ODFI Fraud Risk: Not Just a Merchants Problem

ACH fraud is not an issue which affects consumers and businesses alone – there is also originating depository financial institutions (ODFI) fraud risk.  Anyone who has completed a transaction via phone or internet to pay for goods or services is familiar with ACH Debits and what they entail. From the Receiver’s end, the risk is minimal, provided they are not providing their information to a company that is going to act fraudulently themselves.  And that they are submitting the payment on a secure site. From the Originator’s end the risk is much higher.  Generally there is no account number validation, there is no way to confirm the availability of funds, there are limited tools to ensure that the customer is supplying account information for which he is authorized to make a debit, and an AHC debit can be returned to the Receiver up to 60 days after the transaction if the account holder signs paperwork saying it wasn’t properly authorized – all of which can fall back on the Originator.

ODFI fraud risk, though, speaks to banks also being liable when ACH Fraud is present. While the currently laws don’t specifically put the liability on the bank, this could change. While banks as a whole tend to see themselves as not responsible for ACH transactions due to the verification process required to initiate the transaction, the ODFI could be put in a position where they are held liable for money sent from a customer’s account due to fraudulent activity. Often the amount in question may be negligible amounts (things bought fraudulently by consumers and already covered in guarantees to customers of the bank) and is not something the bank considers a factor in ODFI fraud risk.

Even if it does not, ODFI fraud risk can mean banks can risk either choosing to pay out large sums of money or lose big clients over ACH Fraud. ODFI fraud risk case in point is the Hillary Machinery Inc example.  $800,000 was fraudulently transferred via ACH and wire transactions from Hillary Machinery’s account and their bank at the time was only able to recover $600,000 of it. Hillary Machinery requested the remaining $200,000 be refunded by the bank, and when the bank would not comply, Hillary Machinery moved its accounts to another bank, citing security as a factor.  Despite ODFI fraud risk and risk to the Originator, ACH debit is not something that is going to disappear and merchants need to feel a level of security from their banks when processing ACH debit transactions.