How to Protect Digital Payments from ACH Fraud Risks

Have you ever wondered how even highly secure electronic transactions can be compromised for illicit gains through ACH fraud? 

Where technology leads the way, electronic fund transfer has become the norm. With the rising trend of e-transactions, digital payments, or online funds transfer, there is a potential increase in Automated Clearing House (ACH) fraud in these payments.

To examine the financial fraud risks associated with ACH payment, it is critical to evaluate what is ACH and the reasons why it affects businesses and individuals at the same time.

What is Automated Clearing House (ACH)?

Automated Clearing House (ACH) is a payment network that effectively facilitates secure electronic money transfers between various bank accounts and credit unions in the United States or abroad.

This system processes a vast number of transactions, including direct transfers from employers, payments to contractors and suppliers, consumer transactions including utility bills and insurance premiums, and one-on-one payments.

In the United States, this network is governed by the National Automated Clearing House Association (NACHA). Just like any other digital transaction, ACH processors are also sensitive to the financial criminal’s illicit practices.

ACH fraud takes place when financial criminals exploit the network’s vulnerability to conduct non-traceable and illicit transactions. Due to this sensitivity, approximately 30% of US-based institutions faced ACH credit and debit fraud in 2022.

These instances further lead to a long-term crisis for businesses, banks, and account holders.

As per the new rulings of the (NACHA), National Automated Clearing House Association, “Each third-party service sender (TPS) and Originating Depository Financial Institution (ODFI) must establish and implement a risk-based process that is intended to identify the ACH entries initiated due to fraud.”

Let’s examine the intricacies of ACH payments, the potential risks, and understand the best solutions that amplify the detection and prevention of relevant electronic payment scams.

What is ACH in Banking?

In the banking sector, ACH is primarily used for financial transfers, bill payments, and direct payments. Businesses often use the ACH networks to make frequent payments to contractors and vendors.

ACH payments are handled in batches and usually take one to three business days to complete. They provide organizations with a cost-effective alternative to cheques, wire transfers, and credit card networks.

The procedure begins with the originator initiating a payment, which is then batched and processed by their financial institutions via the ACH network to the recipient’s bank account.

While ACH payments promote efficiency and lower transaction costs, they are not without vulnerabilities, which makes them a primary target for various types of fraud.

Here is the breakdown of the categories of fraudulent ACH transactions:

Categories of Fraudulent ACH Transactions

Fraudsters exploit the ACH system by gaining unauthorized access to entities’ bank account details and manipulating banking processes to transfer funds into their own accounts.

Common methods of fraudulent ACH activity include:

• Account Takeover: Scammers may commit malware or social engineering attacks to acquire the customer’s account credentials illicitly. Using these account credentials, they transfer the debits to other accounts they control to facilitate ghost funding schemes and even real-time money laundering.
• ACH Kiting: In this type of ACH fraud, criminals transfer funds across accounts at various banks. When the clearing house approves the transfer, it appears that the funds are deposited in the account, but they have already been moved.
• Unauthorized Debits: Scammers obtain a victim’s bank routing and account numbers to initiate unauthorized debits through the ACH network. The stolen funds are funneled to money mules, who help obscure the origin and trail of the illicit funds.
• Fake Payments: In this scheme, fraudsters send manipulated invoices to organizations, tricking them into sending payments to unauthorized accounts. This misdirection results in ACH payments being funneled into the fraudsters’ control.
• Targeted Phishing Attacks: Cybercriminals send spoofed emails and infected attachments to individuals, tricking them into revealing sensitive banking information. The malware installed captures login credentials, which are later used to commit ACH scams and support broader money laundering efforts.
• Business Email Compromise (BEC): One of the most common tactics used to conduct ACH fraud is through email forging. The imposters impersonate company executives, financial personnel, or vendors, and redirect the ACH payments to the accounts explicitly managed by them for money laundering.
• Insider Threats: ACH payments are severely vulnerable to fraud due to the misuse of customer information by the organization’s contractors and employees. These insiders threaten the ACH networks as they frequently initiate illicit transactions to divert funds.
• Data Theft: The impersonators hack the company’s database through social engineering to illicitly acquire access to the customer’s legitimate ACH accounts. Furthermore, financial criminals sell this information to the black market or initiate frequent illicit ACH transactions, which is in strict violation of the AML regulations.

What are the Liabilities in ACH Transfer Fraud?

The nature of the ACH fraud liabilities may vary according to each specific case. These liabilities can significantly fall on the individuals as well as the organizations in case of any inadequate internal control practices of the ACH networks.

According to the Federal Bureau of Investigation (FBI), customers using electronic payments through ACH networks are required to contact their related financial institutions, vendors, and IT systems to ensure that all the appropriate security checks and fraud prevention measures are continuously in practice to reduce ACH fraud.

Some of the common scenarios that clarify the nature of the regulatory liabilities are examined below:

• In Business Email Compromise (BEC)-related ACH scams, liability often falls on businesses that failed to verify payment instructions, email data, or the detection of spoofed communication. This reflects a lapse in internal controls and cybersecurity protocols, making the organization accountable for financial loss.
• In Account Takeover (ATO) cases, liabilities generally rest with the financial institution, as customers are not responsible for compromised internal security systems. Regulatory bodies expect banks to implement strong authentication and monitoring systems to detect and prevent unauthorized access.
• Under the US Electronic Fund Transfer Act (EFTA), consumers must report unauthorized ACH transactions within 60 days of receiving their bank statement. Failure to do so shifts liability to the consumer, who may then bear the loss and face non-compliance consequences.

What are the Best Practices for Tackling ACH Issues?

When it comes to countering the fraudulent activities related to electronic payment processors, it is crucial to put in place several regulatory and security measures. Some of the effective practices that reduce the threats of ACH fraud are:

• Multi-Factor Transactional Authentication: According to the Cybersecurity and Infrastructure Security Agency (CISA), all electronic payments are to be backed by multi-factor authentication to counter ACH fraud while ensuring compliance with AML laws.

MFA significantly reduces the risk of unauthorized transactions due to the prevention of credential stealing. Additionally, the suspicious IP addresses and red flags must be shared with industry intelligence sharing platforms.

• Encrypted Payment Gateways: Integration of encrypted payment protocols, such as Transport Layer Security (TLS) and Secure Sockets Layer (SSL), ensures an enhanced level of security during ACH transactions. It is, therefore, critical for the FIs to ensure that these protocols meet the industry and AML standards.

• ACH Fraud Awareness: Staff training is necessary to amplify fraud awareness among the employees. These training programs allow them to handle malicious transactions in real-time.

• Real-Time Monitoring: ACH networks must utilize real-time transaction screening measures to efficiently counteract the processing of fraudulent payments.

• Third-Party Risk Assessment: Consistently assess the security and compliance procedures of third-party providers who have access to your financial systems or handle sensitive data.

• Vendor Agreement and Compliance: Ensure that all vendor contracts include measures requiring adherence to certain security and data management standards. Conduct regular audits or evaluations to ensure compliance, such as those regulated by NACHA.

How Does ACH Hold Counteract the Banking Scams?

ACH hold is a temporary transaction freeze that is initiated through the Automated Clearing House Network. Until the transactions and payments are verified, the ACH hold prevents funds from being transferred to various accounts, mitigating the intensity of ACH fraud.

The delays in the funds settlement allow ACH to investigate the transactions with unrecognized sources. In case a suspicious payment processing is identified, an ACH hold can swiftly fight back against the fraudulent fund withdrawal.

Additionally, it facilitates the cross-checking of transactional details to ensure the prevention of future electronic payment discrepancies.

How Does AML Watcher Improve ACH Fraud Detection and Risk Management?

The mitigation of ACH fraud, transaction scams, and other debit fraud activities has been the central concern among the AML regulatory bodies to reduce the linked money laundering activities.

AML Watcher’s fraud detection helps identify ACH fraud risks with advanced, high-performance algorithms designed for precision and real-time detection.

Furthermore it;

• Provides up-to-date information on sanctioned entities, PEPs, and adverse media to flag high-risk parties involved in any fraud payments.
• Combines data enrichment, linking analytics, and dynamic monitoring to uncover complex fraud patterns in digital transactions quickly and accurately.
• Offers tailored fraud scenarios with customizable rules, enabling institutions to address specific transaction fraud risks relevant to their business.
• Provides chargeback and Account Takeover (ATO) protection to minimize losses from disputed payments and unauthorized access.
• Supports comprehensive risk assessment, enabling financial institutions to evaluate the risk level of transactions and customers effectively.
• Enables compliance teams to focus on suspicious transactions through improved risk intelligence and reduced false positives.
• Helps institutions reduce risk exposure, ensure regulatory compliance, and maintain secure digital payment processes with speed and intelligence.