There has been an increased number of fraudulent transfer of customer accounts via the Automated Customer Account Transfer Service, otherwise known as ACATS, according to Chris Hunter, Principal Analyst with Risk Monitoring at FINRA.
“Firms identified a new type of new account fraud, ACATS fraud, and escalated the concerns to FINRA,” he said on the latest episode of FINRA Unscripted.
Lindsey Barnett, Senior Principal Investigator with the Special Investigations Unit, FINRA, explained that ACATS is an automated system that facilitates the transfer of customer accounts from one firm to another, between the delivering firm and the receiving firm.
“The delivering firm is the firm that maintains the assets that would be moving out of the account into the account at the receiving firm,” she said.
In recent months, FINRA has published two Regulatory Notices regarding the fraudulent transfer of customer accounts using an automated system called ACATS.
Hunter said the first Regulatory Notice outlined the threats and gave firms an opportunity to review their internal procedures to address potential concerns related to fraudulent transfer of customer accounts.
The second Regulatory Notice provided effective ways to address the threat , he added.
“By approaching the threats in this manner, FINRA is equipping firms with intelligence required to protect investors and protect the firms from incurring losses as well,” he said.
Emily Kahn, Principal Intelligence Specialist with the Financial Intelligence Unit, added that FINRA recognizes that the threat landscape is changing and it’s evolving even more quickly than it has in the past.
“The faster that we get the information out to the industry, the faster that they can assess what’s going on at their firm and address it and mitigate the issue if it does occur,” she said.
According to Barnett, FINRA has some concerns that bad actors would be taking advantage of these efficiencies of ACATS and “thus why we wanted to get this notice out to the industry”.
She added that FINRA has observed that firms that allow online account opening or account opening through mobile applications are at a heightened risk for both new account fraud and ACATS fraud.
Kaitlyn Kiernan, Associate Director, Corporate Communications, External Communications at FINRA, said this is the second Reg Notice regarding ACATS fraud in less than six months.
“Late last year, we had Reg Notice 22-21 also touching on ACATS,” she said.
Kahn explained that the first Regulatory Notice was their alert to the membership, to the industry.
The second Regulatory Notice was a lot more expansive, and contains a lot more detailed information, including red flags or indicators of ACATS fraud, also best practices for deterrence and mitigation of ACATS fraud, she added.
“We’re hoping that this is part of that effort to help firms learn from each other and create that intelligence sharing forum within the industry,” she said.
Hunter stressed that firms with inadequate account transfer controls allow for potential reputational damage, loss of consumers’ trust, as well as potential financial losses.
“In today’s world, it really takes one customer voicing a concern that could negatively impact the firm’s reputation and cause other customers to review their relationships with that firm,” he said.
According to Barnett, firms can mitigate the risk by staying up to date on all rules, Reg Notices; by verifying customers’ identities online; and by enhancing the review of transfer requests.
She also wanted to remind firms of their obligation to report fraud or potential fraud through the BSA e-filing system.
“Just note that this does help regulators and law enforcement identify frequent bad actors across the industry and helps prevent further damage,” she said.
