The Four Steps of the Red Flags Rule

It has been said that the best defensive plan is an offensive one. The saying is true for any situation in which information is available to stop problems before they start, especially in the business world. In 2003, the Federal Trade Commission (FTC) announced it would be applying the same proactive principal to the widespread problem of identity theft and business fraud. By implementing mandatory standards of fraud security, the FTC's Red Flags Rule hopes to protect both businesses and consumers nationwide and fight back against hackers and identity thieves.

However, as with any attempt at mass standardization, the Red Flags Rule has been turbulent to introduce. The date by which all affected businesses are expected to comply has been moved twice since the rule was announced. Many businesses claim that the language of the rule has made them confused as to how to achieve compliance, or if their industry will be affected. The FTC has since increased its awareness programs, breaking Red Flags compliance down into four easy steps.

In this article, we will discuss the four steps of Red Flags Rule compliance, and how each is an opportunity for your business to take a proactive role in the fight against business fraud.

Step One: Identify Red Flags
Every business industry has it own unique set of potential red flags, or indicators of potential business fraud. Before you can implement a successful program to detect and prevent red flags, it's essential to first identify suspicious activity unique to your corner of the business world. The FTC provides a series of categories to consider when building a list of relevant red flags, but also urges business owners in this stage to pay special attention to the details of the accounts they manage on a daily basis. What sort of accounts your business deals with—how they are accessed, managed and changed—will play an important role in helping you decide how you will focus on attempts at fraud on your business.

Step Two: Detecting Red Flags
Relevant red flags may exist in two places: new customers and existing customers. It's important to have procedures in place to identify both new and current fraudsters in a way that is not disruptive to your daily business. Comprehensive identity verification and identity authentication systems, when paired with reliable data sources, can be essential tools in helping your business detect fraud. But, there is no universal detection system that will work for everyone. Depending on your industry and the sensitivity of your accounts, you may wish to pull consumer data from multiple sources or invest in an authentication or verification service that covers several different means of making sure your customers are who they say they are. It all depends on what works best for your business.

Step Three: Mitigate Red Flags
If you encounter a red flag, it's important that your business and employees are aware of what steps must be taken to properly mitigate the threat and reduce the opportunity for it to happen again. The appropriate response may depend entirely on the situation, the nature of your business and the nature of your red flags detection program. The FTC offers a set of guidelines for dealing with red flags and fraud encounters, but as the business owner or operator, the situation is truly in your control. It's up to you to determine the best course of action to protect your business, your employees and your customers.

Step Four: Maintain Currency
The methods with which identity thieves and fraudsters attack businesses change on a daily basis. It's essential for all Red Flags compliant businesses to keep their fraud prevention systems up to date with current industry knowledge in order to keep their prevention programs sharp. While a reliable data provider will stay up to date with consumer information, it's up to you and your business to identify which methods are most effective and which should be evaluated or updated for maximum impact on your unique operation.

The Red Flags Rule is simple in and of itself. By following these four easy steps to compliance, you'll be building a system that will effectively prepare you and your employees to prevent, mitigate and report fraud in your daily business. Your system will reach beyond the walls of your business and impact your business partners and customers alike. By being proactive, you'll be doing your part to keep transactions honest and customers confident in their decisions to bring their business to you.

Electronic Verification Systems, an industry leader with more than 10 years of data provision and fraud prevention services experience specializes in integrating identity verification and authentication procedures into established business security structures. We can help you detect and prevent identity fraud, making our solutions ideal for those seeking to become Red Flags compliant.