FFIEC Goes Beyond Traditional Authentication

The FFIEC's recommendations for layered protection include mechanisms other than authentication to detect and prevent fraud. It is important to use information about customer location and behavior as an aid in detecting fraud.

In my previous post, I provided an overview of the supplement to the Authentication in an Internet Banking Environment guidance.

The FFIEC authentication supplement gives specific examples of fraud detection and monitoring systems that financial institutions should consider. It recommends monitoring customer transaction history and behavior. For example, it might be a sign of fraud when a customer who has never transferred funds to an nonaffiliated account does so for the first time. Address changes, changes to banking instructions for funds, and changes to beneficiaries are other important activities that should be verified through multiple contact methods.

The guidance also suggests institutions use multiple communication channels for confirmation of important transactions. For example, confirming password changes by email, telephone, and/or surface mail can provide more reliable authentication and might help to expose fraud attempts to customers. Another effective technique for preventing fraud is to require waiting periods after important account modifications, like address changes and banking instructions. While not foolproof, this approach provides more of an opportunity for customers to play a part in recognizing fraudulent activity.

The use of multiple layers of security is nothing new in the financial industry. Almost all of these methods are commonly implemented in mutual-fund companies and banks. In fact, any organization that extends credit (even the car dealership down the street) is supposed to be on the lookout for activities that would suggest that identity has been stolen and someone is attempting to perpetrate fraud.

The FTC’s Red Flag Rules require organizations to have controls in place to detect apparently fraudulent activities. Examples of “red flags” include mismatches of personal identifying information, incorrect signatures, mismatched addresses, and use of known stolen identities. The use of such nontechnical information is not just a suggestion -- it’s a requirement.

All organizations, whether they are financial institutions, merchants, or health care companies, should consider the types of activities that might signal identity theft, fraud, and misuse of accounts as components of their security control arsenal.

Richard Mackey is vice president of consulting at SystemExperts Corp.