effectively?
By reviewing source documents such as receipts and deposit slips to identify anomalies.
How do loan officers perpetrate sham loans with kickbacks?
They make loans to accomplices who share the loan proceeds, sometimes paying off previous fraudulent loans.
Describe the risk associated with irregular receivables in financial institutions.
Irregular receivables are vulnerable to skimming schemes where incoming payments are intercepted before being recorded.
What is double-pledging collateral in the context of loan fraud?
It involves pledging the same collateral to multiple lenders without disclosing this to any of them.
What is a common method used in loan fraud involving nonexistent borrowers?
Fraudsters submit false applications with inaccurate financial information to secure loans.
Explain the concept of daisy chains in loan fraud.
It involves banks swapping bad loans with each other to hide or mask their true financial condition.
How do fraudsters manipulate credit reports in a credit data blocking scheme?
They obtain loans and intentionally default, then claim identity theft to have negative credit history removed temporarily to secure additional loans.
What are some tactics used in residential loan fraud?
Misrepresenting personal creditworthiness, inflating income, and providing false information about property characteristics.
What makes loan fraud particularly risky for financial institutions?
Even though occurrences are relatively few, the financial impact per occurrence tends to be substantial due to the high dollar amounts involved.
Why are reciprocal loan arrangements considered fraudulent in some cases?
They are used to disguise the true nature of loans and sales between banks, often involving collusion to manipulate financial statements.
How can financial institutions detect loan fraud schemes involving false information?
Through rigorous verification of applicant information and careful scrutiny of financial documents provided.
What is the role of developer overhead in construction financing, and how might it be exploited for fraudulent purposes?
Developer overhead provides operational capital during construction. Exploitation can occur when overhead includes unnecessary costs or when it is improperly allocated without separate underwriting.
What is the primary purpose of the construction cost budget in construction lending?
The construction cost budget serves as an estimate of expenses categorized by specific line items such as foundation, exterior glass, and landscaping. It guides the allocation of funds throughout the project.
How can developers misuse the contingency budget in construction projects to commit fraud?
Developers may fail to monitor the impact of removing allocations from the contingency budget or reallocate savings without notifying the lender, potentially hiding over-budget costs.
Explain the concept of draw requests in construction lending and their vulnerability to fraud.
Draw requests document expenses incurred in construction and request loan advances. Fraud can occur when developers submit requests for personal expenses or unrelated project costs, supported by falsified documentation.
How can a financial institution verify the accuracy of draw requests to prevent fraud?
Verification involves reconciling requested amounts with the approved budget, inspecting completed work, reviewing supporting documents like paid invoices, and ensuring compliance with construction milestones.
Why is it important for lenders to scrutinize lien releases in the context of draw requests?
Lien releases ensure that subcontractors have been paid, preventing future claims against the property. Failure to verify these releases can expose the lender to financial risk.
What is retainage, and how does it mitigate risks in construction lending?
Retainage is withheld from draw requests until construction completion and lien expiration. It incentivizes contractors to complete work satisfactorily and ensures payment to subcontractors, thus reducing lien risks.
How can developers manipulate tenant improvement funds to commit fraud in construction projects?
Developers might reallocate funds intended for tenant improvements to cover other construction costs, jeopardizing the completion of necessary improvements when leasing begins.
What role do change orders play in construction loan fraud, and why are they significant?
Change orders modify the original construction contract and budget. Fraudulent change orders may inflate costs or misrepresent the scope of work to obtain additional loan funds improperly.
Why is the documentation of paid invoices crucial in the draw request process for construction loans?
Paid invoices demonstrate that materials or services have been procured, supporting the legitimacy of expenses claimed in draw requests and mitigating the risk of over-disbursement.
What are the potential consequences for a financial institution if they fail to properly monitor draw requests in construction lending?
Failure to monitor draw requests can result in excessive loan disbursements, increasing financial exposure if the actual project costs exceed available funds, potentially leading to default or foreclosure.
How does the timing of draw requests impact the risk of fraud in construction lending?
Delayed or irregular draw requests may indicate financial stress or mismanagement in the project, prompting lenders to investigate for potential fraud or misappropriation of funds.
In construction lending, why is it crucial for financial institutions to conduct a cost-to-complete estimate?
A cost-to-complete estimate ensures that the loan remains balanced against the actual expenses incurred, preventing over-disbursement and identifying discrepancies that may indicate fraudulent activities.
What measures can a financial institution implement to detect and prevent fraudulent activities related to draw requests?
Implementing thorough documentation checks, conducting regular site inspections, verifying contractor payments through lien releases, and reconciling financial statements can enhance fraud detection and prevention efforts.
What does it mean when a borrower sells loan collateral “out of trust”?
Selling loan collateral “out of trust” refers to unauthorized sales of property without informing or obtaining consent from the lender, potentially leaving the lender with no collateral if the borrower defaults.
What are some red flags that might indicate fraudulent activities in the context of draw requests for construction loans?
Red flags include missing or altered documentation, requests for unauthorized expenses, discrepancies between budgeted and actual costs, and unexplained changes in project scope or costs without proper approvals.
How can nonperforming loans indicate the presence of fraud?
Nonperforming loans, where borrowers struggle or fail to make payments, can result from fraudulent activities such as inflated appraisals, false financial statements, or equity skimming.
Describe how equity skimming contributes to loan fraud.
Equity skimming occurs when borrowers use loan funds without intending to repay, often by renting out or selling property purchased with the loan proceeds without making mortgage payments.
What role do fraudulent appraisals play in loan fraud schemes?
Fraudulent appraisals overstate the value of property, enabling borrowers to obtain larger loans than justified by the property’s actual worth, leading to higher risks of default.
How can high turnover in a real estate developer’s personnel signal potential loan fraud?
High turnover in personnel may indicate internal operational issues within the developer’s organization, which could be associated with mismanagement or underlying financial difficulties.
What are some indicators of change order abuse in construction projects?
Change order abuse may involve frequent or significant amendments to original contracts, potentially indicating collusion between contractors and project officials to increase project costs after contract award.
How can change orders be used as a tool for fraud in construction projects?
Fraudulent change orders may be used to inflate project costs, divert funds, or generate kickbacks by manipulating project scope or costs after the initial contract award.
Why are lien releases important in the context of draw requests for construction loans?
Lien releases confirm that subcontractors have been paid for work performed, reducing the risk of financial claims against the property and ensuring proper use of loan funds.
What risks are associated with developer overhead costs in construction financing?
Developer overhead costs can be misused as working capital for non-project expenses, potentially increasing project costs and affecting the loan’s financial viability.
Explain the term “land flips” in the context of loan fraud.
Land flips involve the rapid resale of property at an inflated price to justify larger loans, often without genuine improvements or changes that justify the increased valuation.
How can disguised transactions lead to loan fraud?
Disguised transactions involve sham transactions or loans without substance, used to conceal other financial problems or to access funds fraudulently under false pretenses.
Why is it important for lenders to monitor the tenant mix in commercial projects?
Changes in tenant mix can indicate management issues or financial instability in commercial projects, potentially affecting property cash flows and the ability to meet loan obligations.
What steps can financial institutions take to detect fraudulent draw requests in construction lending?
Financial institutions should verify supporting documentation, reconcile expenses with the approved budget, and conduct site inspections to ensure that draw requests accurately reflect project progress and costs.
How do change orders impact project management in construction lending?
Change orders modify project scope or costs after contract award, requiring approval to ensure they are legitimate and necessary adjustments rather than tools for fraud or mismanagement.
What are the implications of a nonperforming loan in the context of loan fraud detection?
Nonperforming loans may indicate underlying fraud schemes such as bribery, false statements, or misrepresentation of project costs or financial health, necessitating thorough investigation by fraud examiners.
What is a common method used in construction loan fraud schemes to conceal over-budget costs?
Developers often hide over-budget construction costs by reallocating funds from contingency budgets or tenant improvement allocations.
Why are draw requests considered a significant risk area in construction lending?
Draw requests provide opportunities for developers to fraudulently request advances for inappropriate costs or for projects unrelated to the loan.
How do loan fraud schemes involving collateral sold “out of trust” typically unfold?
Borrowers sell loan collateral without lender authorization, often discovered only after default, leaving lenders with no collateral to recover.
How can change orders be indicators of fraud in construction projects?
Abnormal numbers or amounts of change orders may indicate collusive bidding or over-inflated project costs, potentially concealing other fraudulent activities.
What are some key documents that should be present in a construction loan file to mitigate fraud risks?
Documents such as the architect’s report, plans and specifications, inspection reports, lien releases, and a loan balancing form are crucial to verify the legitimacy of draw requests and project progress.
Why are missing or altered documents particularly concerning in construction lending?
Missing or altered documents can indicate attempts to conceal fraudulent activities, such as overstating project progress or misappropriating funds.
What role does retainage play in construction lending, and why is it important?
Retainage ensures completion of work and payment to subcontractors. It helps mitigate fraud by securing funds until project completion and lien periods expire.
Why is high turnover in a real estate developer’s personnel considered a red flag for fraud?
High turnover may indicate internal operational issues, potentially signaling underlying problems such as mismanagement or fraudulent activities.
What are some red flags of loan fraud related to nonperforming loans?
Red flags include fraudulent appraisals, false statements on loan applications, equity skimming, and disguised transactions designed to conceal true loan performance.
How can change in ownership makeup (business divorce) be indicative of fraudulent activity?
A sudden change in ownership structure often accompanies disputes over financial mismanagement or fraud, prompting partners to seek separation.
What role do missing documents in loan files play in identifying potential fraud schemes?
Missing documents may indicate attempts to cover up deficiencies or fraudulent activities, such as waiver of necessary documents to obscure loan terms
Why are loan increases or extensions flagged as potential indicators of fraud in lending?
Multiple loan increases or extensions may suggest attempts to conceal a nonperforming loan or to facilitate related-party transactions without proper underwriting.
How do disguised transactions contribute to fraud in lending?
Transactions disguised to avoid recording loan loss reserves or to facilitate quid pro quo arrangements with borrowers can mask underlying financial weaknesses or fraud.
What are some critical documents and checks involved in draw requests that help mitigate fraud risks?
Documents such as paid invoices, lien releases, inspection reports, and bank reconciliations are crucial for verifying the legitimacy of costs claimed in draw requests.
How can cash flow deficiencies in commercial projects serve as red flags for fraud?
Unexplained cash flow deficiencies may indicate diversion of funds or mismanagement, highlighting potential fraud schemes impacting project viability.
Describe the primary characteristics of real estate fraud.
Real estate fraud involves any false representation made with the intent to deceive in connection with a real estate transaction. It often includes misrepresentations related to property value, borrower qualifications, or loan terms.
What are common examples of loan falsification in real estate transactions?
Loan falsification can involve altered bank statements, fabricated earnings documentation, fraudulent letters of credit, misrepresentation of employment, and failure to disclose liabilities.
Explain the role of forged documents in perpetrating mortgage fraud schemes.
Forged documents such as tax records, bank statements, and lease agreements are used to falsely verify borrower income and assets, thereby deceiving lenders about the borrower’s financial status.
How does the income capitalization approach contribute to the valuation of commercial properties in real estate transactions?
The income capitalization approach estimates property value based on its income-generating potential. It is particularly useful for commercial properties where income is a key factor in determining value.
Describe the purpose and process of the sales comparison approach in real estate appraisals.
The sales comparison approach evaluates a property by comparing it to similar properties that have recently sold. Adjustments are made based on differences in location, size, condition, and other relevant factors.
What are the typical components of a narrative appraisal report used in complex commercial real estate transactions?
A narrative appraisal report includes detailed information about the property, its surroundings, market conditions, and the reasoning behind the appraiser’s valuation. It often includes maps, photographs, and charts.
Explain the concept of “made-as-instructed” appraisals and why they might raise red flags in real estate transactions.
Made-as-instructed” appraisals refer to valuations that are biased or manipulated to meet specific expectations, often resulting in inflated property values. They raise red flags because they compromise the appraisal’s independence and accuracy.
How does the cost approach to property valuation differ from the sales comparison approach?
The cost approach estimates property value by calculating the cost to replace the property with a similar one, considering depreciation. In contrast, the sales comparison approach bases valuation on recent sales of comparable properties.
What are some indicators of appraisal fraud that fraud examiners should look for in real estate transactions?
Indicators include unusually high appraisal fees, the use of invalid or inappropriate comparables, missing or contradictory supporting information, and appraisals that don’t align with documents in the loan file.
Describe the types of fraudulent activities that might involve the use of falsified appraisal reports.
Fraudsters might use falsified appraisals to justify marginal loans, extend or renew bad loans to avoid losses, deceive stakeholders about property values, or manipulate loan approvals to achieve personal gain.
How can fraud examiners detect fraudulent income documentation in mortgage applications?
Fraud examiners can detect fraudulent income documentation by comparing it with other documents in the loan file, such as bank statements and tax records. Discrepancies or inconsistencies may indicate fraud.
Explain the significance of the fair market value in real estate transactions.
Fair market value is the estimated price at which a property would sell on the open market between a willing buyer and a willing seller. It serves as a basis for determining property taxes, loan amounts, and sales prices.
What role do appraisers play in preventing real estate fraud, specifically through the appraisal process?
Appraisers help prevent fraud by providing independent and accurate valuations based on market data and property inspections. Their role ensures that property values are fairly represented to lenders and stakeholders.
How does the income capitalization approach accommodate the valuation of income-producing properties?
The income capitalization approach values income-producing properties based on their expected cash flows. It considers factors such as rental income, operating expenses, vacancy rates, and market conditions to determine property value.
What steps should fraud examiners take to verify the accuracy and legitimacy of appraisals in real estate transactions?
Fraud examiners should review appraisal reports thoroughly, compare them with documents in the loan file, assess the appraiser’s credentials and independence, and verify the accuracy of key assumptions such as market data and property conditions.
Name three key parties involved in a mortgage transaction and briefly describe their roles.
Key parties include the mortgagor (borrower), mortgagee (lender), and mortgage broker. The mortgagor borrows money, the mortgagee funds the purchase, and the broker facilitates transactions for a commission.
Define mortgage fraud and explain why it is prevalent in the mortgage industry.
Mortgage fraud involves intentional misrepresentation or omission of information related to a mortgage loan application, typically for financial gain. It adapts to economic changes and lax lending practices, as seen during the 2008 recession.
How has the role of mortgage brokers evolved over time?
Historically, brokers primarily facilitated mortgage loans between borrowers and lenders. Today, they still play a significant role in originating loans but operate under stricter regulations due to past abuses.
What factors contribute to the persistence of mortgage fraud?
Commission-driven incentives, intense lender competition, diverse loan products, high loan volumes, the subprime lending market, technological vulnerabilities, and involvement of new players in the industry contribute to mortgage fraud.
How does the secondary market influence mortgage lending practices?
Mortgage loans are often sold in the secondary market shortly after origination, providing liquidity to lenders and enabling them to originate more loans without relying heavily on deposits.
Describe the impact of the 2008 subprime mortgage crisis on the mortgage industry
The crisis led to the collapse of major financial institutions, financial reforms, and increased austerity measures in Europe. It also exposed vulnerabilities in lending practices and highlighted the need for stricter regulations.
What role does technology play in facilitating mortgage fraud?
Technology facilitates the fabrication of loan documentation, false verifications through prepaid mobile phones and mail drops, and electronic closings that may lack proper oversight.
Discuss the impact of lender competition on mortgage fraud.
Intense competition can pressure lenders to cut costs and relax underwriting standards, increasing the likelihood of fraudulent practices to secure loans quickly.
How do mortgage lenders and brokers profit from high loan volumes?
High loan volumes increase production but may compromise quality control and due diligence, making it easier for fraudulent loans to slip through the system.
Define a subprime loan and explain its role in mortgage fraud.
A subprime loan is offered to borrowers with poor credit histories at higher interest rates. They were prominent in the 2008 crisis and are susceptible to fraud due to increased risk and less stringent underwriting.
What are some common tactics used by fraudsters in mortgage fraud schemes involving technology?
Fraudsters use photo-editing software to falsify documents, rent mailboxes for false verifications, and manipulate electronic closings to obscure fraudulent activities.
Describe the role of mortgage investors in the mortgage industry.
Mortgage investors purchase mortgages as securities either from original lenders or the secondary market, providing liquidity to lenders and further influencing lending practice
How has the mortgage industry responded to the challenges posed by mortgage fraud?
The industry has implemented stricter regulations, enhanced oversight of mortgage transactions, and adopted technologies to detect and prevent fraudulent activities.
What is the significance of the mortgage underwriter in preventing mortgage fraud?
Underwriters assess the creditworthiness of borrowers and verify information on loan applications, playing a crucial role in detecting inconsistencies or falsifications that may indicate fraud.
Discuss the emergence of organized crime in mortgage fraud schemes.
Organized crime groups exploit opportunities in mortgage fraud due to potential high profits, minimal risks compared to other criminal activities, and lenient penalties, as reported by the FBI.
What is a builder bailout scheme, and what are its key characteristics?
A builder bailout scheme occurs when a builder, facing financial difficulties due to stagnant inventory, uses schemes like hidden seller financing and inflated property values to quickly sell properties. Characteristics include new construction in an overbuilt market, inflated commissions, and undisclosed incentives.
Describe an air loan scheme in the mortgage industry.
An air loan is a fraudulent loan for a nonexistent property. Perpetrators fabricate documentation including borrower identity, property ownership, and appraisals. It involves high collusion and typically results in early default
How do identity fraud schemes exploit personal information in mortgage fraud?
Identity fraud schemes involve insiders like mortgage brokers using stolen or falsified identification to facilitate loans for individuals with poor credit, bypassing lender scrutiny.
Explain the characteristics and risks associated with fraudulent sale scams.
Fraudulent sale scams involve filing forged property transfer documents to obtain loans on properties not owned by the perpetrator. They exploit absentee or deceased property owners.
What preventive measures can jurisdictions implement against unauthorized draw on home equity line of credit (HELOC) fraud?
Preventive measures include using biometric methods for authentication, camera surveillance at recording offices, and legislative actions to deter fraudulent filings.
What is the principle behind a fraudulent second lien scheme?
In a fraudulent second lien scheme, perpetrators use inflated appraisals and collusion among loan officers, appraisers, and title agents to obtain additional loans against properties with insufficient equity.
Discuss the phantom-help scam in foreclosure rescue schemes.
The phantom-help scam involves promising foreclosure relief but charging homeowners high fees without providing any meaningful assistance, often resulting in bankruptcy filings by scammers.
What is the lease-back scheme in foreclosure rescue scams, and why is it fraudulent?
In a lease-back scheme, homeowners transfer property ownership to scammers under the promise of leasing back the property. Scammers fail to uphold the lease agreement, leading to loss of property and equity for homeowners.
How did loan modification programs become susceptible to fraud following the 2008 financial crisis?
Fraudulent practices in loan modification programs included misrepresentation of financial hardship, occupancy status, and income levels to secure more favorable loan terms from lenders.
What role do short sale facilitators or negotiators play in short sale fraud schemes?
Short sale facilitators, often unregulated, exploit distressed homeowners by charging upfront fees for negotiating with lenders, flipping properties at a profit, or facilitating straw buyer schemes.
Explain the concept of a charge upfront fee in the context of short sale fraud.
Fraudulent short sale facilitators charge distressed homeowners upfront fees for negotiating with lenders but fail to provide legitimate assistance, resulting in financial loss for homeowners.
How do foreclosure rescue scams exploit vulnerable homeowners?
Scams like phantom-help and lease-back schemes prey on distressed homeowners facing foreclosure by promising relief or tenancy while deceiving them into surrendering property ownership.
What distinguishes identity theft schemes from identity fraud schemes in mortgage fraud?
Identity theft schemes involve assuming another person’s identity to fraudulently acquire property or loans, often through forged documents and collusion with insiders in the mortgage industry.
Describe the risks associated with using straw borrowers in mortgage fraud schemes.
Straw borrowers allow fraudsters to use their identity and credit history to obtain loans under false pretenses, often involving collusion with industry insiders to fabricate loan applications.
How did the economic recession of 2008 contribute to the proliferation of mortgage fraud schemes?
The recession created conditions like decreased property values and increased financial desperation among builders and homeowners, leading to schemes like builder bailouts and foreclosure rescue scams.
What is a builder bailout scheme?
A builder bailout scheme occurs when a builder faces financial distress due to unsold inventory. The builder may use hidden seller financing, inflated property values, and undisclosed incentives to quickly sell properties and pay off debts.
Describe an air loan scheme in the context of mortgage fraud.
An air loan scheme involves fraudulent loans for nonexistent properties. Colluding insiders fabricate all documentation, including borrowers and property appraisals, leading to substantial financial losses for lenders.
Explain the concept of foreclosure rescue scams.
Foreclosure rescue scams prey on distressed homeowners by promising to save their homes through fraudulent schemes like phantom-help scams or lease-back schemes, ultimately resulting in financial loss for the homeowners.
What are some common tactics used in short sale frauds?
Short sale frauds often involve charging upfront fees for negotiation services not rendered, or manipulating short sale transactions to benefit insiders through undisclosed second transactions at higher prices.
What role do identity fraud and identity theft play in mortgage fraud?
Identity fraud involves using stolen personal information to secure loans fraudulently, often by insiders like mortgage brokers. Identity theft involves assuming someone else’s identity to perpetrate mortgage fraud schemes.
Differentiate between property flipping and property flopping.
Property flipping involves legitimate resale for profit after improvements, whereas property flopping involves manipulating short sales by undervaluing properties to acquire them cheaply and resell them quickly at inflated prices.
What are the risks associated with reverse mortgages in terms of fraud?
Risks include inflated property valuations, identity theft, and convincing seniors to use reverse mortgages for fraudulent investments, leading to financial exploitation of elderly homeowners.
Explain the concept of equity skimming in mortgage fraud.
Equity skimming involves purchasing properties with minimal investment, renting them out without paying mortgages, and profiting from rental income before properties are foreclosed, often leaving lenders with losses.
What is mortgage pulling, and how does it contribute to fraud?
Mortgage pulling involves disguising loans that exceed legal limits by issuing them to different partners of a partnership, thereby avoiding scrutiny and potentially defrauding lenders through fraudulent loan applications.
How do non-arm’s-length short sales contribute to mortgage fraud?
Non-arm’s-length short sales involve collusion between parties to undervalue properties, deceive lenders, and allow homeowners to retain properties through fraudulent means, circumventing fair market practices.
Discuss the characteristics and red flags of builder bailout schemes.
Builder bailout schemes often occur in overbuilt markets with inflated commissions, non-disclosed incentives, and payments made by builders to hide financial distress, leading to eventual loan defaults and vacant properties.
What preventive measures can lenders implement to combat short sale frauds?
Lenders can require disclosures of all transactions and relationships, use independent valuation assessments, and enforce strict oversight to prevent short sale facilitators from exploiting distressed homeowners.
How do fraudulent short sales impact lenders and the housing market?
Fraudulent short sales burden lenders with losses due to undervalued properties and non-disclosed secondary transactions, undermining market stability and financial integrity.
Explain the risks associated with property flipping in mortgage fraud.
Property flipping risks include fraudulent appraisals, rapid resale at inflated values, and improper use of loan funds, leading to financial losses for lenders and destabilization of property markets.
What regulatory measures can mitigate risks associated with reverse mortgages?
Regulatory measures include mandatory counseling for borrowers, restrictions on loan-to-value ratios, and enhanced oversight to prevent inflated property appraisals and financial exploitation of elderly homeowners.
What is new account fraud, and when does it typically occur?
New account fraud occurs within the first ninety days of opening an account, often initiated by perpetrators who open accounts with the intent to commit fraud.
How do fraudsters typically use false identification in new account fraud?
Fraudsters use easily obtainable false identification to open accounts under fake identities, enabling them to withdraw funds before the bank detects the fraud.
Describe a common scheme involving business accounts using stolen checks.
Fraudsters open new business accounts using checks stolen from other businesses, withdraw the funds, and close the account before the theft is discovered.
What is mobile deposit fraud, and why is it particularly risky for financial institutions?
Mobile deposit fraud involves using digital images of checks to deposit funds without physical verification, which allows fraudsters to remain anonymous and forge deposits.
What is the process in personal accounts using fraudulent checks?
Fraudsters open new personal accounts with forged or stolen checks, deposit one and withdraw cash from the other shortly after, often leaving the bank with a loss.
How can financial institutions mitigate the risk of mobile deposit fraud?
Institutions can set low daily deposit limits, impose waiting periods on new accounts, and share deposit information to detect duplicate items.
What steps should financial institutions take to prevent new account fraud?
Institutions should verify the identity of new customers with reliable identification documents and question large cash deposits and suspicious transaction patterns.
What risk does automated teller machine (ATM) deposit pose in new account fraud?
Similar to mobile deposits, ATM deposits do not require face-to-face transactions, making them susceptible to fraud by allowing anonymous deposits.
Why is it crucial for tellers to be trained in identifying fraudulent checks used to open new accounts?
Tellers should recognize signs such as altered identification, unusual account activity, and discrepancies in check details to prevent fraudulent account openings.
What are some red flags indicating potential new account fraud?
Red flags include customers from outside the bank’s service area, inconsistent personal details, immediate cash withdrawals after deposits, and requests for temporary checks.
What are some common behaviors or characteristics of potential new account fraud perpetrators?
Perpetrators may exhibit nervousness, impatience, or attempts to rush through account opening processes, which should raise suspicions for tellers and staff.
How can financial institutions verify the legitimacy of business accounts during the opening process?
Institutions should verify business legality, compare provided information with official records, and conduct visual checks of the business premises where possible.
How can financial institutions use customer identification services and credit reporting agencies to prevent new account fraud?
Institutions should verify customer information against third-party databases and use credit reports to assess the customer’s financial history and credibility.
Why are large cash deposits and rapid fund withdrawals considered risky behaviors in new account transactions?
These behaviors, known as pass-through transactions, can indicate attempts to quickly move illicit funds through accounts before detection or investigation.
What are some additional measures financial institutions can take to protect against new account fraud beyond identity verification?
They can implement fraud detection systems, train staff in fraud awareness, and regularly update policies to address evolving fraud tactics and vulnerabilities.
What is wire transfer fraud, and why is it particularly risky for businesses?
Wire transfer fraud involves unauthorized or fraudulent transfers of funds through electronic means. It poses a significant risk to businesses because a single major fraud incident can severely impact their financial stability.
Describe the common method of dishonest bank employees perpetrating wire transfer fraud.
Dishonest bank employees with access to account information may wire funds to themselves or related parties, exploiting their insider access for personal gain.
How do fraudsters use misrepresentation of identity in wire transfer fraud schemes?
Fraudsters posing as customers use pretext calls to obtain correct account information from banks, then order transfers to dummy accounts in another bank, masquerading as legitimate transactions.
What security measure is recommended to prevent unauthorized wire transfers related to system password compromises?
Financial institutions should implement secure password protocols and restrict access to sensitive account information, especially for temporary users like computer consultants.
Explain the term “forged authorizations” in the context of wire transfer fraud.
Forged authorizations involve falsifying bank officers’ or customers’ signatures or permissions to transfer funds to unauthorized accounts, often benefiting the fraudster.
How can unauthorized entry and interception contribute to wire transfer fraud?
Unauthorized individuals gaining access to wire rooms or intercepting transmissions can alter transfer details or initiate unauthorized transactions, bypassing normal security protocols.
What role do audits play in preventing wire transfer fraud?
Audits conducted by fraud examiners or auditors help verify compliance with wire transfer policies, review transaction logs, and ensure that controls are effective in detecting and preventing fraud.
What are some recommended controls for businesses to prevent wire transfer fraud?
Businesses should require dual authorization for wire transfers, maintain secure password protocols, conduct regular audits of transactions, and restrict access to sensitive information and wire transfer facilities.
How can financial institutions enhance security against wire transfer fraud?
Financial institutions should issue unique authorization codes, maintain up-to-date lists of authorized personnel, monitor all incoming and outgoing wire transfers, and verify transaction details with customers directly.
Why is separating duties among wire transfer personnel important for fraud prevention?
Separation of duties ensures that employees handling wire transfer requests do not also verify the transactions, reducing the risk of internal collusion or unauthorized transactions.
What precautionary measures should banks take regarding wire transfer requests received via fax?
Banks should verify the authenticity of wire transfer requests by contacting customers directly using phone numbers on file, rather than relying solely on faxed instructions which may be forged.
Why is wire transfer fraud considered a significant threat in today’s digital banking environment?
The digital nature of wire transfers allows fraudsters to exploit vulnerabilities in electronic transactions, often involving large sums of money and sophisticated methods of deception.
How can financial institutions mitigate risks associated with wire transfer fraud from external parties?
Institutions should screen wire transfer personnel thoroughly, train employees on fraud awareness and internal controls, and require mandatory vacation periods to detect unauthorized activities.
What steps can businesses take to verify the authenticity of wire transfer instructions?
Businesses should conduct regular reconciliations of accounts affected by wire transfers, maintain transaction logs, and verify instructions with customers through secure communication channels.
How do mobile deposits and ATM transactions contribute to the risk of new account fraud in wire transfer schemes?
Mobile deposits and ATM transactions provide convenient but potentially vulnerable avenues for fraudsters to initiate unauthorized transfers, often without face-to-face verification
What is an automated teller machine (ATM) primarily used for?
An ATM is primarily used for dispensing cash, but it can also perform functions like depositing funds and checking account balances.
What are some examples of ATM fraud schemes?
ATM fraud schemes include theft of cards and PINs, employee manipulation, counterfeit ATM cards, counterfeit ATMs, skimming devices, and shimming devices targeting chip-based cards.
What is shimming and how does it differ from skimming?
Shimming targets chip-based cards by placing a small device inside the card reader to collect card data, enabling fraudsters to create magnetic-strip card clones for unauthorized transactions.
How does skimming work in the context of ATM fraud?
Skimming involves installing devices on ATMs that capture payment card information, including PINs, typically in secluded or less secure locations.
How can financial institutions detect ATM fraud involving skimming devices?
Detection involves monitoring for unusual ATM usage patterns, conducting regular inspections of ATM hardware, and using technologies that detect foreign devices attached to ATMs.
What is wire transfer fraud, and why is it particularly risky for businesses?
Wire transfer fraud involves unauthorized transfers of funds typically initiated through deceptive means. It poses a significant risk to businesses as a single major fraud incident can severely impact their financial stability.
Name common schemes associated with wire transfer fraud.
Common schemes include dishonest bank employees transferring funds improperly, misrepresentation of identity to obtain account information, compromised system password security, and forged authorizations.
How can financial institutions prevent wire transfer fraud?
Prevention measures include maintaining secure authentication methods, conducting regular audits of wire transactions, verifying all transfer instructions, and separating duties among employees handling wire transfers.
What role do behavioral analytics play in detecting account takeover fraud?
Behavioral analytics systems monitor transaction patterns to establish normal user behavior. Deviations from this behavior, such as unusual transaction volumes or locations, trigger alerts for further investigation.
Describe an advance-fee fraud scheme.
Advance-fee fraud involves persuading victims to advance money under false promises, such as offering access to large sums of money at below-market interest rates, often resulting in the loss of the upfront fee with no actual delivery of promised funds.
What are some red flags of advance-fee fraud?
Red flags include requests for fees to access funds, complex layers of intermediaries, and requests for confidentiality agreements to protect supposed deals.
What is the primary risk associated with ATM deposit fraud?
ATM deposit fraud occurs when fraudulent deposits are made, often using manipulated checks or other unauthorized means, leading to financial losses for the institution.
How can financial institutions protect against advance-fee fraud?
Protection measures include verifying the legitimacy of offers, conducting thorough due diligence on intermediaries, and avoiding transactions that require upfront fees without clear guarantees.
Why are wire transfers particularly vulnerable to fraud?
Wire transfers are vulnerable due to their immediate and irreversible nature once executed, making them attractive targets for fraudsters seeking quick financial gain.
How can financial institutions enhance security against ATM fraud?
Enhanced security measures include installing anti-skimming and anti-shimming technologies, ensuring ATMs are located in secure areas, and implementing regular inspections and maintenance of ATM hardware.
What is a common type of fraud involving automated teller machines (ATMs)?
Skimming involves using devices to capture payment card information at ATMs, often through false card readers or PIN entry overlays.
How does shimming differ from traditional skimming at ATMs?
Shimming targets chip-based cards by inserting a small device into the ATM card reader to capture data from the card’s chip, enabling fraudsters to create magnetic strip clones.
What are some detection methods for account takeover fraud?
Automated monitoring systems can detect anomalies such as unusual transaction volumes, unexpected geographic locations, or irregular login patterns compared to a user’s typical behavior.
What is an example of account takeover fraud?
Account takeover occurs when a fraudster gains unauthorized access to a customer’s account, often through phishing or data breaches, to conduct transactions without the account holder’s knowledge.
Describe a common fraud scheme involving letter-of-credit (LC) transactions.
LC fraud often involves presenting forged or fraudulent documents to the issuing bank to obtain payment under false pretenses, typically in international trade transactions.
What are “inside/outside” fraud schemes, and how are they perpetrated?
Inside/outside fraud involves collusion between insiders and external parties or criminals. Insiders may manipulate systems or provide access to facilitate fraud schemes.
How can financial institutions prevent loan fraud related to brokered loans?
Implementing rigorous due diligence and independent reviews of loan documentation can help prevent fraud schemes where phony loans are sold or misrepresented.
What control measures can prevent letter-of-credit fraud in international trade?
Ensuring that all presented documents strictly comply with the terms of the LC agreement and conducting thorough document verification can mitigate risks of LC fraud.
What is a key indicator of advance-fee fraud?
Requests for upfront payments or fees in exchange for promises of future financial benefits or services are typical indicators of advance-fee fraud.
What role do separation of duties play in preventing financial institution fraud?
Separation of duties reduces the risk of fraud by ensuring that no single individual has control over all aspects of a transaction, thereby requiring collusion for fraud to occur.
How can financial institutions detect and prevent ATM deposit fraud?
Regular review of deposit transactions and implementing controls like deposit reconciliation and verification can help detect fraudulent deposits through ATMs.
Why are routine examinations of officers’ accounts important in fraud prevention?
Regular scrutiny of officers’ accounts during mandatory vacations can reveal unauthorized activities such as embezzlement or improper withdrawals from dormant accounts.
How does skimming at ATMs exploit the physical environment of the machine?
Skimming devices are often placed on ATMs in secluded locations where perpetrators can tamper with the machine undetected, increasing the likelihood of successful data capture.
What is the purpose of using shimming devices in ATM fraud?
Shimmers target chip-based cards by intercepting data from the card’s chip, allowing criminals to create fraudulent magnetic strip cards for unauthorized transactions.
How do automated monitoring systems detect anomalies in account activity?
These systems analyze transaction patterns such as unusual purchase volumes, atypical geographic locations, or inconsistent login behaviors to flag potentially fraudulent activities.
What is the objective of the Basel Committee on Banking Supervision (BCBS)?
The BCBS aims to enhance banking supervisory practices globally by promoting cooperation among central banks and supervisory authorities.
Describe the three pillars of the revised Capital Adequacy Framework proposed by the Basel Committee.
The three pillars include: (1) Minimum capital requirements, (2) Supervisory review of internal assessments and capital adequacy, and (3) Market discipline through effective disclosure practices.
What is the purpose of the Basel Capital Accord introduced in 1988?
The Basel Capital Accord introduced a framework for measuring credit risk and establishing minimum capital standards, initially set at 8% of risk-weighted assets.
What role does the Bank for International Settlements (BIS) play in supporting the Basel Committee?
The BIS provides the secretariat for the Basel Committee and facilitates the committee’s work on setting international banking standards and best practices.
What are the Core Principles for Effective Banking Supervision (Core Principles) and how many principles do they encompass?
The Core Principles are a set of 29 minimum standards for supervisory practices, categorized into supervisory powers, responsibilities, functions, and prudential regulation and requirements.
How do countries typically use the Core Principles for banking supervision?
Countries use the Core Principles as benchmarks to assess and enhance the quality of their banking supervisory systems, adapting them to their specific national circumstances.
What is the purpose of Suspicious Transaction Reports (STRs) or Suspicious Activity Reports (SARs) as mandated by Recommendation 20 of the Financial Action Task Force (FATF)?
STRs or SARs require financial institutions to report transactions suspected of involving criminal proceeds or terrorist financing to the country’s financial intelligence unit for investigation.
Explain the significance of compliance with the Core Principles in relation to financial stability
High compliance with the Core Principles contributes to overall financial stability by strengthening supervisory systems, although it does not guarantee the prevention of individual bank failures.
How do STRs/SARs contribute to combating financial crime globally?
They facilitate early detection and investigation of potential financial crimes, enabling authorities to disrupt illicit activities and prevent money laundering and terrorist financing.
Which laws in the United States mandate the reporting of Suspicious Activity Reports (SARs)?
The Bank Secrecy Act (BSA) in the United States requires financial institutions to file SARs with the Financial Crimes Enforcement Network (FinCEN) for suspicious transactions.
What is the role of financial intelligence units (FIUs) in the context of STRs/SARs?
FIUs review reported suspicious transactions and collaborate with law enforcement agencies to investigate and prosecute financial crimes.
How do STRs/SARs support international cooperation in combating financial crime?
By standardizing reporting requirements globally, STRs/SARs enhance international cooperation among FIUs and law enforcement agencies to combat cross-border financial crimes.
What challenges do countries face in implementing the Core Principles for banking supervision?
Challenges include adapting the principles to fit national regulatory frameworks, addressing supervisory shortcomings, and ensuring effective implementation across diverse banking systems.
Why do the Core Principles emphasize supervisory review and market discipline in addition to minimum capital requirements?
These elements enhance the robustness of banking supervision by ensuring that banks not only meet capital adequacy standards but also undergo rigorous internal assessments and adhere to transparent disclosure practices.
How does the Basel Committee encourage convergence of banking supervisory practices globally?
The committee promotes convergence by formulating broad standards and guidelines that member countries can adapt to their national systems, fostering a more consistent approach to banking supervision worldwide.
How did Basel II improve upon the 1988 Basel Capital Accord?
Basel II improved upon the 1988 Accord by introducing three pillars: Pillar 1 revised capital requirements to better reflect credit and operational risks, Pillar 2 emphasized effective supervisory review, and Pillar 3 enhanced market discipline through public disclosures.
What was the primary goal of the Basel II Framework?
The primary goal of the Basel II Framework was to enhance the sensitivity of capital requirements to the actual risks banks face, thereby promoting adequate capitalization and improving risk management practices.
What are the three options available under Basel II for assessing credit risk?
Under Basel II, banks can use the standardized approach, or choose from two internal ratings-based (IRB) approaches: Foundation IRB and Advanced IRB, depending on their risk measurement capabilities.
What is the purpose of the capital conservation buffer introduced under Basel III?
The capital conservation buffer ensures that banks maintain a buffer of capital to absorb losses during periods of financial stress, thereby promoting sound supervision and governance.
How did Basel III change the minimum requirements for common equity?
How did Basel III change the minimum requirements for common equity?
Describe the purpose of the countercyclical buffer in Basel III.
The countercyclical buffer aims to protect the banking sector during periods of excessive credit growth by requiring banks to hold additional capital during such phases.
What is the liquidity coverage ratio (LCR) under Basel III?
The LCR requires banks to hold sufficient high-quality liquid assets to cover their net cash outflows over a 30-day period under stressed conditions, ensuring liquidity resilience.
How does Basel III address the risks posed by global systemically important banks (SIBs)?
Basel III imposes additional loss absorbency requirements on SIBs based on their systemic importance, thereby mitigating risks to the financial system.
What are the key principles outlined in the BCBS guideline on operational risk management?
The key principles include developing a robust risk management environment, effective identification and assessment of operational risks, the role of supervisors in oversight, and the importance of disclosure.
What are some examples of operational risk event types identified by the BCBS?
Examples include internal fraud, external fraud, employment practices, business disruption, system failures, and execution errors.
How does Basel II address market risk in addition to credit risk?
Basel II introduced requirements for measuring and managing exposures to market risk, thereby broadening its scope beyond credit risk.
What is the role of Pillar 2 in the Basel II Framework?
Pillar 2 emphasizes the need for effective supervisory review of banks’ internal risk assessments to ensure adequate capitalization and risk management practices.
How does Basel III enhance global liquidity standards?
Basel III introduces metrics like the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) to monitor and manage liquidity risks effectively across banks and at the system-wide level.
Why did the Basel Committee on Banking Supervision (BCBS) update the Basel II Framework to Basel III?
Basel III was introduced to strengthen the regulation, supervision, and risk management of the banking sector in response to lessons learned from the 2008 financial crisis.
How did the Basel II Framework encourage banks to adopt more sophisticated risk management practices?
Basel II provided incentives for banks to develop internal risk measurement models and to align capital requirements more closely with their own measures of credit and operational risks.
How should banks handle the introduction of new products, activities, processes, and systems according to Principle 4?
Banks should ensure that the operational risk inherent in new products, activities, processes, and systems is subject to adequate assessment procedures before they are introduced or undertaken.
What is the purpose of Principle 4 in risk management for banks?
The purpose of Principle 4 is to ensure banks identify and assess the operational risk inherent in all material products, activities, processes, and systems.
According to Principle 5, who should receive regular reports on operational risk profiles and exposures?
Regular reports on operational risk profiles and exposures should be provided to senior management and the board of directors.
What is the main requirement of Principle 5 for banks in terms of operational risk?
Principle 5 requires banks to implement a process to regularly monitor operational risk profiles and material exposures to losses.
What does Principle 6 state about the policies, processes, and procedures banks should have in place?
Principle 6 states that banks should have policies, processes, and procedures to control and/or mitigate material operational risks.
How often should banks review their risk limitation and control strategies according to Principle 6?
Banks should periodically review their risk limitation and control strategies.
What is the main focus of Principle 7 for banks in risk management?
The main focus of Principle 7 is that banks should have contingency and business continuity plans to ensure their ability to operate on an ongoing basis and limit losses in the event of severe business disruption.
What should banking supervisors ensure according to Principle 8?
According to Principle 8, banking supervisors should ensure that all banks have an effective framework to identify, assess, monitor, and control/mitigate material operational risks.
What is the role of supervisors as outlined in Principle 9?
Principle 9 outlines that supervisors should conduct regular independent evaluations of a bank’s policies, procedures, and practices related to operational risks and ensure mechanisms are in place to stay informed about developments at banks.
According to Principle 10, what should banks disclose to allow market participants to assess their risk management approach?
Banks should make sufficient public disclosures to allow market participants to assess their approach to operational risk management.
What is a common method used by check counterfeiters to produce fraudulent checks?
Check counterfeiters commonly use a quality computer, a color inkjet printer, check format and MICR font software, magnetic ink cartridges, and paper stock to produce fraudulent checks.
What is one reason check fraud remains prevalent despite declining check use?
One reason check fraud remains prevalent is because payment by check continues to account for a significant proportion of all business-to-business payments in the United States.
How do business email compromise (BEC) schemes contribute to check fraud?
Business email compromise (BEC) schemes contribute to check fraud by targeting checks and facilitating fraudulent transactions.
What is check washing and how does it work?
Check washing involves using acid-based chemicals to erase specific information on a check, such as the payee name or amount, and then rewriting the check with new details.
What are paperhangers in the context of check fraud?
Paperhangers are individuals who specialize in passing phony checks, often targeting establishments with lax security or inexperienced employees.
Explain the check kiting scheme.
Check kiting is a scheme where multiple bank accounts are used to record the deposit of interbank transfers before recording the disbursement, temporarily inflating account balances with non-existent funds.
How do third-party bill paying services potentially contribute to check fraud?
Third-party bill paying services can contribute to check fraud by producing unauthorized checks that may go undetected until the account holder reviews their bank statement.
What is a demand draft and how can it be misused?
A demand draft is a check created without the buyer’s signature, using the buyer’s checking account number, and can be misused to withdraw funds fraudulently from a person’s bank account.
Why are traveler’s checks still targeted by fraudsters despite their declining use?
Traveler’s checks are still targeted by fraudsters because they provide a convenient payment method for some travelers, and counterfeit versions can be used to obtain cash.
What type of checks are targeted in payroll check fraud schemes?
Payroll check fraud schemes typically target payroll checks printed by processing companies, which can be duplicated and cashed with false identification.
What is dumpster diving in the context of check fraud?
Dumpster diving involves retrieving financial documents or information from a trash receptacle to commit fraud.
How did the fraudsters in the $10 million scheme utilize dumpster diving?
They retrieved checks, bank statements, credit card receipts, and other documents from garbage bins to create counterfeit checks, false driver’s licenses, and false credit reports.
What preventative measure can banks, merchants, and individuals take to avoid dumpster diving fraud?
They should shred and properly dispose of sensitive and confidential materials.
How can scanning contribute to check fraud?
Fraudsters can reproduce checks by using a scanner and a legitimate check, borrowing check stock without stealing it, and manufacturing checks by scanning corporate logos from business cards.
Describe a scenario where system password security compromise leads to check fraud.
Individuals with legitimate access to sensitive account and daily code information for a limited time (e.g., computer consultants) effect improper transfers through unauthorized access.
Why is check fraud considered a relatively low-risk crime?
The chances of being arrested and prosecuted are low, and the penalties are relatively mild in most jurisdictions.
What was the modus operandi of the organized crime ring involved in the Houston, Texas check fraud scheme in 2012?
They stole rent checks and money orders from apartment building lockboxes, washed and counterfeited the checks, and recruited individuals to cash the fraudulent checks
What is a common structure of a check fraud ring?
A counterfeiter or printer, a distributor, providers of false identification, and co-conspirators who open false bank accounts or negotiate fraudulent checks.
What are some of the necessary items for a check fraud ring to operate?
A scanner, printer, and personal computer are often the only necessary equipment.
How do organized crime rings obtain the information needed for large-scale check fraud?
They obtain information from illicit sources on the dark web, often from data breaches targeting financial, retail, and other businesses.
What are some key indicators tellers should look for to detect fraudulent checks?
Magnetic routing numbers, the accuracy of the date, visible differences in font, non-reflective magnetic ink for routing codes, and mismatched MICR coding.
How can businesses prevent check fraud when cashing business and payroll checks?
Examine all checks, insist the check be signed in front of the clerk, compare signatures, be careful with large-dollar checks from noncustomers, and look for signs of counterfeiting or alterations.
What techniques can be used to prevent check fraud?
Special security printing techniques such as a pattern of colors, scrambled indicia printing, micro lines, three-dimensional holograms, and security seals visible when held up to light.
What should investigators look for during a check fraud investigation?
Frequent deposits and checks in the same amounts, irregular check endorsements, large periodic balances with no apparent business, and inappropriate access to signature plates.
What specific actions should tellers take when handling suspicious checks?
Telephone the business or account officer for approval on suspicious requests, examine checks for poor-quality printing and paper, and be cautious of checks that appear to have been chemically altered or copied.
What precaution should businesses take to secure their checks from check washing?
Businesses should lock checks securely when not in use and avoid leaving blank computer-printed checks in the printer.
What is the purpose of check writing pens in preventing check washing?
Check writing pens use special ink that prevents criminals from using solvents to remove or alter the payee’s name or check amount.
