How Bank Frauds Happen From the Inside and Out

Bank fraud represents a significant financial crime involving deceptive practices to unlawfully acquire money, assets, or property from financial institutions or their clientele. This type of crime often relies on manipulation and misrepresentation rather than overt theft, utilizing various schemes to bypass established controls. Understanding these operational aspects helps recognize the diverse methods through which bank fraud occurs.

External Schemes Targeting Customers

External fraudsters frequently devise sophisticated schemes targeting individual bank customers, aiming to illicitly obtain personal information or direct funds. These methods often exploit vulnerabilities in digital interactions and personal data security.

Identity Theft and Account Takeover

Fraudsters initiate identity theft by gathering a customer’s personal identifying information. This can be achieved through phishing emails, exploiting data breaches, or physical methods like “dumpster diving.” Once information such as Social Security numbers, dates of birth, or account credentials is obtained, it is used to open new financial accounts in the victim’s name. Fraudsters may also employ credential stuffing, using stolen usernames and passwords from other data breaches to gain unauthorized access to existing bank accounts. They can also use social engineering tactics, manipulating customer service representatives or automated systems by posing as the legitimate account holder to bypass security protocols and gain account access.

Phishing, Vishing, and Smishing

These social engineering tactics involve deceptive communications designed to trick customers into revealing sensitive information. In phishing, fraudsters send fraudulent emails appearing to originate from a legitimate source, often containing urgent requests to “verify” account details or click malicious links. Vishing utilizes deceptive phone calls where fraudsters impersonate bank representatives, employing urgent language or threats to coerce individuals into disclosing account numbers, passwords, or PINs. Smishing involves similar deceptive messages delivered via text message, often including links to fake websites or requests for immediate action to “resolve” an account issue.

Check Fraud

Check fraud encompasses several methods used to illicitly obtain funds through paper or digital checks. Check kiting exploits the “float” time between when a check is deposited and when funds are debited. A fraudster deposits a check from an account with insufficient funds into another, then quickly withdraws cash before the first check clears. Check alteration occurs when a legitimate check’s details, such as the payee’s name or the amount, are physically or digitally modified after it has been written. Counterfeit checks are entirely fabricated instruments, designed to look like legitimate checks, which fraudsters attempt to cash or deposit.

Credit and Debit Card Fraud

Methods for credit and debit card fraud involve stealing card data and using it for unauthorized transactions. Card skimming is executed by installing clandestine devices on legitimate card readers at ATMs, gas pumps, or point-of-sale (POS) terminals. These devices covertly capture card numbers and magnetic stripe data when a customer swipes their card. Card cloning involves transferring stolen magnetic stripe data onto a blank card, creating a duplicate for in-person transactions. For online card-not-present (CNP) fraud, fraudsters use stolen card details, often acquired through data breaches or phishing, to make unauthorized purchases over the internet or by phone.

External Schemes Targeting Financial Institutions

Financial institutions are direct targets for external fraudsters who seek to exploit vulnerabilities in their systems, processes, or assets. These schemes often involve sophisticated planning and an understanding of banking operations, aiming to extract significant financial value directly from the bank.

Loan Fraud

Loan fraud involves obtaining credit under false pretenses by deceiving the bank’s lending departments. Fraudsters may submit falsified financial statements, exaggerating income, assets, or existing liabilities to appear more creditworthy. They might also use fictitious collateral, fabricating ownership of valuable assets or inflating their appraisal values to secure larger loans. Misrepresenting identities or using synthetic identities, which combine real and fake information, is another tactic to secure loans without intent to repay. Additionally, fraudsters may create shell companies—entities with no legitimate business operations—solely to apply for and receive loans, subsequently diverting the funds and dissolving the company.

Wire Transfer Fraud (Business Email Compromise – BEC)

Wire transfer fraud, particularly through Business Email Compromise (BEC) schemes, targets bank employees by impersonating legitimate parties. Fraudsters commonly use sophisticated email spoofing techniques or gain unauthorized access to corporate email accounts to send fraudulent instructions. They might impersonate a company executive, a vendor, or a client, directing bank personnel to initiate unauthorized wire transfers to accounts controlled by the fraudsters. The social engineering aspect of BEC involves crafting convincing narratives, often citing urgent business needs or confidential transactions, to pressure employees into acting quickly without proper verification.

Automated Teller Machine (ATM) Fraud

ATM fraud extends beyond simple card skimming to direct attacks on the machines themselves or their networks. Jackpotting involves installing malicious software or using specialized physical devices to force an ATM to dispense large amounts of cash rapidly. Black box attacks bypass the ATM’s computer system entirely, connecting a device directly to the cash dispenser to issue commands for cash payout. Fraudsters also exploit software vulnerabilities within the ATM network, gaining unauthorized access to control multiple machines or intercept transaction data.

Cyberattacks Affecting Bank Operations

Financial institutions are frequent targets of various cyberattacks designed to disrupt operations, steal data, or extort money. Ransomware attacks involve deploying malicious software that encrypts a bank’s critical systems and data, rendering them inaccessible. The attackers then demand a ransom payment, typically in cryptocurrency, for the decryption key. Distributed Denial of Service (DDoS) attacks overwhelm a bank’s online services with a flood of malicious traffic, causing websites and digital banking platforms to become unavailable to legitimate users. Sophisticated data breaches target core banking systems, aiming to steal sensitive customer information, financial records, or intellectual property.

Internal Fraudulent Activities

Internal fraudulent activities involve bank employees or insiders exploiting their positions, access, and knowledge to commit fraud against the financial institution or its customers. These schemes represent a breach of trust and often leverage intimate knowledge of the bank’s operational procedures and internal controls.

Embezzlement and Misappropriation of Funds

Bank employees engaged in embezzlement systematically divert funds for their personal enrichment. This can involve siphoning small amounts from dormant customer accounts, hoping these minor deductions will go unnoticed. Employees might also create fictitious expenses, submitting false invoices or expense reports to generate unauthorized payments that they then collect. Manipulating accounting records is another common tactic, where an employee alters ledger entries or transaction details to conceal the theft of cash or the redirection of funds. Direct theft of physical cash from vaults, teller drawers, or ATM replenishment processes also falls under misappropriation, often concealed by falsifying cash count records or transaction logs.

Fictitious Accounts and Transactions

Insiders can leverage their access to create fake customer accounts or manipulate existing ones for fraudulent purposes. An employee might establish a fictitious account using fabricated identity documents or stolen personal information, then generate fraudulent loans or lines of credit tied to this fake entity. These loans are typically approved without proper underwriting, as the insider bypasses internal controls. Similarly, employees can manipulate existing legitimate customer accounts to process unauthorized transactions, such as transferring funds to accounts they control or to those of accomplices. This involves altering transaction details, overriding system alerts, or manually inputting false information to facilitate the illicit movement of money.

Data Manipulation and Information Theft

Employees with access to sensitive systems can illegally access, alter, or steal confidential customer data or internal financial information. This unauthorized access might be used for personal gain, such as selling customer lists to marketing companies or identity theft rings. Data manipulation can involve changing financial records to conceal other fraudulent activities, such as altering loan repayment schedules or adjusting account balances. Employees might also steal intellectual property, like proprietary algorithms or business strategies, to sell to competitors or use for personal ventures.

Loan and Credit Card Application Fraud (Insider Facilitation)

Employees can actively facilitate fraudulent loan or credit card applications by bypassing established internal controls and manipulating approval processes. This often occurs when an employee colludes with an applicant—who might be a friend, family member, or an accomplice—to secure credit they would not otherwise qualify for. The insider might falsify income verification documents, inflate asset values, or ignore negative credit history details during the application review. They can also override system flags or expedite approval processes, ensuring that applications with false information are processed without adequate scrutiny.

Bribery and Kickbacks

Bribery and kickbacks involve employees accepting illicit payments or other benefits in exchange for preferential treatment or for facilitating fraudulent activities by external parties. An employee might accept cash or gifts from a loan applicant to ensure their application is approved, even if it carries high risk or contains inaccuracies. Similarly, an insider could receive a kickback from a vendor in exchange for awarding them a lucrative contract, even if their services are overpriced or substandard. This quid pro quo arrangement compromises the bank’s processes, as decisions are made based on personal gain rather than the institution’s best interest.