Bust Out Fraud - What is Bust Out Fraud?

The Banking Industry is Facing Challenges

Banks are supposed to be safe places for you to deposit your money and save it for future transactions. Despite efforts by the banking sector to keep systems safe, fraudsters still find a way to somehow to steal money through bust out fraud.

What is Bust Out Fraud and How does it Happen?

Bust out fraud takes time and usually happens over a specific period of time. Here, a criminal opens an account with fake details. Then, they deposit money into that account using fake checks and false automated clearing house (ACH) transactions.

The deposits are usually large and very consistent. The fraudster may deposit the amounts every week to show the bank that the account is active. Once the bank gains trust in the depositor, they increase that person’s credit limit.

The criminals take their time with the account. They borrow according to that credit limit and pay back the money on time. The trend continues that way, until one day the fraudsters take a huge loan and disappear. They don’t bother paying back the money because that was their end goal all along.

Most cases of bust out crime are carried out by both credit and debit cards. The Perpetrator of the fraud account will ensure that overpayments with bad checks are made just before the bust-out activity that creates a major loss for the bank. Below is an illustration of the step-by-step actions taken by the Perpetrator during a planned fraud:

  1. Credit application
  2. The build-up of a good credit history
  3. Access to more credit based on good credit history
  4. Draw down all available credit
  5. Escape before fraud activity is detected on time

Based on observation, a majority of fraudsters prefer the use of bank cards in order to successfully commit the crime. Other mediums used by the perpetrators include home-equity lines of credit, retail cards and sometimes both secured and unsecured loans.

The criminals generally apply for the credit four to twenty-four months prior to the fraudulent action.

How Banks can Detect this Type of Fraud

According to recent studies, banking institutions have now come up with a concept that can be used to identify bust-out behavior. Below are the signs that banks look for:

  • Bankcard inquiries are likely to begin increasing at a steady pace. The average number of inquiries was recorded to be two, which take place about fifteen months before the crime. With just about 3 months before the mission completion, bankcard inquiries are bound to increase and reach a peak of seven.
  • Accounts linked to bankcards are also seen to increase gradually over time. Most perpetrators will own about seven cards at least fifteen months prior to the bust-out plan.
  • The pattern usage of the credit card will be maintained steadily for about three months before the fraud activity. Thereafter, the pattern will start to change significantly.
  • There will be no signs and signals of delinquencies up to the time of the bust-out activity when they will begin to suddenly increase.

If you take a closer look at the activities prior to the fraud completion, the perpetrator will try to gain access to as many credit cards as possible in order to fully take advantage of the system.

The Prevalence of Bust Out Crime

Unfortunately, card issuers lose more than $1.5 billion every year because of bust out activity. This figure is a representation of 1% of the banking industry’s total annual revenue.

Reports from major banks show that there has been a significantly high number of credit loss reserves in the past several years. It’s unfortunate that institutions are yet to come up with better prevention measures that would completely stomp fraudsters from committing bust-out heists.

However, there are still some that end up being caught such as the bust-out crew arrested by the FBI in 2004. The crew was reported to have made a total profit of $6.8 million between 1995 and 2003.

How to Prevent Bust Out Account Fraud

This activity is yet to be completely phased out of the banking sector because criminals are changing their patterns. For example, some fraudsters could wait for as long as year before they carry out the bust out activity.

Regardless, here are a few measures that financial institutions can use to help curb bust out account fraud:

  • Avoid writing bad checks since this might trigger an account closure
  • Decrease credit limits to prevent high borrowing
  • Only use high credit limit on cards that are under a pre-pay program
  • Ensure that older credit cards are under pre-pay before applying for a new one

Final Thoughts on Bust Out Fraud

As long as there’s money exchanging hands between individuals and financial institutions, there will always be fraudsters trying to get what they don’t deserve. Bust out account fraud still continues to trouble many banks. Banks should do more to educate their customers about safeguarding their personal information. This is because the less data hackers have, the less likely they are to commit bust out crime because they can’t use their own credentials to open an account.

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