Confirmation Fraud Preparation and Reduction

Banker Resource
May 29, 2013 — 1,388 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

While confirmation fraud is an intensely debated topic, at one time it was simply glossed over because of probably low risks involved. So the procedure against it was simple which required less effort and thought. But the same is turning out to be a tremendous challenge because the fraudsters have come to know about the oversight.

Confirmation Fraud – The Schemes

Confirmation fraud schemes involve two steps. In the first step, false statements are provided. In the second step, the responder is manipulated to audit those confirmations. The confirmations of a third party could be sent to the customer, vendor, or the financial institution of clients. So, the responder has the chance to commit frauds since it is within their identity.  

Fraudsters are known to easily manipulate confirmation procedures as shown in several cases. This is made possible because the process is simple and can be easily circumvented. The liability in a confirmation fraud and any related part includes not just the loss of clients or reputation, but criminal charges as well as law suits, personal, financial, and criminal exposure as well as the financial exposure of the firm.

Threats From Confirmation Fraud

There are at least four threats from confirmation fraud. These include statement of account and contact provided by the client, contact name provided by the client, intervention or influencing the authentication process conducted by the auditors, and validation of institution signature. All or any of these could be used to bypass the process of third party confirmation.   

Confirmation fraud is possible because auditors rarely conduct independent validation that authenticates contact information. Paper confirmation can be easily thwarted by providing wrong contact information and statement. The process of paper conformation is thwarted by providing incorrect name but correct phone/fax number and mailing address as the auditors attempt to verify address, phone number, and email.

Confirmation fraud is quite possible when some dishonest clients influence auditing procedures by creating third party credentials matching or resembling the actual ones. In other words, there are several loopholes open to fraudsters including the fact that signatures are rarely authenticated.

Risks Involved When Responding to Confirmation Requests

A unique set of challenges confront the individuals and companies that respond to confirmation, leaving the possibility of confirmation fraud. Conformations meant for the third party are not delivered to the client but go to the requester, making the possibilities of frauds much easier. There are several ways in which frauds can be conducted from there.

Confirmation fraud is relatively easy to commit if confirmation processes are paper-based. In paper-based systems of confirmation, it is easy for the fraudsters to circumvent the process because confirmations are not returned to them but go to the requester.

There are limitless opportunities for the fraudsters to commit confirmation fraud because they can use return envelopes that are addressed and stamped because they know copies of these envelopes are rarely made. In addition, several other methods such as incomplete communication, lack of penalty for bad requests, among others are used by them.

Banker Resource