Lynchburg Business

Raising Red Flags: How Businesses Are Fighting Fraud

Issue: April 2010 by Carrie Williams in Human Resources, Inside The Magazine

Everyone knows that being careless with your identity is asking for trouble. Identity theft remains the top complaint among consumers according to a 2009 report released by the Federal Trade Commission. However, the overall number of complaints actually dropped from more than 314,000 in 2008 to just over 278,000 in 2009. It seems that people are beginning to understand the importance of protecting their personal information.

In order to further lower the amount of negative feedback and the frequency of identity theft occurrences, the government has implemented the Fair and Accurate Credit Transactions (FACT) Act. All institutions under FTC jurisdiction must comply by June 1, 2010, the fourth extension from the original date of November 1, 2008.

Are you ready?

Many local businesses are already using the Red Flags Rule, a very important area of the FACT Act. This particular regulation, commonly referred to simply as “the rule,” continues to be a standard with institutions in the region. Though the rule was formally implemented in 2008, AVP and Branch Support Officer for Bank of the James, Lisa Wood, affirms that they have been incorporating many of the elements into their practices since the very beginning.

The key advantage of the rule for Wood is that it increases the awareness of bank employees to suspicious activity that could be alluding to fraud.

“The rule requires you to determine the risks based on account types and other banking activities, then identify incidents correlating to those categories that may indicate fraudulent or suspicious actions,” Wood explained.

Like Bank of the James, area branches of Select Bank and First National Bank have also been enforcing the regulations even before official requirements. Senior Vice President for First National Bank, Lucy Johnson, says that “many of the procedures and responses of the policy have been standard practice for our bank for many years.”

The principles inherent in the Red Flags Rule are out to protect customers first and foremost.

“The rule helps to protect our most important asset—the customer,” Sherri Sackett, AVP for Select Bank, said.

However, institutions that stay true to the regulations and procedures are certainly protecting themselves as well. Johnson described the rule as a way to “help the bank detect the possibility of identity theft and be in a position to prevent the theft or mitigate the consequences of our customers, as well as the bank.”

Each of the three aforementioned banks look for suspicious personal identifying information in order to identify possible Red Flag scenarios. These can address discrepancies, suspicious documents and unusual or unverified address changes that coincide with changes in account activity.

Another big one for businesses to look out for is an invalid tax ID number. Johnson suggests comparing that information against lists to make sure the customer is not stealing the number of someone who is now deceased. Banks also verify that the issue range for the number agrees with the customer’s birth date. Alerts and warnings from consumer reporting agencies also act as reputable Red Flags to look out for.

Different accounts pose different kinds of risks. To name a few, there are deposit, credit, consumer and business accounts. The list could go on and on. So which are the most important ones for a local business to monitor? For Select Bank, the accounts they deem the most predisposed to fraud are small business accounts.

“Business identity theft is growing at an alarming rate because many small business owners don’t think that they are susceptible to identity theft, which leaves them more vulnerable. A small business owner with good credit and a large credit limit can look extremely appealing,” Sackett explained.

Deposit accounts that integrate the use of a debit card also need to be carefully monitored. Wood says that employees with Bank of the James are trained to watch these particular accounts since, “historically within the industry, they are one of the most common targets for identity theft and fraudulent usage.”

A different approach to take in terms of identifying these high-risk accounts is to look at each one as they are opened. First National Bank “risk rates” each and every new account to determine on a case-by-case basis which ones need to be carefully scrutinized. Based on the activity expected of the account, Johnson says that the bank will assign it a rating to decide what its level of monitoring will be.

“Identity theft is more common and becoming much more sophisticated. It is important to take steps to protect your customers,” Wood said.

However, as the complaints show, these precautionary measures don’t always eradicate the possibility of identity theft. FTC-regulated entities have the responsibility of doing their best to make sure the Red Flags don’t even arise. Verifying all personal information before opening an account for a new customer or before making changes to those of an existing client will make it more difficult for identity theft to occur.

Johnson says that First National Bank asks “due diligence questions regarding the type of activity expected on new accounts and appropriately risk rate each account.” Making sure to do all the detail work in the beginning helps First National, and banks like them, avoid future discrepancies. This also helps employees become well-versed in the standard activity of a particular account so that they won’t necessarily need the mandated Red Flags Rule—their own subconscious red flags will wave on their own.

Tracking address changes and flagging suspicious activity on accounts when notified by customers are also active measures that many local banks are taking. Select Bank even has their own response team in place to follow predetermined steps when incidents arise. These steps could be anything from monitoring an account for a set amount of time, to notifying law enforcement, if deemed necessary.

As for local business owners, keeping your eye on the details is the best thing for you and your customers when it comes to fraud and identity theft.

“The damage that can occur to reputations and consumer confidence from a problem gone unchecked or unidentified can be disastrous,” Sackett said.

Bottom line: Don’t let your customers down by ignoring the Red Flags.