Deposit Fraud is increasing as paper is replaced

‘Twas in another lifetime, one of toil and blood and online fraud
When blackness was a virtue the road was full of mud
I came in from the wilderness, a creature void of form
Come in, she said
I'll give ya shelter from the scamming storm

Bob Dylan, with thanks,

Deposit fraud occurs when money in the form of electronic or paper payment is put into a bank account. The owner of the deposited amount then takes over and controls the almost instant disbursement of that deposit. The deposit owner can be the scammer themselves or a surrogate. The surrogate owners are often called Mules and are recruited through social media ads with a promise of a fee per transaction.

Paper: Cheques and Cash – a fast, declining market

Cheques are normally cleared after three days and with the change in law can now be electronically presented and cleared within 24 hours. For example, Lloyds cleared 3.8 million cheques in H1 2021 through mobile apps. Cleared does not mean good and a bad (returned) cheque means money is withdrawn by the bank from the account. Any money moved from the account using the proceeds of the bad cheque becomes the owners’ liability. Cheque volume declined by 32% over the last year.

Cash, since 2017 when debit cards became the most frequently used payment method in the UK, and usage is continuing to decline. COVID accelerated cash decline 40% in 2020 compared to 2019. By 2024, cash is expected to be used less than 10% for in-store purchases. In addition, large amounts of cash are regarded as suspicious and are actively discouraged by sellers.

Cheque fraud is dropping as the use of cheques continues to decline rapidly. Unlike the use of electronic payments and subsequent fraud are surging.

Electronically – a fast, growing market

Funds arriving electronically hold no credit risk, the money is clear and ready to move immediately. Faster Payments are ideal for convenience in the online world and, unfortunately, very beneficial for the scammers.

The money from scams are deposited into a payee bank account. The payee bank account could now be operated by the scammer or by a bank account controlled by them. A favourite for criminals in laundering money is to make deposits into Mule Accounts.

Mule Bank Accounts

Fraudsters like to recruit people with clean records, i.e., with no record of criminal activities, with the promise of regular, easy money. The person opens the bank account and hands over the control of the deposit to the fraudster.

In 2017, UK banks identified 8,500 money mule accounts. Since 2018, £60 million in 88,000 bank accounts has been frozen by banks blocking the use of deposits used for fraud and money laundering. 60% bank account holders were under 30 with 25% under 21. In 2020 8,800 mule accounts were owned by people under 21. However, since 2017 there has been an increase of 34% in the number of accounts belonging to 40–60-year-olds.

Between September and November 2020 EMMA 6 (European Money Mule Action) reported 4,031 money mules, 227 money mule recruiters and 422 individuals arrested. A further 1,500 criminal investigations were initiated, 5,000 transactions identified and prevented £40 million averaging £8,000 per transaction. There are 6,000 banks in the EU in 2019.

Banks need to monitor the use of bank account for criminal activity and key signs are:

• New transactions are at odds with the existing transaction history, e.g overseas transactions, purchases of crypto currencies, large sums of money appearing and disappearing within the day

• Additional bank accounts opened by the same owners, including business accounts, and money arrives and leaves these accounts quickly leaving a residue amount

• The payee bank accounts at non-enabled Confirmation of Payee (CoP) banks are becoming dominant at a payer bank account

Banks should be monitoring their bank accounts for Mule Activity and need to collaborate better between each other.  This function of swapping information between banks needs to be improved and standardised by the banking industry and its regulators. This will also help in protecting people from scammers as the payer knows more about the payee bank account behaviour and history.

As fraudsters are rapidly moving their payee accounts to non-enabled CoP banks, comprising 95% of the banking community, the need for a coordinated exchange of payer to payee bank account information is urgently needed to understand who the payee is.