What is fraud?

The word fraud is generally defined as intentional misrepresentation of fact made by someone who knows it is wrong and intends to use it to convince someone else to make a decision based on that false information, which results in some sort of harm or damage.

Fraud comes in many shapes and sizes. It can range from a kid writing a check on a parent’s account to someone filing a claim for car damage in a hit and run, when it was actually done by a family member on accident in their own driveway. There are also the more extreme cases where senior level company leaders approve projects to move items to market that maybe didn’t quite pass all the regulatory requirements or quality checks necessary.

Why is it important to understand?

Each state has fraud regulations, as well as the federal government, depending on your industry. If any person operates a business across state lines, there could be many laws with which to comply. It is critical to research what regulations apply to your business, including those unrelated to fraud, as regulatory violations can result in losing your business license, paying fines (sometimes per violation) and possible additional civil or criminal penalties including jail time, depending on your level of awareness of the act or involvement.

Regulations have the same effect as law but are basically more detailed instructions on how to enforce laws or carry them out. Sometimes these will also be referred to as “rules” or “administrative laws” but they carry the same force and are crucial for compliance.

What kind of fraud might involve us or you?

A couple of the types we see most frequently include:

  • Payment fraud, which is simply a false or illegal transaction.
  • Identification fraud—such as a stolen or fake ID—or the misuse of an ID, is what we see sometimes by a family member generally if there are age restrictions on the transaction.

Fraud is different from an ACH return code. An ACH return code is a red flag indicator of fraud as it occurs when a transaction was not properly authorized or contains inaccurate information. However, ACH return codes are indications of many things and cover instances ranging from insufficient funds to invalid account numbers, some of which are caused by honest mistakes or other errors, not criminal fraud.

How can you protect yourself?

It is not only a good idea to have a documented Anti-Fraud program, but it may be a regulatory requirement in your state that is not dependent on the size of your business. Even if it isn’t required, if a regulator contacts you or you need to seek recovery, having a well-documented program could work in your favor and possibly help reduce any potential regulatory fines or other scrutiny. Key components of a program may include, but are not limited to, the following:

  • Procedure documents for your monitoring system
  • A training program for employees that supplies awareness for all and is more in-depth for integral employees who could be involved in the monitoring system or be a front-line person who has an opportunity to note red flags proactively before you have a loss or complaint
  • Documented evidence that you have incorporated anti-fraud in all areas of your company
  • Reporting mechanisms (although not discussed here, you should also be aware of the potential for internal fraud and align that program with your compliance program) that allow people to report concerns anonymously

For more information about Dwolla and fraud specifically, look here and here. For more information about fraud generally, contact a subject matter expert in your area, which may be an attorney versed in anti-fraud and regulatory compliance. Also, research laws specific to your industry, as well as specific to where you will be doing business. As Benjamin Franklin supposedly said, “an ounce of prevention is worth a pound of cure”.

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