Amid escalating fraud risks and increasingly complex payment landscapes, banks and financial services firms face heightened pressure to protect their organizations from sophisticated scams. One particularly alarming threat is first-party Automated Clearing House (ACH) fraud – where a legitimate customer initiates an ACH transaction only to later reclaim the funds fraudulently. The Financial Industry Regulatory Authority (FINRA) is sounding the alarm over the surge in these schemes. As the volume of ACH payments has grown, these schemes have become more frequent, leading to big financial losses and operational disruptions, FINRA notes.

A well-selected, white-labeled Treasury Management System (TMS) can be a powerful tool in mitigating these risks, helping banks and financial services firms prevent first-party ACH fraud while addressing the challenges of unsettled trades.

This article explains why.

Understanding First-Party ACH Fraud

First-party ACH fraud exploits the ACH system’s streamlined processes. In this type of fraud, a legitimate customer initiates an ACH transfer from their bank account, fully aware that insufficient funds or other manipulative tactics will later trigger a reclaim. Two prevalent scenarios include:

• Non-Sufficient Funds Fraud (NSF). The customer knowingly initiates an ACH pull from an account lacking sufficient funds.  The firm, aiming to provide “instant funds,” processes the transaction immediately.  When the insufficient funds are detected, an ACH reclaim is initiated.  If the funds have already been spent or transferred, the firm must cover the resulting shortfall – often through asset liquidation or by drawing on reserves.
• Unauthorized Reclaim Fraud (URF). In this scenario, after initiating a legitimate ACH deposit, the customer transfers the funds to another institution. They then file a fraudulent claim, asserting the transaction was unauthorized. As the funds are no longer available, the firm is left responsible for reimbursing the amount, thereby incurring a financial loss.

These methods exploit the ACH system’s relatively lenient controls compared to wire transfers, making it considerably, if not dramatically, easier for fraudsters to execute their schemes.

Industry Challenges

According to FINRA, non-bank broker-dealers face unique challenges in combating ACH fraud.

Since they are not considered parties to ACH transactions, broker-dealers have very limited authority to investigate, stop, or reverse transactions. When a customer submits a fraud claim, the process is driven by the banks involved – beginning with the Originating Depository Financial Institution (ODFI) sending funds through the ACH network and culminating with the Receiving Depository Financial Institution (RDFI) prompting the return of funds. This structure often leaves broker-dealers exposed to significant financial losses. Some firms attempt to gather detailed information on red flags and contact both the ODFI and RDFI to halt suspicious transactions, but FINRA notes that this process is extremely time-consuming and largely ineffective at stopping the transfer of funds.

Risks of Falling Victim to First-Party ACH Fraud

The implications of falling prey to first-party ACH fraud are far-reaching:

• Financial losses. Banks and financial services companies may face financial setbacks when they are forced to cover reclaimed funds, sometimes at a loss, particularly if they must liquidate assets quickly.
• Operational disruption.  The diversion of resources to investigate and rectify fraudulent transactions can disrupt regular operations and detract from strategic initiatives.
• Reputational damage. Recurring or publicized incidents of ACH fraud can erode client and stakeholder trust, potentially damaging a firm’s long-term reputation.
• Regulatory scrutiny. Increased incidents of ACH fraud can draw heightened scrutiny from regulatory bodies such as FINRA and FinCEN, increasing audit and compliance burdens.

The potential impact of first-party ACH fraud underscores the urgent need for robust controls and proactive risk management strategies to safeguard against such fraudulent schemes.

Effective Practices to Identify and Mitigate the Threat

To counter the risks associated with first-party ACH fraud, FINRA recommends several strategies:

• Implement a holding period. Establish a “seasoning period” for funds transferred through ACH to freeze the funds temporarily.  This delay allows the firm to assess whether activity in a new account is suspicious before granting immediate access to the funds.
• Information sharing with clearing firms. Collaborate with clearing firms by sharing comprehensive data on potentially fraudulent ACH transaction activities.  Firms can then customize controls and risk parameters based on the behavior observed in customer accounts.
• Leverage third-party risk ratings. Utilize third-party vendors to assess the risk profile of customers attempting to deposit funds.  These risk ratings, based on reviews of a customer’s accounts and overall activity, provide a real-time evaluation that aids in decision-making.
• Enhanced verification for high-risk accounts. Implement additional verification methods for newly opened customer accounts that meet certain risk criteria.  This may include requiring copies of bank or brokerage statements to verify that sufficient funds are available.
• Adopt same-day ACH functions. Implement a same-day ACH process based on the National Automated Clearinghouse Association’s (NACHA) ACH Schedules and Funds Availability table.  Same-day ACH enables transactions to settle on the same business day, significantly reducing the waiting period and allowing for faster funds availability.  Faster settlement times allow for quicker detection of issues such as insufficient funds.
• Share intelligence on fraudulent activities. Actively share information on known fraud scenarios, red flags, and suspicious identifying information (e.g., IP addresses) with industry intelligence-sharing platforms like FinCEN’s 314(b) Information Sharing Program, Early Warning Services, the National Cyber-Forensics and Training Alliance, and InfraGard.
• Engage with ODFIs and RDFIs. Work with the institutions involved by prompting them to investigate suspicious ACH transfers, establishing indemnification agreements to mitigate liability, and gathering evidence related to fraudulent transactions for further investigation.

These best practices from FINRA form the backbone of an effective defense against first-party ACH fraud, and they set the stage for the automation capabilities that modern treasury solutions offer.

How White Labeling the Right TMS Can Help

Building on the best practices recommended by FINRA, banks and financial services firms can significantly enhance their fraud prevention and trade settlement capabilities by white labeling a TMS that includes:

• Automated settlement capabilities.  Delays in trade settlements increase the risk of financial loss.  Look for a TMS that automates the entire settlement process.  Treasury Curve’s Auto Settle ensures that trades are settled promptly and accurately, significantly reducing the time between trade execution and fund movement.  By eliminating manual steps, the risk of human error, fraudulent manipulation, or timing gaps that fraudsters could exploit is minimized.  This accelerated process not only reduces the chances of first-party ACH fraud but also improves operational efficiency and compliance.  With real-time confirmations and automated workflows, banks and financial services firms can be confident in the integrity and reliability of their settlement processes.
• SOC certification and insured systems.  Ensure that TMS platforms are SOC-certified and insured, indicating adherence to high security and operational standards.  SOC certification provides independent validation that the system meets stringent criteria for data security, privacy, and operational integrity.  An insured system can offer financial protection in the event of a breach or incident, reinforcing the solution’s overall reliability and trustworthiness.
• Integrated workflow management.  Treasury management systems with a Money Fund Portal should consolidate all aspects of payment processing and trade settlement – from requests and forecasts to approvals, transactions, and reconciliations – into one streamlined platform.  This integration eliminates the need for multiple bank logins and manual reconciliations, reducing the possibility of human error and enhancing auditability.  By automating and unifying payment processing functions, organizations gain enhanced oversight and real-time visibility into their cash flow processes.
• Automated controls and real-time monitoring.  A treasury management system with a Money Fund Portal should offer real-time monitoring and automated alerts to flag unusual transactions instantly, allowing for rapid intervention before potential fraud escalates.  The system should also continuously analyze transaction patterns against established risk thresholds, providing immediate feedback on any anomalies detected.  This proactive approach not only enables swift corrective action but also supports ongoing risk management and optimization of internal controls.
• Easily auditable processes.  Transparent, auditable transaction trails simplify internal audits and regulatory compliance, ensuring that any discrepancies are quickly identified and resolved.  A TMS should log every transaction and action, creating detailed records that streamline the audit process.  Comprehensive documentation facilitates swift investigations and corrective measures and reinforces overall accountability and regulatory adherence.

By integrating these features, a TMS not only builds on FINRA’s recommended practices but also automates the entire payment lifecycle, reducing the risk of first-party ACH fraud.

Why Treasury Curve’s White-Label Solution Stands Out

White-labeling Treasury Curve’s TMS allows banks and financial services firms to provide their clients with a secure, user-friendly platform while benefiting from built-in fraud prevention and settlement optimization features.  Treasury Curve’s solution helps financial institutions:

• Mitigate the risk of first-party ACH fraud through a secure TMS platform that embeds the approval process for investment trades.
• Reduce the incidence of unsettled trades with faster, more reliable settlement processes, including Auto Settle capabilities that automate and secure trade settlements.
• Enhance regulatory compliance through detailed, easily accessible audit logs.
• Improve client trust and satisfaction by providing a secure and seamless investment experience.

Conclusion

First-party ACH fraud and unsettled trades pose significant risks for banks and financial services firms, but white-labeling the right TMS can provide a powerful defense.  By selecting a platform with advanced fraud mitigation tools, real-time monitoring, and integrated settlement capabilities like Treasury Curve’s Auto Settle, banks and financial services firms can protect their assets, maintain compliance, and strengthen client relationships.

Contact us now to get started on your journey to safer, more reliable treasury management.