Banks, like other financial institutions, must detect and prevent fraudulent activity to protect their customers and organizations. To do this effectively, bank fraud investigations should be conducted to manage and mitigate fraudulent threats. These bank fraud investigations not only help detect bank fraud cases but also provide your organization with valuable insights into the nature of these attacks, assisting you to refine your organization's fraud detection and prevention systems.
To help your organization understand how to effectively perform bank fraud investigations, this blog covers the following:
- What is a Bank Fraud Investigation?
- Who Conducts a Bank Fraud Investigation?
- How Long Does a Bank Fraud Investigation Take?
- The Bank Fraud Investigation Process in 6 Steps
- Tools for Optimizing Banking Fraud Investigation
- FAQs About Bank Fraud Investigation
What is a Bank Fraud Investigation?
A bank fraud investigation is an internal process conducted by the bank to determine whether a suspicious claim or activity is genuinely fraudulent or not. The purpose of a bank fraud investigation is to identify and understand the fraud threats and to develop strategies for prevention.
The bank fraud investigation process also helps determine the next steps in addressing bank fraud cases. This involves confirming whether fraud has occurred, who committed it, how the fraud was carried out, and how to defend and prevent future bank fraud cases.
Who Conducts a Bank Fraud Investigation?
First and foremost, bank fraud investigations are the responsibility of the bank itself. The bank will submit a Suspicious Activity Report (SAR), which will be escalated to the proper legal authority. From there, the legal authority that further investigates fraud is heavily based on the relevant jurisdiction.
In the U.S., jurisdiction is extremely important for reporting suspicious activity and bringing charges against potential fraudsters. This can involve state or federal law enforcement agencies, ranging from local police departments to the Federal Bureau of Investigation (FBI).
How Long Does a Bank Fraud Investigation Take?
In the U.S., banks have ten business days to conduct a bank fraud investigation after a customer makes a claim. If the bank hasn’t made a determination by this point, it must temporarily credit the customer’s account while continuing the bank fraud investigation process. If the bank itself detects suspicious activity, this timeline doesn’t apply, but the bank still needs to file a Suspicious Activity Report (SAR) within 30 days of identifying the fraud.
Additionally, the duration of a bank fraud investigation varies depending on the case's complexity. Simple fraud cases might be resolved within a few days, while more complicated cases, such as fraud rings, can take months. The type of fraud attack, whether it involves banking fraud detection or more sophisticated methods, and the unique circumstances of each case influence the investigation timeline. Regardless of complexity, banks should resolve fraud cases quickly to minimize costs and prevent further fraudulent activity.
The longer a bank fraud investigation takes, the more it costs, and the longer the bank is vulnerable to fraud. Extended investigations use up resources and delay the implementation of effective fraud detection and prevention systems. By resolving bank fraud cases swiftly, banks can lower costs, free up investigators' time, and strengthen their fraud detection and prevention systems to prevent similar attacks in the future.
The Bank Fraud Investigation Process in 6 Steps
The bank fraud investigation process involves a series of key steps designed to identify, assess, and address fraudulent activity. Below are the six essential steps that can guide your organization through investigating bank fraud cases.
Step 1: The Bank is Alerted of Potential Fraud
The bank fraud investigation typically begins when suspicious activity is detected, either through a fraud detection and prevention system or when a customer reports potential fraud. Once the fraud is identified, the bank fraud case is escalated to investigators and prioritized based on severity. Alert scoring and case management systems streamline this process by flagging and organizing alerts, speeding up investigation time. These systems ensure that suspicious activity is promptly addressed, even if customers don't report it. This proactive approach minimizes threats and improves overall fraud detection and prevention.
Step 2: The Bank Investigates the Activity to Determine if It’s Fraud or Not
Once the bank fraud cases are prioritized based on importance level, the investigators can determine whether the suspicious activity amounts to fraud or not. During this bank fraud investigation stage, the bank will analyze relevant transaction details, including the transaction value, location, involved parties, and account information. If necessary, they gather additional data, such as IP addresses or transaction locations, to understand user behavior and identify how fraud occurred.
This analysis is crucial in uncovering suspicious activity and determining whether it’s part of a larger pattern of banking fraud. Once fraud is confirmed, the bank uses the gathered information to enhance its fraud detection and prevention system. For instance, the use of data monitoring solutions allows teams to analyze user behavior such as logins, account changes, and more so banks can predict potential fraud before it occurs.
Step 3: Make a Determination on the Case and Liability
After fully investigating the case and all its circumstances, the bank fraud investigation process moves to the critical step of determining liability. Was this a merchant error or a third-party fraud? Did the fraud detection system falsely flag legitimate activity? Did the customer file a false report?
Essentially, the bank needs to determine who is responsible and where liability lies to take the appropriate action moving forward, including who assumes the cost, who they report on, and who they charge for the fraud.
Step 4: Take Action on the Case
Once the bank has determined whether or not the activity was fraudulent and decided who is liable, they are typically ready to take action on the bank fraud case. This bank fraud investigation stage could involve stopping the transaction (if possible), banning the fraudster, or reimbursing the customer for their losses.
The bank can do several things, and in some cases, more than one will apply:
1. Reimburse the customer
The bank will likely reimburse the customer if the customer loses funds from the fraud (and the bank has determined they aren’t responsible or involved). Typically, this would involve the bank absorbing the costs themselves or pursuing legal action against the fraudster to recoup their losses.
According to the Fair Credit Billing Act, the cardholder can only be held liable for $50 in the event of fraud on their account, assuming they aren’t involved or they didn’t enable the fraud with poor account security. However, in many cases, the bank will absorb this cost themselves rather than force their customers to pay. This is entirely at the bank's discretion, but most banks will cover these costs to maintain high-quality customer service and user experience while strengthening their fraud detection and prevention system to avoid future fraud incidents.
2. Not reimburse the customer
In rare cases, the bank may choose not to reimburse the customer. This typically only occurs if the bank fraud investigation concludes or strongly suspects that the customer was somehow involved in the suspicious activity or is somehow at fault for it occurring. This could be the case if the customer filed a false report, participated in the alleged fraud, or somehow compromised their account’s security. At this point, the customer would have to legally pursue the fraudster themselves to recoup their losses.
3. Absorb the costs
Banks absorb the costs for a number of reasons. Typically, it boils down to keeping customers happy and maintaining or earning their loyalty. It could be that the incident is not worth escalating to warrant a full bank fraud investigation, as the costs of the investigation may outweigh the cost of the fraud itself. However, this approach should only be applied to one-off cases, but in situations where bank fraud is recurring, it’s essential to address the issue thoroughly to prevent future occurrences.
4. Charge the merchant
If the bank determines the merchant is liable, the bank will credit the customer and seek to recover the losses directly from the merchant. This may involve charging them a chargeback fee or even requesting a larger portion of the lost amount.
5. Pursue legal action against the fraudster
Rather than absorbing the costs of the fraud, the bank may choose to pursue legal action against the fraudster to recover these losses. This often requires costly legal action on the bank's part. Whether this is worth pursuing will depend on the legal costs associated with bank fraud investigations and whether the fraudster can be identified and held accountable.
Step 5: Update Fraud Detection and Prevention Systems
Once the bank fraud investigation is concluded, banks must integrate this knowledge into their fraud detection and prevention strategy and change their systems to accommodate this new information. This will allow you to close loopholes that expose your bank to fraud, allowing you to identify more fraud cases and prevent them from happening in the future.
Step 6: Submit a Suspicious Activity Report
In an effort to curb money laundering, terrorism financing, and other financial crimes, financial institutions are required to submit a SAR report. This ensures these criminals are investigated and held accountable for their actions, as law enforcement will pursue these incidents accordingly. A SAR report must be submitted within 30 days of the suspicious activity being discovered, although extensions can sometimes be granted for specific circumstances.
Tools for Optimizing Bank Fraud Investigations
Efficient banking fraud investigations rely on the right tools to streamline processes, prioritize cases, and enhance the effectiveness of teams. For instance,
Case Management software is ideal for helping teams manage investigations, including prioritizing and managing workloads. With this tool, teams can optimize and streamline their process by having cases escalated to the right investigator. Alert scoring systems are also great for prioritizing the cases that truly matter most to the bank, allowing the biggest threats to be investigated first. Tools like Transaction Monitoring can also help mitigate the need for investigations altogether. With proper transaction and data monitoring signals at your disposal, risk and compliance teams can actually monitor for indicators of potential fraud before it occurs.
At Unit21, we offer these tools to support banks and financial institutions in their bank fraud investigation. With the right tools in place, you can streamline your processes and better address fraud, reducing its impact and frequency.
Effectively Conduct Bank Fraud Investigations with Unit21!
Bank fraud investigations involve a constant trade-off between the potential fraud losses saved and the time and resources invested in the investigation. It’s important to remember that even low-value fraud can add up if it’s repeated. Conducting bank fraud investigations and investing resources in your strategies and systems can be a wise allocation of resources.
Schedule a demo today to learn more about how Unit21 can help improve your fraud investigation times and optimize performance!
Frequently Asked Questions About Bank Fraud Investigation
Navigating bank fraud investigations can raise many questions. To help clarify common concerns, we've compiled a list of frequently asked questions. Let’s take a closer look below:
What are the key components of an effective fraud detection and prevention system in banking?
An effective fraud detection and prevention system in banking involves multiple components, including real-time transaction monitoring, machine learning algorithms, artificial intelligence, behavior analytics, and risk scoring. These technologies help identify unusual transaction patterns, detect potential fraud attempts, and predict future threats before they occur.
What are the legal implications of bank fraud charges for businesses?
Bank fraud charges can have serious legal implications for businesses. If a company is found guilty of bank fraud, it can face heavy financial penalties, legal fees, and even criminal charges. The company’s reputation could also be significantly damaged, leading to the loss of customer trust and business relationships.
What role do SARs play in the bank fraud investigation process?
SARs are critical in escalating suspected fraud to the appropriate legal authorities. When a bank’s fraud investigators confirm that fraudulent activity has occurred, they must file a SAR, which law enforcement agencies like the FBI then review.
How can banks ensure their fraud detection and prevention system is compliant with regulatory standards?
To ensure your fraud detection and prevention systems are compliant, you must stay updated on the latest regulatory requirements related to financial crime prevention, including the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. Regular audits and updates to the system’s protocols, alongside ongoing staff training on compliance issues, are essential for maintaining adherence to legal standards and avoiding penalties.
What should a customer do if they suspect bank fraud, and how can they assist in the fraud investigation?
If a customer suspects fraud, they should immediately contact their bank’s fraud department to report the incident. They can assist the fraud investigation by providing any relevant transaction details, such as dates, amounts, and locations. Customers can also take steps like changing passwords and monitoring their accounts for any further suspicious activity.
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