Between 2015 and 2017, Micheal J Tiernan the co-owner of Ford’s Colony Realty and Southeast Settlement and Title Company embezzled thousands of dollars from these companies, and he was ultimately indicted on seven felony counts of bank fraud as well as two felony counts of filing false tax returns and one felony count of failure to file income tax.
This story will never make international headlines, but it is the type of situation that banks need to be aware of. To give you a sense of the steps your financial institution should take to minimize the risk of fraud, this post is going to break down this case and look for places where the bank or the businesses could have adopted strategies that would have detected the fraud faster and lessened their losses.
1. Tiernan deposited $88,000 in checks from both companies into his personal account.
In 2015, Tiernan started his embezzlement scheme by writing checks worth a total of about $88,000 from the two businesses’ accounts to himself, and he deposited the checks in his personal account.
To spot fraudulent checks from business accounts, your financial institution may want to implement Payee Positive Pay. With Payee Positive Pay, business clients provide you with a file of the checks they write and the payee’s name. When you receive checks drafted from their accounts, your system automatically reviews the information on the check to ensure it matches the details in the review file, and it flags items that don’t match for additional review.
Payee Positive Pay can help to prevent thieves from inside and outside the company from writing fraudulent checks on a company’s account, but unfortunately, if the person drafting the review file is also the person writing the fraudulent checks, Positive Pay may not detect an issue.
Detecting this risk falls on the business. For their own financial safety, businesses should have a set of checks and balances that prevent any single person from having unbridled access to the business bank accounts. When you run a financial institution, you don’t have a lot of control over this element, but you can be proactive by educating your business customers about the risks of internal fraud, how to protect themselves, and the importance of limiting access to business accounts.
2. Tiernan changed the mailing address associated with the account to his home address.
After writing dozens of checks from the Southeast business bank account to himself, Tiernan requested a new signature card for the account, and he changed the address on the account from the business’s actual address to his home address.
To detect this type of fraudulent behavior, you need a fraud detection solution that doesn’t look at financial transactions in silos. Instead, you need fraud detection tools that analyze hundreds or even thousands of data points to look for unusual patterns or overlaps.
In this case, the CFO of the company ordered a new signature card, wrote company checks to himself at a time when the other executives were not receiving salaries, and changed the address on the account to his home address. On their own, each of these details can easily get past traditional fraud detection tools. In contrast, when you have fraud detection solutions that analyze all types of transactions including address changes and not just monetary transactions, you get a better look at the whole picture, and fraud becomes less likely to slip through the cracks.
3. Tiernan Wrote Another Round of Business Checks to Himself, After Cancelling a Large Amount of Debt
In 2016, Tiernan wrote 84 checks worth a total of $285,000 to himself from the Southeast business bank account. Then, he cashed or deposited these checks using his personal account. The following year, he wrote another 23 checks worth $111,352 to himself from the business bank account and also deposited those checks into his personal account.
These large deposits indicated that Tiernan was financially lucrative, but in 2016, the bank canceled $160,500 in debt from a home equity line of credit that Tiernan had with his wife. This type of discrepancy should immediately raise a red flag, and to detect these issues, your financial institution needs anti-fraud solutions that look at all transactions together rather than in silos.
As explained above, Payee Positive Pay and tightening access controls with the business could have helped with this issue, but beyond those basic safeguards, the fraud could have been detected by a program that looks for aberrations from typical spending patterns.
Fraud-detection tools that use machine learning to get to know your customers and build a profile of their actions. These tools learn how much your customers are likely to spend or even the types of payments they make on lines of credit. They also track data on types of payments, the timing of expenses, and other details. Then, when these tools spot aberrations such as dozens of checks being written to one person from the account, they flag the account for potential fraud.
4. Tiernan Backdated Invoices.
After the other co-owners of these entities brought forward a lawsuit against Tiernan, he tried to cover his tracks by backdating invoices in old accounting records for both companies. Again, access control and checks and balances are key for businesses who want to protect themselves from this type of fraud. ideally, at least two people should sign off on activities such as issuing invoices or backdating invoices.
Bank fraud costs you money and hurts your reputation. To protect your financial institution from all types of fraud, you need tools that look at hundreds of data points, analyze transactions in real-time, and use machine learning to get to know your customers.
At SQN Banking Systems, we help our clients implement the most effective fraud detection and prevention solutions for their financial institutions. Ready to improve anti-fraud measures at your bank? Then, contact us today.