Reducing Fraud & Error within Banking Processes

Fraud and error represent two of the biggest threats to an organisation’s financial security – and therefore its revenue, profitability, and success.

As two sides of the same coin, fraud and error have the same consequence: financial loss. Fraud is a criminal act, performed intentionally with the goal of taking money via unnoticed or unauthorised transactions, whilst error is a mistake made by an employee or otherwise authorised person. When these occur within banking processes specifically, they represent significant risks to the financial health of an organisation.

What is fraud detection and prevention?

There are many types of fraud detection and prevention, including Anti-Money Laundering (AML), Know Your Customer (KYC), Payment Screening, Sanctions Screening, and Confirmation of Payee.

Some preventative measures are manual steps in a finance department’s workflow, but these can be resource intensive and may add even further risk of fraud and error to the process. Modern fraud detection and prevention practices are automated, carried out by systems rather than by human hand. As well as speed and reliability, automated fraud and error prevention is also more advanced – able to connect to external resources like sanctions lists and criminal databases. Increasingly, artificial intelligence and machine learning are becoming part of the effort to prevent fraud and error.

Who is responsible for reducing fraud and error?

Ultimately the responsibility lies with you, the organisation. That applies both to leadership, in operating sign-off and approval processes that take all the necessary steps to prevent fraud, but also to individual employees, who should have robust frameworks to follow in order to keep company finances safe.

Depending on your sector, you may also be legally required to comply with certain regulations.

Anti-Money Laundering (AML)

Money laundering is one of the UK’s chief concerns when it comes to wider crime prevention, as laundered money plays such a big role in financing crime of all shapes and sizes.

Generally, AML refers to a set of laws, processes, and bodies designed to prevent money laundering within businesses. In the financial sector, this means registering with the government’s anti-money laundering programme.

In everyday practice, AML for a business means using tools which verify identities, check sanctions and watchlists, and identify suspicious behavioural patterns.

Modern fraud prevention tools will perform these checks automatically and regularly, halting the banking process when it finds something amiss, and requiring a human check to verify or sign off the payment.

Know Your Customer (KYC)

KYC is all about the absolute determination that your customer is who they say they are. This applies both to verifying their identity from the outset, and repeatedly checking that you are dealing with that person/organisation periodically over time.

In everyday practice, KYC for a business means checking customer or client documents against verified databases to identify any discrepancies or attempts to mask details and identities. For individual customers, this may mean checking passports and income details. For corporate customers, it may mean checking company registrations and incorporations.

Modern fraud prevention tools will perform these checks automatically and regularly, halting the banking process when it finds something amiss, and requiring a human check to verify or sign off the payment, and ultimately reducing fraud and error.

The government also publishes KYC guidance for UK companies to follow.

Within these two primary security initiatives are various individual features that, together, form a robust protection against all types of financial fraud and error:

Payment Screening

Payment screening is a series of real-time checks applied to payments, regardless of customer or history. It uses past behaviour to identify suspicious irregularities, and scans for red flags like duplicate payees.

Payments screening runs on smart rules, which can be updated situationally to reflect changes – and applies to all domestic and cross-border payment types.

Sanctions Screening

Sanctions screening uses external databases and watchlists to detect accounts linked to financial crime, and alert you to make a further manual investigation.

These checks are performed at the outset, during the onboarding of a new client or customer, but also periodically, as generalised due diligence checks and when payment detail change requests are made.

Confirmation of Payee (CoP)

CoP checks individual details of persons and companies to ensure that payments are being sent to the correct account.

CoP is particularly effective at reducing fraud and error – by stopping phishing attempts and APP fraud, this ensures that these attempts are caught and manually checked before payments are processed.

Why is fraud risk management important?

Besides the threat of financial loss, which can be existential to an organisation when in significant amounts, there are further impacts that may have a negative bearing on a company:

Reputational: market and customer perception can be affected by fraud, whereby your organisation may be seen as unsafe, unreliable, or insufficiently protected. This erosion of trust can lead to further financial loss.

Human: whilst corporate fraud may be levelled at company level, there are several human impacts – from internal layoffs as the result of lost revenue, to dissatisfied customers and clients as the result of interrupted business.

Compliance: organisations may face regulatory action, including fines and the interruption of business, after suffering at the hands of fraud.