Who pays for payments fraud?

July 13, 2016 Lynn Larson

We all pay for fraud in some way, but who bears the direct cost? It can depend on the fraud and payment type, but some organizations think insurance will cover everything. This is typically not the case. Following are two examples of what insurance generally does not cover, one of which ties in with the executive card fraud I wrote about in June. Because it is such an important topic, AP Now is exploring the insurance angle within their payment fraud survey going on this month; learn more below.

Internal Failure

Insurance carriers may back away from organizations who blatantly drop the ball in preventing a fraud. Last month, I shared the fraud case involving Bill Davis, ex-CEO of Community Action of Minneapolis. The board did nothing to prevent or detect the fraud; worse, some board members apparently benefited from it. As Star Tribune columnist Jon Tevlin wrote last week, insurance companies can and do refuse to cover board members when they are grossly negligent in their duties (according to Kate Barr, executive director of the Nonprofits Assistance Fund). Read the complete article to see how this fraud case is evolving.

Does your organization have solid controls pertaining to card use by executives and the people responsible for monitoring them?

Business Email Compromise (BEC)

Organizations may or may not have insurance coverage for losses due to BEC scams. As a refresher, in a BEC scam, an email appearing to be from an internal executive is actually sent by a fraudster who requests that AP wire a certain sum of money to a specified account. Some insurance carriers are reclassifying BEC losses from E&O and/or fidelity bonds, which have low to modest deductibles, to cyber crime, which often requires organizations to purchase a separate, specific insurance policy with high deductibles. Has your organization checked into its insurance coverage lately?

Who is Liable?

If an insurance carrier is off the hook, we are left with the question, “Who bears the direct cost of fraud?” It could be your organization. Fortunately, card payments generally include some external protections that other payment methods do not. Ensure you are familiar with the related contract terms between your organization and its card issuer.

From whose pockets does fraud extract money?

Payments Fraud Survey

Fraud has evolved, taking on new forms, but the old fraud tactics remain as well. To determine what organizations have experienced, AP Now is currently conducting a survey, which addresses all payment types. Even if you have not been a fraud target, please take the survey to share the strategies that have helped protect your organization. Each participant will receive an executive summary of the results and an invitation to attend the related live webinar.

Take the Survey

About the Author

Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more…

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Major lawsuit settlement overturned.

July 5, 2016 Lynn Larson

On June 30, a federal appeals court shook things up by overturning the multi-billion dollar lawsuit settlement involving Mastercard and Visa. The settlement initially occurred in 2012—seven years after merchants filed the lawsuit—and received final court approval at the end of 2013. It ushered in the U.S. surcharging era, even though surcharges have not infiltrated Commercial Card programs like many feared. Given the latest court action, we have to wonder, “What’s next?”

Will the card networks revert back to the old “no surcharging” rules? I doubt it because the future is unknown. The card networks would not want to change something now if they might have to change it again later. More litigation is likely. Mastercard and Visa might initiate an appeal with a higher court. It could even reach the Supreme Court at some point. Alternatively, they could try to stay out of court by working out a new settlement with merchants.

Why Was the Settlement Repealed?

The settlement was opposed by many merchants, including big names like Walmart and Amazon. One point of contention was that merchants would not have the right to sue the networks over card fees in the future. The judge also noted that merchants were inadequately represented; their attorneys earned millions for getting a deal done. For details, visit the official settlement website.

It could take years before this spilled milk is cleaned up.

Speaking of the Supreme Court...

Last month, a group of merchants in Texas (a state that has outlawed surcharging) asked the U.S. Supreme Court to revisit the previous court decision that went against them and their claim that “no surcharge” laws violates their free speech rights. The outcome is pending.

For more information, see surcharge news past and present.

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Executive card fraud beyond belief.

June 22, 2016 Lynn Larson

I was planning to take a break from the fraud topic, but recent local news changed my mind. The day after I delivered a three-hour workshop on P-Card risk assessments, an article published by the Star Tribune grabbed my attention: Nonprofit CEO Bill Davis pleads guilty to fraud, theft charges. Here we go again. It drives home what I have written about before. Everyone, including executives, must be held accountable. Read what happened below. Could this occur at your organization?

The Fraud

Bill Davis was CEO of Community Action of Minneapolis (CAM), a nonprofit organization for assisting low-income people with heating/energy bills. Within a multi-year span, he spent thousands of dollars every month on the company card for personal purchases, including a new car, expensive trips, and gifts for different girlfriends.

Apparently, the Minnesota Department of Human Services (DHS) fulfilled some type of audit role. Davis was charged after the DHS discovered his organization misspent at least $800,000 between 2011 and 2013. This fact made me wonder how frequently audits occurred. Every few years?

How Could this Happen?

There appears to have been no card program policies and procedures. Davis seemingly had free reign to do whatever he wanted. It gets worse...

According to one article, Davis bullied his employees and fired them if they asked too many questions. He also had the backing of local politicians, some of whom were on the organization’s board. To top it all off, when facing increased scrutiny of his actions, he claimed unfair treatment.

Fast forward... Davis has pleaded guilty to 16 counts of fraud and theft, and prosecutors have ample evidence. Sentencing is pending.

Access the Articles

Below are links to the Star Tribune articles. I encourage you to take a look. The second one is particularly entertaining in a sad way.

See also my July 13, 2016, blog post (Who pays for payments fraud?) that offers additional insight into this fraud case.

Reminders

First the “Duh” statements:

No organization should ever hand out company credit cards without any rules or ongoing monitoring.
No position should be exempt from oversight or disciplinary action.

Is executive fraud shocking in this day and age? Unfortunately, likely not, but the details of a particular incident can still have shock value.

Addressing Executives

This is challenging, but organizations must plan for potential issues. Executives have to report to someone, likely a board. Does your organization have a mechanism by which employees can bring concerns about the C-suite directly to the board? From the start of a card program, the board needs to agree and sign off that executives will be held accountable like any other employee.

Perhaps an organization’s internal agreement that employees sign prior to obtaining a card should also include a stipulation that all cardholders will be held to the same policies and procedures, regardless of position, age, gender, ethnicity, etc. Consult with your legal department or Human Resources on this.

I am interested in what others have to say on this topic.

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