Crossed Wires: Keys to Reducing Wire Transfer Fraud

The five young men were living the good life as they tooled around New Orleans in their pick of luxury cars – a Lexus SUV, Cadillac Escalade, Range Rover, Mercedes Benz, a Jaguar. But the opulence ended when the FBI and the U.S. Postal Service seized the vehicles and shut down their lucrative scam. Using fake wire transfers, the five had allegedly stolen more than $500,000 from the accounts of American Airlines, Avis Car Rental, Walgreens, and other large corporations. According to federal authorities, the men allegedly had set up accounts with two legitimate third-party companies that process electronic payments. Using stolen bank numbers from the large corporations’ accounts in Chicago, Atlanta, New York, and New Orleans, they purportedly used the third-party payment processors to debit the corporate accounts, which they claimed were their clients and owed them money, authorities said.1  

Wire transfers of funds are nothing new – they began in the United States in the 1940s. However, with today’s growing emphasis on a cashless society, wire transfers increased by 200 percent just in 1998. Not surprisingly, wire transfer fraud also has increased by 70 percent since 1995.

Typically, fraudsters who commit this type of crime are knowledgeable about wire transfer activity, have at least one contact within the target company, and are aggressive in carrying out the theft.

Instantaneous Transfer 

Wire transfer services electronically move funds worldwide from a financial institution to a beneficiary account at any banking point according to a customer’s instructions. (A banking point is any institution or business capable of receiving electronic transactions such as banks, savings and loans, credit unions, brokerage firms, and insurance companies.) On any day, $1 trillion to $2 trillion moves among financial institutions.

The most common methods for transmitting funds include Fedwire, book-entry securities service, and the Clearing House Interbank Payment System (CHIPS). Fedwire, a transfer system established by the U.S. Federal Reserve System, enables bank accounts in about 7,800 depository institutions to be debited and credited virtually instantaneously through Federal Reserve banks. The transactions primarily are for completing interbank purchases and sales of federal funds; purchasing, selling, and financing securities transactions; disbursing loan proceeds or repaying loans; and for conducting real estate business. (See sidebar.)

The book-entry securities service, also operated through Federal Reserve banks, facilitates the custody and transfer of federally guaranteed mortgage-backed securities, all U.S. Treasury securities, many federal agency securities, and certain international agency securities. CHIPs is used primarily for international electronic money transfers. (The Federal Reserve Board’s Web site is: www.federalreserve.gov. and the CHIPs Web site is: http://risk.ifci.ch.)
Although these technologies enhance operations and increase the efficiency of the financial institutions, they also provide a tremendous opportunity for criminals who learn to manipulate the electronic environment for their personal gain. Wire transfer fraud is a particularly dangerous risk to a business’s solvency – one major wire fraud can destroy any firm. Single losses average $100,000 or more. Fraud examiners and auditors need to advise management on ways to prevent and detect wire transfer fraud.

Business Audits 

Every firm, of course, must have written policies and procedures for wire transactions. In addition, fraud examiners or auditors should conduct unannounced audits of those transactions. Following are other examples of wire transfer controls.

• Make sure the person authorizing the wire transfer isn’t the individual who orders the wire transfer.
• Require those ordering transfers to have secure passwords.
• Maintain and keep a current list of those ordering wire transfers, and a log of all transfers.
• Require vacations of persons who handle wire transfers.
• Require that reconciliations of accounts affected by wire transfers be performed by persons not involved with the wire transfer process.
• Keep all confidential information about firms’ accounts and wire transfers in safe rooms secured with locks. Give computer key cards to these rooms to authorized personnel only. Shred trash.
  Businesses frequently perform vendor audits, but often neglect to audit their bank’s wire transfer controls. A fraud examiner should evaluate these areas.
• Pick a sample of transactions and review the log of the calls made back to the banking points to verify their authenticity (You may listen to the tape recording of the actual authorization to assure compliance with call-back rules.)
• Review documentation of past wire transfer activity from bank statements or bank on-line transaction history for a daily debit and credit match of each transaction.
• Obtain written confirmations of transactions from the wire transfer provider to determine the timeliness of their receipt by your firm.
• Promptly reconcile problems caused by the usual custom of ending all wire transfers for a day in the mid-afternoon. (Some customers believe they should receive credit and interest on funds received at the end of a day. However, wire transfers made after the afternoon closing time aren’t credited until the next business day.).

Bank Audits 

Financial institutions should ensure the following safeguards when transferring funds.

• Provide customers with unique codes that are required to authorize or order wire transfers.
• Maintain and update lists of employees authorized to perform wire transfer transactions.
• Compile audit trails of incoming and outgoing wire transactions, as well as the employee responsible for each portion of the transaction.
• Review all wire transfer transactions at the end of each day to ensure that the original transfer instructions were executed correctly.
• Make sure the businesses to which the funds are transferred are contacted to ensure authenticity of fund transfer requests. If the businesses are contacted by phone, the phone numbers used should be the original numbers given by the customers when the accounts were opened and not the phone numbers provided by the callers who requested the transfers.
• Don’t execute wire transfers solely from faxed instructions. Again, verify authenticity by phoning the original numbers given by the customers when the accounts were opened and not the numbers provided by the callers who requested the transfers.
• Require that all accounts affected by wire transfers be reconciled by bank employees not involved with the wire process.
• Ensure the in-house wire operations manual is available only to authorized personnel and secured when not in use – especially after hours. Cleaning crew employees could help themselves to client pass codes and other confidential information.
• Tape record all incoming and outgoing calls for wire transfer instructions.
• Carefully screen wire transfer personnel applicants.
• Reassign to other departments wire transfer employees who have given notice that they are resigning but still have some time left with the company.
• Require all employees involved in the transfer of funds to take at least five consecutive days of vacation each year; assign their duties only to other wire transfer department staff members during their absence.
• Make sure bank employees never disclose sensitive information over the telephone until the caller’s identity and authorization have been verified to the customer information file.
• Separate duties among wire employees who transmit or receive requests for funds. These employees shouldn’t also verify the accuracy of the transactions.
• Train employees on proper internal controls, fraud awareness, and the importance of protecting information. Share alerts issued by the Federal Reserve on fraudulent schemes.

Wire transfer schemes are a potential risk to businesses today. As technology advances, fraud examiners and auditors must stay current with these new technologies and preventive techniques to stave off potentially devastating frauds.

James Incaprera, CFSSP, CPP, is Louisiana investigations manager at Bank One in New Orleans, La. Joyce C. Lambert, Ph.D., CIA, CPA, is professor of accounting at the University of New Orleans.  

1The Times-Picayune, “4 Booked, 1 Sought in Theft of $500,000,” Jan. 6, 2000. 

SIDEBAR 

Federal Reserve – the Wire Transfer Referee – Influences Flow of U.S. Money 

Federal Reserve Banks were established by Congress in 1913 as the operating arms of the nation’s central banking system. Acting as the fiscal agent for the U.S. government and influencing the flow of money and credit in the nation’s economy, Reserve Banks:

• hold the cash reserves of depository institutions and make loans to them;
• move paper currency and coins into and out of circulation;
• collect and process millions of checks each day;
• provide checking accounts for the U.S. Treasury;
• issue/redeem government securities;
• supervise and examine member banks for safety and soundness; and
• set monetary policies.

The Federal Reserve System is divided into 12 Federal Reserve Districts with banks in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Twenty-five branches of these banks serve areas within each district.

Federal Reserve Banks generate their own income, primarily from interest earned on government securities and from the provisions of priced services to depository institutions as required by the Monetary Control of 1980. Federal Reserve Banks aren’t operated for a profit and return to the U.S. Treasury all earnings in excess of expenses.

Wire Transfers 

The Federal Reserve Banks operate the Fedwire funds transfer and book-entry securities services.

Fedwire Funds Transfer  

Depository institutions that maintain a reserve or clearing account with a Federal Reserve Bank may use Fedwire to send payments to, or receive payments from, other account holders directly. These payments primarily are for the settlement of inter-bank purchases and sales of federal funds; the purchase, sale, and financing of securities transactions; the disbursement of loan proceeds or the repayment of loans; and the settlement of real estate transactions.

In practice, Fedwire funds transfers are processed virtually instantaneously.

Fedwire funds transfers are final when the receiving depository institution account is credited or when the receiving depository institution is notified of the transfer, whichever comes first.

Book-Entry Securities  

The book-entry securities service, operated by the Federal Reserve Banks, facilitates the custody and transfer of federally guaranteed mortgage-backed securities, all marketable U.S. Treasury securities, many federal agency securities, and certain international agency securities. More specifically, this service handles:

• U.S. Treasury bills, notes, and bonds;
• debt securities issued by several federal and federally sponsored agencies, including the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), the Farm Credit System, the Federal Home Loan Banks, and the Student Loan Marketing Association (Sallie Mae);
• mortgage-backed securities (including collateralized mortgage obligations and real estate mortgage investment conduits) issued and guaranteed by Freddie Mac and Fannie Mae; and
• dollar-denominated bonds issued by the World Bank, regional development banks, and certain other international organizations.

Access to the book-entry securities service is limited primarily to depository institutions but can be granted, however, to a few other entities, such as federal agencies, state government treasurers (which are designated by the Department of the Treasury to hold securities accounts), and limited-purpose trust companies that are members of the Federal Reserve System. Non-bank brokers and dealers typically hold and transfer their securities through depository institutions that are Fedwire participants and that provide specialized government securities clearing services.

Source: Web site of The Federal Reserve Board, www.federalreserve.gov