ACH Fraud: Why Your Business Should Be Concerned

Transferring money has never been easier. With electronic payment systems like the Automated Clearing House (ACH) becoming more ubiquitous and accessible to businesses of different scales, industries, and even locations, it comes as no surprise that the use of these tools has grown extensively in recent years.

Processing over $30 billion in payments per year, ACH is capable of handling a wide array of low-value transactions, both debit and credit, from payroll to vendor payments. Sadly, the rise of ACH network usage and the increased adoption of real-time payments entails a heightened risk.

According to a survey by J.P. Morgan, ACH credit fraud has grown by 6 percent since 2021, with several of the affected businesses unable to recover funds lost in these scams.

For businesses in especially vulnerable industries, it is necessary to understand what ACH fraud is and how it works to protect their operations.

What Is ACH Fraud?

Payments and withdrawals processed through the ACH network are sent to the designated clearing house, where they await authorization. In the United States, the National Automated Clearing House Association oversees this network. Once these transactions are authorized, they arrive at their final banking destination.

The notable time delay in processing ACH payments is the key vulnerability that fraudsters tend to exploit to steal funds through the network.

To carry out ACH fraud, a criminal only needs two things: a bank account number and a bank routing number. Once they get this information, they can easily transfer money from the victim's account, either as a lump sum or as recurring payments to another account. They also have the option to make purchases of goods or services.

This is what makes ACH fraud particularly concerning: It is very simple to execute. With basic details like what's printed on a standard check, a fraudster can already steal thousands, if not millions, in just a few keystrokes.

Anyone with a bank account can be a victim of ACH fraud, but businesses that deal with large, frequent payments — such as mid-sized banks, educational institutions, and healthcare companies — tend to be the usual targets.

In 2022, the Federal Bureau of Investigation issued a warning to healthcare organizations, citing an incident in which a fraudster stole $3.1 million from a hospital by rerouting patient payments to their own account.

In another case cited by the FBI, a healthcare company lost $840,000 in an ACH scam after a hacker impersonated an employee and changed the ACH instructions.

Common Tactics and Types of ACH Scams

Business owners should be familiar with the various ways ACH fraud may manifest to detect the early signs and prevent it. While ACH fraud is a broad category, it typically falls into a few key types.

Account Takeover

In this type of ACH fraud, criminals gain unauthorized access to a business or individual's bank account by stealing log-in credentials through phishing attacks or malware. A common tactic used by fraudsters is sending out a phishing email disguised as a notification from the bank the targeted company uses.

Once an employee unknowingly provides the necessary details, criminals access the account to initiate fraudulent transactions, siphoning money into accounts they own. These attacks often go unnoticed until the funds have already disappeared.

Business Email Compromise (BEC)

BEC attacks involve fraudsters impersonating high-ranking executives of a company or even vendors. They send spoofed emails to lower-ranking employees, typically departments with easy access to finances, to trick them into authorizing fraudulent ACH payments on their behalf.

These attacks are highly targeted as criminals take time to learn the members of a company's senior management. If your business doesn't have a proper verification process for payment requests, then you are particularly vulnerable.

ACH Kiting

In this type of ACH transfer scam, a fraudster takes advantage of the time lag between initiating an ACH transaction and the actual debiting or crediting of funds. They move funds between two or more accounts at different banks to artificially inflate their respective balances.

These false balances allow them to withdraw or spend money that does not exist before the transactions are cleared, resulting in significant losses for both banks.

Synthetic Identity Fraud

Using a “synthetic identity” is when scammers create a completely fake identity by combining real information (such as stolen social security numbers) and made-up ones. They open bank accounts and initiate ACH transactions, often using it to move stolen money.

How ACH Fraud Negatively Impacts Your Business

Reports show how ACH fraud left numerous businesses financially devastated and scrambling to recover — some never able to. However, the aftermath of this crime runs deeper. If you own a business, you should pay close attention to potential risks and threats to avoid bearing the brunt of the following consequences that can cripple your operations.

1. ACH fraud threats derail your workflow

Fraud doesn't just hit your bottom line — it can also greatly disrupt your day-to-day operations. In many cases, companies rectify fraudulent transactions by reverting to manual processes, which can be time-consuming and labor-intensive.

Businesses may also have to dedicate resources to investigating any flagged fraudulent activity, which can strain routine tasks and slow down or even temporarily halt internal processes.

If a fraud case is significant enough, it can also erode a company's ability to maintain regular operations overall. For example, drained cash reserves caused by fraud may lead to cash flow issues such as missed payments to suppliers, which can further sour relationships and hurt the company's long-term success.

2. Fraud attempts can severely damage your reputation

One of the most harmful long-term effects of ACH fraud is a hit on your reputation. Businesses subjected to high-profile fraud incidents tend to lose the trust of their customers and partners.

This is especially crucial if the company caters to other businesses as clients or if its standard operations require it to safeguard clients' sensitive data and funds. Any breach of this trust can have a lasting impact.

Companies seen as vulnerable to fraud may also struggle to establish new partnerships or retain existing ones, as they may be categorized as “high-risk” by other businesses in their industry. This can severely limit growth opportunities and tarnish a company's reputation for years.

3. ACH transfer scams can cause serious compliance issues

On top of internal issues that arise after the fact, businesses that experience ACH fraud may also face legal and compliance ramifications. Many industries, particularly those deemed vulnerable to fraud, are often bound by strict regulations when it comes to electronic payments. A failure to prevent ACH scams could result in hefty regulatory fines or even legal battles with the affected customers, if any.

The legal consequences can be much more drastic if the company is found to have violated compliance protocols. This includes allowing unauthorized ACH transactions to occur without proper and rigorous oversight. As a result, the company may face further restrictions on its access to payment systems, which significantly impede its business operations.

Stay Two Steps Ahead of ACH Fraud Attempts with Fraud.net

Given the dire aftermath of ACH fraud, prevention remains the best cure. Stay proactive with your fraud detection and prevention measures by enlisting robust, comprehensive solutions to keep threats at bay.

Fraud.net enables businesses to stay ahead of evolving fraud tactics. Using advanced AI and real-time risk assessment systems, Fraud.net monitors financial transactions and application processes of all kinds on your behalf, detecting and flagging fraud risks before they wreak havoc on your business.

Don't wait until it's too late. Book a meeting with Fraud.net today to discover how we can help you achieve fraud-resistant operations.