What is Automated Clearing House (ACH) Fraud and How Does it Work?

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The Automated Clearing House (ACH) is a network of independent companies, banks, unions, and processors that oversee deposits, debits, and transfers within their administration. Nationwide, the ACH is responsible for paychecks, the distribution of Social Security benefits, and applicable tax refunds. More specifically, it is one of the largest payment networks in the US, with nearly every bank account having some connection to the network. 

The ACH’s vast network includes personal and commercial accounts, making it a standard solution for electronic transfers of all types. However, it is also a high-value target for scammers globally. Below, you can find information about ACH fraud, how it works, its signs, and its prevention.

What is ACH Fraud?

Automated Clearing House fraud occurs when someone uses the ACH network to make unauthorized transactions. As with most digital banking, these transactions are usually electronic, shifting funds from one account to another using the ACH network. ACH fraud includes unauthorized debit withdrawals, consumer account takeovers, and business email scams. 

Scammers who commit this form of financial fraud have access to their victim’s bank account and routing numbers. However, how the agent can obtain this information varies. They may purchase the details on the dark web, or they could have tricked the victim into sharing their information—such are the dangers of submitting banking details on shady, unverified websites and marketplaces. Consumers aren’t the only victims of ACH fraud either; businesses and corporations are falling victim to malicious actors more often than ever, thanks to social engineering events and poor fraud prevention. 

Once someone falls victim to ACH fraud, getting those lost funds back is challenging, if possible. The ACH’s widespread success in online banking is partially due to its quick transaction times, so when a malicious actor makes a transaction, the systems respond immediately. Add this lightning-quick processing time to fraudsters’ ability to withdraw and close their victims’ accounts, and there is very little the ACH can do to garner restitution for consumers. Businesses have even fewer options for repercussions, as they usually only have 24 hours to catch and submit fraudulent claims (whereas consumers have around 60 days to make a report). 

How ACH Fraud Works

Here’s how fraudsters use the ACH network to approach your financial accounts:

Exploiting Account Credentials

As mentioned above, one of the most common ways ACH fraud occurs is via account takeover fraud; more specifically, this is when scammers break into a consumer’s account and begin collecting additional sensitive data or making unauthorized transactions. Account takeovers often include compromised banking account numbers, routing numbers, usernames, and passwords. Schemers can gather everything they need to break into an account through phishing attacks, data breaches, and social engineering plots. 

Social Engineering Attacks

Social engineering attacks are among the most successful ways a scammer can collect information for later schemes. Commonly directed at the employees of a target company, social engineering can occur via business emails or over social media. In either case, the scammer impersonates someone with authority and pressures another person into giving them access or critical information. Business email compromises (BECs) are frequently the most common denominator concerning ACH fraud.

Unauthorized ACH Transfers

Once the scammers have the necessary details, they can begin making unauthorized (fraudulent) transactions in the ACH network. Such transactions may include laundering, where the victim’s account is sent criminal funds, then it’s sent out to another criminal account “clean”; they can redirect an account’s deposits to send them to another controlled account, as with payroll fraud; they might even pose as vendors to acquire payments on falsified invoices. 

Types of ACH Fraud

Fraudsters use a variety of tactics to deceive their targets. If you recognize these patterns or something feels off, it’s wise to proceed with caution.

Business Email Compromise

ACH fraud is most destructive through business email compromises, with 67% of attacks succeeding. These schemes are so successful because fraudsters impersonate legitimate company representatives. From within these disguises, scammers can send emails requesting account passcodes, send fraudulent invoices to collect cash or goods, and release network trackers into company databases, putting every employee at risk for data exposure. 

Payroll Fraud

If a company employee’s account is breached, payroll fraud might quickly follow. In these schemes, attackers access their victims’ financial information and alter elements to divert deposits to another account. These fraudulent activities are particularly challenging for those who live paycheck-to-paycheck, as they may take weeks to uncover and correct, if possible. 

Account Takeover

ACH fraud typically begins with a successful account takeover attack, when scammers identify (or buy) the login details of a consumer’s company, financial, or any other user account. These events are called “account takeovers” because once the fraudster has free access to the account, they can delete it at any time. Subsequently, hackers who gain access to bank accounts can make whatever falsified transactions they want before deleting the account (and any ties to it) altogether. 

Vendor Fraud

Although not targeting consumers, vendor fraud can have significant consequences for the public. Vendor fraud occurs when a fraudster impersonates another company, creates a falsified invoice for services, or sends false payment information to change a business’s payment route and then collects costs based on those documents. For consumers, an increase in vendor fraud means higher-cost goods, higher overall fee rates, and even the loss of particular services or the closure of businesses. 

Signs of ACH Fraud

• Consumers, bookkeepers, and business owners can recognize ACH red flags if they know where to look. Unfamiliar transactions are usually the clearest sign that something has gone wrong with the account. Noticing patterns within an account’s sending habits is key in identifying scams beyond a one-off transaction; some scammers send recurring, although typically small, transactions to accounts. 
• If an employee notices alterations in their payroll information without advanced notice, it indicates suspicious activity. Companies cannot change such details instantly. Consequently, employees must notify their administrators if they don’t recognize the changes.
• ACH fraud may also occur if there are failed or rejected payments from the ACH network in the account history. These failures occur because the fraudsters may attempt to verify their access or make changes that the system considers unusual, like large transactions to foreign countries. 
• Another sign of ACH fraud is when an employee receives a message from a friend or coworker requesting information they should already know or have access to themselves. Odd behavior from familiar people is a typical sign that a scammer is puppeteering an account, professional or personal. If this occurs, speak with others before sending sensitive details or codes. 

Consequences of ACH Fraud

ACH fraudsters harm you in numerous ways - from affecting your financial state to damaging your reputation and more!

Financial Losses

Consumers are constantly at risk for information exposure, which is typically financial fraud; they stand to lose money directly from their accounts, and if they pursue charges, they may lose more if they aren’t successful. Any accounts associated with the compromised one are also in danger, as some scammers can use tools to gain access to adjacent user profiles through back or side doors. Concerning financial losses, companies are at risk for much of the same; they might lose direct funds from vendor accounts, but more likely, they will lose money attempting to protect their systems retroactively. 

Reputational Damage

Data breaches are occurring with ever-growing frequency. Hospitals, universities, independent businesses, and conglomerates are all targets of cyber attacks; every time a data breach occurs, the chances that the victimized company will survive to decrease. A company closing is the consequence of the loss of consumer trust. If the public cannot depend on a company to deliver what it promises, they will go to another provider. Consumers are also in danger of reputational losses, as scammers can do anything with a user’s profile if they can take it over. 

Operational Disruptions

Automated Clearing House fraud also has behind-the-scenes repercussions for both consumers and companies. Consumers may suffer from having their accounts or services temporarily suspended. At the same time, while investigations are active, companies spend thousands attempting to understand how the fraud happened and its long-term consequences. If an organization doesn’t already have a cyber security team in-house, these investigations must be conducted by experts. Disruptions also impact organizations undergoing recovery efforts like restoring backup databases or manually reviewing accounts.

How To Prevent ACH Fraud

Though nothing guarantees 100% security from ACH fraud, certain preventive tactics can help you be safer. 

Use Multi-factor Authentication (MFA)

Multi-factor authentication is fast becoming standard security for sensitive consumer accounts. Adding these second and tertiary steps is crucial for protecting accounts from malicious actors. When properly set up, these protections mean that even if the scammer has an account password, unless they have the victim’s phone, computer, or passwords to other profiles, they won’t get very far into altering or collecting financial information.

Implement Payment Verification Processes

Companies should verify payment requests with authentic account holders before sending or releasing funds, especially when these transactions involve large sums of money. Verifying such information differs between industries, but requesting to speak with an organization’s financial officers is a good place to start (assuming you can verify the number online first).

Monitor Bank Accounts Regularly

Relying on others to keep their accounts safe isn’t a solution. Cyber security tells us that if even one account is breached, hackers could threaten all others in the system; this is why advisors suggest protecting one’s account as much as possible while regularly monitoring its activity history. In particular, credit and investment accounts must be closely watched, as they are common targets for fraudster abuse. 

Educate Employees and Team Members

Organizations can also prevent ACH fraud by preparing for its most frequently occurring instances. As mentioned above, 67% of all ACH fraud attempts over compromised business email accounts succeed. Consequently, business owners should encourage continuous employee training for identifying phishing scams and other types of malicious communications. The more familiar employees are with recognizing the signs of fraudsters, the more likely they will be able to flag a fraudster before a scheme starts. 

What To Do If You’re a Victim of ACH Fraud

What’s your best recovery strategy when ACH fraudsters hack you? Complete the steps below as soon as possible to minimize the harm caused. 

Contact Your Bank Immediately

Anyone, from business owners to consumers, who think they have been made a victim of ACH fraud should start by calling their financial providers immediately. For consumers, banks may be able to reverse transactions, issue chargebacks, or open additional investigations if they see suspicious activity. Business owners, meanwhile, only have 24 hours to report any possible ACH fraud suspicions; the moment they make the report, their financial institutions will likely (temporarily) freeze their accounts until investigations begin or are completed.   

Report the Fraud to Authorities

Victims should consider filing reports with service regulators besides notifying the impacted financial institutions. Trans Union, Experian, and Equifax are great options to consider if a credit account has been misused, as they can freeze a person’s (or entity’s) credit without much trouble. Otherwise, victims might consider notifying fraud law enforcement for additional repercussions. Those who want to assist enforcement with preventing fraud can also make an online report using the Federal Trade Commission’s online report tool. 

Strengthen Security Measures

Consumer and business accounts must strengthen their security, primarily if they have found suspicious activity within their profiles. It’s not enough to change passwords; complex, long passwords should replace all existing access codes. Companies should utilize MFA across all systems—and role-specific access may also be beneficial for some organizations—with recorded access histories. IT officials should implement further security tools like encryptions and VPNs as soon as possible.

ACH fraud is a significant risk to all who use online transactions and banking platforms. The ACH network connects almost every online banking option to its servicing partners. It usually starts with a successful phishing attack, where a fraudster tricks an individual, employee, or other party into sharing sensitive details. Depending on the fraudster’s long-term goals, they can alter payment details or send fake invoices.

However, ACH fraud prevention is relatively easy when prospective victims become proactive. Consumers can help prevent ACH fraud by using strong passwords and multi-factor authentication options. In contrast, organizations can help prevent ACH fraud by using role-specific permissions, verifying who they are speaking with, and continuously training their employees to identify suspicious behaviors. Moreover, everyone becomes safer using vigilance and multi-step protections to protect each other against fraudsters.