Fighting fraud requires participation from all areas of a community bank, and defenses must evolve continually. Staying on top of it can feel overwhelming, but there are four factors that, when combined, can provide a solid foundation for a bank’s fraud fighting efforts.
Here are the layers experts say can help banks accomplish this.
Layer 1: How Do Internal Controls Strengthen Fraud Defense?
“At the community bank level, strengthening internal controls really comes down to getting the basics right and sticking to them consistently,” says Whitney Bouldin, vice president and controller for $1.1 billion-asset Citizens Bank & Trust in Guntersville, Alabama.
Controls such as proper segregation of duties, dual controls, daily reconciliations and clearly defined approval limits remain essential, Bouldin says. It is important to ensure that no one person has too much control over a transaction from start to finish.
Segregation of duties helps to mitigate chances of insider risk, whether that’s intentional malfeasance or unintentional mistakes, says Scott Anchin, senior vice president of strategic initiatives and policy for ICBA. If multiple employees execute different aspects of a particular activity, there is more redundancy and less chance for error.
“Senior management also needs to adhere to duty segregations to make sure that not only is the policy being followed at all levels, but that they are really setting the expectation that segregation is the appropriate behavior,” Anchin says.
Another important consideration is regularly evaluating and updating internal controls as the bank’s operations, products and delivery channels evolve, Bouldin says. Controls that were effective in the past might no longer be sufficient in today’s increasingly complex and technology-driven environment.
“Strong internal controls do not have to be complicated, but they do need to be intentional, consistently applied and supported across the organization,” she says.
Layer 2: Why is Governance and Oversight Critical for Fraud Prevention?
Strong governance in a community bank is really about engagement and communication, Bouldin says. When boards and senior leadership stay engaged and maintain open lines of communication with management, it creates a strong foundation for oversight.
Community banks need to make sure the board is “read in,” especially at the highest level, Anchin says. The board should have a role in setting the bank’s risk profile, and they should understand how management and employees are executing risk management policies commensurate with the bank’s risk profile.
“Without board involvement, you lack that higher-level strategic bent that is so critical,” he says.
For an “added layer of assurance,” community banks should institute some sort of internal audit function, whether that takes the form of a professionalized audit function within the organization or the creation of a board audit committee comprising independent directors, Anchin says.
According to Bouldin, audit committees are especially effective when they take an active interest in understanding emerging risks and asking informed questions.
“When governance feels collaborative and supportive, it encourages transparency, strengthens accountability and helps ensure that controls and policies are operating as intended,” she says.
Community banks must make sure that the organization implements risk assessments related to fraud risks on a regular basis, Anchin says.
“Fraud is always shifting, and there are so many new schemes that are emerging every day, so any risk assessment needs to be responsive to that frequency,” he says.
Layer 3: How Does Staff Education and Training Reduce Fraud Risk?
Staff members are often the first ones to notice when something does not feel right, especially at a community bank where relationships are close and employees know their customers well, Bouldin says. Training helps employees recognize red flags, understand how fraud schemes are changing and feel confident responding appropriately.
“The most effective training is practical, ongoing and easy to relate to real situations employees face,” she says. “Short refreshers, real-life examples and discussions about current fraud trends tend to resonate far more than training that feels disconnected from day-to-day responsibilities.”
Scenario-based learning is especially powerful, as it allows employees to think through how they would respond in real situations, Bouldin says. The key is keeping training relevant, engaging and timely so it supports employees in making good decisions when it matters most.
“It is not just about meeting requirements,” she says. “It is about giving employees the knowledge and awareness they need to protect the bank and its customers. When staff understand why controls exist and how fraud actually happens, they are more likely to take ownership of fraud prevention in their daily work.”
Anchin emphasizes that community banks should make sure staff training is both constant and consistent.
“One-off trainings are minimally effective,” he says. “People go through them as a rote exercise and may or may not retain what they learn. But making it really part of the culture, instilling in staff that continuous training helps to reinforce some of their learnings, that will better help keep some of these things top of mind for staff.”
Tailoring is important, too, Anchin adds. Frontline and back-office staff can have differing procedures to mitigate risk, so training needs to be customized to meet their needs.
Layer 4: What Role Do Advanced Technologies Play in Bank Fraud Detection?
Advanced technologies like artificial intelligence and machine learning are becoming increasingly important, even for community banks.
Bouldin has found that these tools help analyze large volumes of transactions in real time and identify patterns that traditional systems might miss. She notes that they are particularly effective at reducing false positives, which saves bank staff time and helps focus attention on truly suspicious activity. Other helpful technologies that she cites include enhanced transaction monitoring systems, behavioral analytics and identity verification tools.
“While technology alone cannot eliminate fraud risk, it is a powerful tool that significantly strengthens fraud detection when paired with strong controls and human judgment,” Bouldin says.
Advanced technology is becoming more available and easier to implement than ever, according to Anchin. Both core service providers and third-party vendors are introducing innovative technology solutions that are both feasible and cost-effective for community banks.
Anchin stresses that community banks must not rely on technology “as a black box.” Management, employees and even the board must take the time to understand how particular technologies work, he says. That way, the bank can implement the proper governance procedures and controls, as well as train staff appropriately, he says. Vendor management and due diligence are also critical.
“Technology is an aid, but humans are the decision makers,” Anchin says. “Humans understand customers, and relationships are why community banking is such a powerful and effective model.”
How to Integrate a Layered Fraud Defense Framework
More from ICBA
Visit icba.org/fraud-and-scams to find resources for fighting fraud, including a printable flyer for consumers on how to prevent check fraud.
Community banks must combine all these factors into a layered framework where policies, people and technology work together.
“For community banks, the key is integration,” Bouldin says. “Internal controls, governance, staff training and technology should not operate in silos. They need to support one another.”
Controls establish the rules, governance ensures accountability, training empowers employees and technology enhances detection and efficiency, she says. When these elements work together, they create multiple layers of defense, so that if one layer fails, another can catch the issue.
Indeed, a fraudster only needs to find one way in, so the more defenses that a community bank has in its arsenal to block every possible route, the better off it will be, according to Anchin.
Community banks must evaluate their layered approach as situations change, whether that comes in the way of staff turnovers, the implementation of new technologies or the emergence of new types of fraud.
“Fraud and scams are continually evolving, so you cannot have one control or one layer that is going to predict every iteration or permutation of a scam,” Anchin says. “When you layer your defenses, you are helping to future-proof yourself against evolving complex and sophisticated frauds and scams.”
Bouldin believes community banks bring unique strengths to fraud prevention, including close-knit teams, strong relationships and the ability to adapt quickly.
“A layered approach,” she says, “allows community banks to stay resilient, proactive and focused on protecting both their customers and their communities.”