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Bank Refund Fraud – a New Trend

Bank fraud is always evolving. And we at ASL are well placed to spot new trends, as we work with banks and their insurers to investigate the losses they cause.

A recent trend? The emergence of a scam involving organised criminal gangs targeting banks all around the globe. It takes advantage of banks’ refund policies and the workings of the inter-bank payment networks. The result – big gains for the bad actors. And significant losses for banks, often racked up in just a few hours.

The Fraud:

It starts with the orchestrators gaining unauthorised access to merchants’ Point of Sale terminals. They then use them to initiate fraudulent refunds to the debit cards of accomplices.

The refund instructions are sent via inter-bank payment networks, which notify the recipient banks that funds are coming. Originating from genuine businesses, the refunds appear legitimate. The instructions prompt the recipient banks to credit the available balances of the complicit card holders. The fraudsters then rapidly move the proceeds on – typically through ATM cash withdrawals or by purchasing cryptocurrency.

The issue of course is that the expected refunds are never received by the banks that have already permitted withdrawals against them.  The transactions cannot settle, as the merchants’ banks cannot match the refunds to underlying purchases.

These frauds are typically discovered and shut down after just a few hours. But significant financial damage can be sustained in the meantime. The orchestrators are highly organised and can generate thousands of fraudulent requests within hours.

There are sometimes opportunities for recovery – we always keep a close eye on those and have helped pursue them with some success. Often though, the perpetrators can’t be found, the proceeds are long gone, and the target bank has no recourse against anyone else.

Lessons Learnt:

Preventing this type of fraud is theoretically simple – banks need only make the value of credit card refunds available to customers after, not before, they receive the funds from the merchant’s bank.

Most of the affected banks that we have spoken to have changed their refund policies to combat this. There can however be some reluctance – customer agreements need to be rewritten, core banking systems updated, and more.

If nothing else, the emergence of this fraud serves as a reminder of the ever-evolving nature of financial fraud. Continuous efforts are certainly required to protect the integrity of the banking industry.  Banks – supported by their brokers and insurers – are at the forefront of them.

August 2023
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