Starting on November First of 2009, financial institutions and other creditors were mandated to comply with the Red Flag provisions of the Fair and Accurate Credit Transactions Act of 2003. The purpose of the Red Flag rules is to alleviate and prevent identity theft. Identity theft could be defined as any fraud involving people getting particular benefits by pretending to be someone else.

Broad in scope, the Red Flag rules define financial institutions as any organization engaged in insurance, banking, or similar activities, and a number of the definitions come with the breathing room to expand compliance demands. Any consumer account involving multiple payments or transactions that is offered to these organizations can potentially be subject to the rules.

In a nutshell, the rules state that any financial institution or creditor that may be subject to a reasonable and predictable risk of identity theft must create or develop an identity theft prevention program in order to remain in compliance. These programs should include identification of any activity that might be considered identity theft. They should pursue red flags that have already been identified, and should take action to prevent and mitigate theft. Finally, period review and updating of red flags are necessary to comply with the Red Flag provisions.

Additionally, the Red Flag provisions say that an institution’s identity theft prevention program should be managed and written by senior company management. Training and overseeing this service are required.

Identity theft is an expensive and disparaging issue; business and consumer losses came to about $56.6 billion in 2005 alone. But when one considers how harmful identity theft can be to a business, not complying with these regulations can be even more expensive and harmful. Potential losses, costly investigations, regulatory fines and potential lawsuits are all negative consequences of non-compliance. It seems as though their best bet is to follow the rules.

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