ACH fraud: Understanding what it is and why it happens
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ACH payments are a reliable way to manage payroll, process customer transactions, and pay vendors. But like any electronic payment method, they are vulnerable to fraud. Cybercriminals exploit weaknesses in ACH systems to initiate unauthorized transfers, putting your business’s finances and reputation at risk.
Fortunately, understanding how ACH fraud happens—and implementing the right prevention strategies—can help safeguard your business.
Let’s look at how ACH fraud occurs and, more importantly, how to protect against it.
What is ACH fraud?
Once criminals obtain this information, they can make fraudulent withdrawals or payments that lead to financial losses and operational disruptions. Below are some of the most common ACH fraud tactics businesses face.
How does ACH fraud happen?
There are several different ways ACH fraud can happen. Understanding the most common ways it happens and how they can impact your business can help you protect against them.
1. Unauthorized transactions
Fraudsters use stolen bank accounts and routing numbers to initiate transfers without permission. They often obtain this information from compromised documents—such as checks—or data breaches. Once they have access, they can withdraw funds directly from your account, resulting in financial losses for your business.
2. Phishing and social engineering scams
Deceptive emails, phone calls, or fake websites can trick your employees into sharing sensitive information, such as login credentials or account numbers. For example, a fraudulent email posing as a bank request may ask you to confirm account details. Falling for these scams gives fraudsters direct access to your funds.
3. Account takeovers
Cybercriminals use stolen credentials, malware, or keylogging software to gain unauthorized access to your bank account. Once inside, they can initiate transfers, lock you out, or reroute funds to external accounts. Account takeovers can severely disrupt your business operations and require an extensive recovery process.
4. ACH kiting
ACH kiting is a scheme that exploits processing delays in ACH transactions—which typically take one to two business days to settle. Fraudsters transfer funds between multiple accounts, creating the illusion of inflated balances. They withdraw nonexistent funds before the transactions clear, leaving businesses with financial losses.
3 methods for detecting ACH fraud to protect your business
According to an Association for Financial Professionals (AFP) survey, nearly a third of responding businesses experienced ACH fraud in 2022. It’s clearly a threat all businesses need to be prepared for.
Detecting ACH fraud early can prevent financial losses and operational disruptions. Here are three key strategies for identifying fraudulent activity before it escalates.
1. Transaction monitoring techniques
Monitoring transactions in real time is one of the most effective ways to detect ACH fraud. Be on the lookout for:
- Unusual transaction patterns: Large or frequent transfers to unfamiliar accounts may indicate fraud. A sudden spike in transactions during non-business hours or repeated small transfers could signal an attempt to test your system’s vulnerabilities.
- Transaction anomalies: Discrepancies such as altered account numbers or unusually high transfer amounts should raise concern. Fraudsters often attempt to manipulate these details to blend in with routine transactions.
- Geo-location inconsistencies: Payments from unexpected locations—such as foreign countries or high-risk regions—can be a red flag. Many fraud detection tools can automatically flag and review suspicious transactions.
Some businesses examine their transactions for suspicious activity at certain intervals, such as monthly. But it’s important to monitor your transactions in real time so you can resolve any issues as quickly as possible.
2. Biometrics and behavioral analytics
Biometric authentication and behavioral analytics strengthen fraud detection by verifying user identities and tracking unusual transaction patterns in real time.
- Biometric authentication: Security measures like fingerprint scans, facial recognition, and voice verification make unauthorized access nearly impossible. Even if fraudsters obtain login credentials, they won’t pass biometric verification without physical access to the authorized user.
- Behavioral analytics: These tools analyze typing speed, login locations, and device preferences to detect anomalies. If a user logs in from an unfamiliar device or exhibits unusual behavior, the system can flag the activity for review.
While biometric authentication and behavioral analytics are highly effective security measures, fraudsters are becoming more sophisticated by the day. It’s still a good practice to monitor your transactions in real time no matter what other security you have in place.
3. Information sharing in anti-fraud networks
Staying informed about fraud trends can help your business stay ahead of emerging threats. Here are a couple of ways you can do that:
- Anti-fraud consortiums: These networks share data on fraud tactics and trends, giving businesses real-time intelligence on industry-wide threats. Joining these consortiums and gaining access to shared insights can help your business identify fraud patterns before they impact your transactions.
- Industry alerts: Subscribing to updates from regulatory bodies, financial institutions, and industry associations can keep your businesses informed about new fraud schemes. Organizations like the National Automated Clearing House Association (Nacha) regularly issue warnings about fraud attempts targeting ACH payments.
Being connected to these networks and alerts adds an extra layer of protection to your security efforts. Once you can detect potential threats, you can take proactive steps to prevent them from happening altogether.
Strategies to prevent ACH fraud before it happens
Fortunately you don’t have to wait around for ACH fraud to happen before you can do something about it. Here are several ways you can strengthen your security protocols and minimize vulnerabilities to protect your business from unauthorized transactions:
- Strengthen authentication processes: Implement multi-factor authentication (MFA) to require multiple identity verification steps, such as a password and a text code. Enforce role-based access control to limit account access to only authorized employees.
- Establish robust internal controls: Require dual authorization for high-value transactions to prevent unauthorized transfers. Set transaction limits and conduct regular account reconciliations to catch discrepancies early.
- Educate your team on fraud prevention: Provide training on phishing attempts, social engineering tactics, and suspicious emails to reduce the risk of employee-targeted fraud. Conduct mock phishing exercises to help your team recognize and respond to threats.
- Use secure technology: Employ tokenization and encryption to protect sensitive transaction data from unauthorized access. Deploy firewalls, intrusion detection systems, and fraud prevention tools that offer real-time alerts and anomaly detection.
- Maintain strong vendor and partner management: Verify vendor credentials before initiating payments to prevent fraudulent transactions. Regularly update vendor payment details to minimize the risk of fraudsters exploiting outdated information.
- Stay compliant with regulations and best practices: Follow Nacha operating rules and other ACH security guidelines to ensure compliance. Collaborate with financial institutions to stay informed on evolving security strategies and requirements.
- Implement ACH filters and authorized user lists: Use ACH filters to block unauthorized withdrawals and restrict transactions. Maintain an up-to-date authorized user list to ensure only pre-approved individuals or entities can initiate transactions.
These security measures are important for protecting your business from ACH fraud, but the thought of implementing them all can feel overwhelming. The right accounts payable (AP) software can protect your business by automating many of these strategies.
What do you do if you’re already a victim of ACH fraud?
Knowing how to prevent ACH fraud is critical. But what if your business has already been affected? Taking immediate action can help minimize losses and improve your chances of recovering funds.
Follow these steps for the best possible outcome:
1. Contact your bank immediately
Notify your bank as soon as you detect unauthorized activity, and ask to freeze your account to prevent further transactions. Businesses often have only 24 hours to report fraudulent transactions for the best chance of recovery.
2. Document everything
Gather details about the fraudulent transaction, including dates, amounts, account numbers, and any suspicious communications. Creating a timeline of events will help streamline the investigation and may be required for legal or insurance claims.
3. File an affidavit
Work with your bank to complete and sign an affidavit detailing the fraudulent activity. This is essential for formal records and may be necessary for legal proceedings or fund recovery efforts.
4. Recover stolen funds
If the fraud is reported quickly, your bank may reverse unauthorized transactions or coordinate with the receiving bank to recover funds. If recovery through your bank is unsuccessful, consult legal counsel to explore claims under the Uniform Commercial Code (UCC) or other financial regulations.
5. Report to law enforcement and regulatory authorities
File a police report to create an official record of the fraud. Additionally, consider reporting the incident to agencies like the Federal Trade Commission (FTC), which can provide guidance and resources for handling financial fraud.
7. Notify affected parties
Inform vendors, clients, or partners impacted by the fraud to maintain transparency and protect their interests. Clear communication helps preserve trust and allows others to take preventive measures.
8. Review and strengthen security measures
Assess vulnerabilities in your financial processes and implement stronger authentication methods. Conduct regular security audits to identify weak points and reinforce fraud prevention measures.
9. Monitor accounts regularly
Establish a daily account reconciliation process to detect unauthorized transactions early. Consider investing in fraud detection tools that use AI to flag unusual transaction patterns before fraud escalates.
While it’s great to have these steps to fall back on if your business experiences ACH fraud, the fact is that businesses aren’t always able to recover the stolen funds. You’ll want to invest time and resources toward ensuring that you’ll never have to use these steps.
Automate your AP and protect your business with Ramp
While ACH fraud is a serious risk, it can be prevented with strong security measures and a proactive approach. Acting quickly when fraud occurs can help protect your business and reduce long-term damage, but prevention is the best strategy.
Staying on top of fraud prevention can be difficult, but the right AP automation software can help. Here are a few of the features Ramp AP software uses to prevent ACH fraud—or any other type of fraud—and keep your funds secure:
- Multiple layers of security to prevent unauthorized access
- Multi-factor authentication and step-up authentication for high-risk activities
- Automated security monitoring and alerts for suspicious activity
- Automated invoice matching with alerts for potential overpayments or fraud
And of course Ramp Bill Pay will also streamline your entire accounts payable process. You’ll be able to automate everything from approval workflows to ACH payment initiation and vendor onboarding, freeing up your team to work on other initiatives.
See what else Ramp Bill Pay can do for your business.