As technology grows, fraud prevention is more vital than ever to protect your finances. By preventing fraud attacks before they happen, you can safeguard your organization from identity theft, impersonations, and internal fraud.
Below, we split the best practices for fraud prevention into three steps. Each step addresses every risk an organization faces. Read more to discover how you can protect your bottom line and maintain public trust!
What is Fraud Prevention, and Why Does It Matter?
Fraud prevention involves identifying risks and implementing security measures to protect financial assets, personal data, and banking transactions.
Fraud is a costly financial threat to businesses and individuals worldwide. According to the Association of Certified Fraud Examiners (ACFE) 2024 Report to the Nations, organizations lose 5% of their annual revenues to fraud, a whopping $4.7 trillion in global losses.
While many organizations have fraud response strategies in place, preventive measures are just as essential. As the saying goes, "Prevention is better than a cure." Even when fraud cases are resolved, their impact lingers. Aside from legal fines and direct financial loss, they also cause reputational harm. This negative impact on the organization makes it harder to attract customers, clients, and investors.
Best Practices for Fraud Prevention and Securing Transactions
Fraud prevention reduces risks before they arise. Organizations can strengthen their fraud prevention measures by focusing on:
- Risk Assessment identifies potential fraud risks by evaluating data vulnerabilities in the organization's processes.
- Internal Controls provide accountability to the organization for the integrity of its financial and accounting information.
- Risk Monitoring evaluates preventive measures so that organizations can make informed decisions about how to prevent fraud better in the future.
Below, we elaborate on each prevention measure organizations can use to combat fraud, protect their financial accounts, and secure their transactions against unauthorized access.
The Role of Risk Assessment in Fraud Prevention
Without risk assessment, finance teams within organizations cannot implement fraud prevention effectively. Risk assessment for fraud involves evaluating the organization's size, complexity, and industry. It evaluates the organization's susceptibility to fraud and how much it may occur. For example, if your business depends on online platforms, it can be susceptible to cybersecurity risks.
As such, finance teams must explore potential fraud risks in all aspects of their organization:
- Third-Party Risks: Despite good relations with external partners, vendors, and suppliers, they can unintentionally introduce fraud risks.
- Operational and Enterprise Risks: Internal processes and financial systems must be secured to prevent internal fraudulent transactions and cyber attacks.
- Governance Risks: Failure to comply with financial regulations can result in lawsuits and penalties, which can cause an organization to go bankrupt.
Strengthening Security with Internal Controls
Internal controls are the true preventive measures against fraud. They consist of policies and procedures for detecting and reporting fraud risks, as well as tools for automated security. Internal controls guide employees and cover all aspects of an organization to ensure the integrity of their financial operations.
For Third-Party Risks: Data Verification and Monitoring
Using digital tools for identity verification and real-time fraud monitoring can detect fraudulent activity before it leads to financial theft and losses.
Authentication of information prevents fraud attempts before they happen. Fraudsters often attempt to intercept communications and send fake invoices with altered payment details. By reviewing all payment requests from customers, vendors, and company personnel, including senior officials, impersonations can be stopped in their tracks.
Here's how businesses and individuals can combat third-party and enterprise fraud risks:
- Identity Verification: Confirming the authenticity of vendors, customers, and financial partners before approving transactions.
- Real-Time Monitoring: Tools that monitor transaction activity can detect unusual patterns and unauthorized changes. For example, we offer Fraud Text Alerts to detect possible fraud in real-time. They notify members of transactions being made with their accounts. Members can validate or void these transactions by replying 'Yes' or 'No.'
- Reviewing Payment Requests: Carefully verifying payment instructions from customers, vendors, and internal personnel, including senior officials, to prevent impersonation fraud.
- Multi-Factor Authentication (MFA): adds security to online banking.
- Routine review and updates of bank signatures: Updated bank signatures help detect possible unauthorized changes and transactions.
- Financial monitoring tools: Kasasa Protect empowers Canopy CU members to track their monthly credit score, bank account activity, credit/debit cards, Social Security numbers, and health insurance to detect potential fraud risks.
For Operational and Enterprise Risks: Employee and Executive Accountability is Vital
One of the most effective strategies to prevent fraud is investing in employee training and awareness programs:
- Awareness of fraud risks: Employees are trained to recognize fraud schemes such as phishing emails, impersonation fraud, and unauthorized transactions.
- Procedures to avoid fraud losses: Employees learn how to report suspicious activity and follow internal security policies.
- Regular updates on cybersecurity threats: Fraud tactics evolve, so ongoing training is necessary.
Beyond training, organizations must implement strict access controls and duty segregation to protect against internal fraud risks from enterprise decision-makers and employees. Key strategies include:
- Clear division of duties: Prevents any one employee from having complete control over financial transactions.
- Surprise audits: Ensures compliance with internal controls and fraud detection measures.
- Verifying out-of-pattern payment instructions: Any unusual financial requests from internal employees, vendors, or executives should undergo additional verification.
For Governance Risk: Understanding Financial Compliance Regulations
Financial compliance maintains public trust in companies and the banking system. Strict financial regulations help prevent fraud within the organization and from third parties. They also protect consumer data, safeguard consumers' savings and investments, and ensure that businesses and financial institutions conduct financial operations ethically.
Here are standard practices for financial compliance:
- Know Your Client (KYC): A standard identity verification process that prevents fraud by verifying the identity of customers and financial clients.
- Payment Card Industry Data Security Standard (PCI DSS): Financial data security regulations for payment card account data security and global-scale consistent data security.
- General Data Protection Regulation (GDPR) – A European law governing customer data collection, storage, and privacy protection, followed by many U.S. businesses handling consumer data.
Risk Monitoring for Informed Next Steps
Risk monitoring comes after risk assessment and internal control implementation. It's an ongoing evaluation to update fraud prevention programs. It also involves risk reporting, as it records previous actions and breach investigations, which helps identify vulnerabilities and ongoing or emerging fraud risks.
Stay Safe with Canopy Credit Union: Take Action Today
At Canopy Credit Union, we provide secure banking solutions for individuals and businesses. We regularly audit and update risk assessment models and internal controls so that your transactions are secure and free from fraud.
Ready to prevent fraud in your business transactions? Contact us today to start acquiring the tools you need.