Check Fraud Crime and how it can be prevented
In recent years, corporate check fraud has been increasing at an alarming rate. In 1993, The Wall Street Journal reported that the amount of counterfeit checks written against corporate accounts totaled at that time an estimated $1 billion annually. A substantial portion of those fraudulent checks are for large dollar amounts.
ABOUT CORPORATE CHECK FRAUD
Why is corporate check fraud reaching epidemic proportions?
Check fraud is a relatively low risk crime with potentially high stakes and good odds of success. Check fraud has increased substantially since 1988, when new regulations were introduced to accelerate check deposit availability. Under Regulation CC, banks are required to make funds available within two days for local checks and within five days for out-of-town checks. Because of Regulation CC and competitive pressures to accelerate availability, banks are increasingly making funds available for checks before those checks have actually cleared. This situation makes it easier for criminals to successfully negotiate fraudulent checks.
A second major reason for the recent increase in check fraud is the availability of low-cost, professional-quality electronic publishing and copying technology. Using color copiers, laser printers, scanner and desktop publishing systems, counterfeiters can easily produce excellent copies of corporate checks. Not long ago, the majority of corporate check fraud cases involved stolen check stock. Today, most corporate check fraud involves the use of electronic image-processing equipment to produce forged checks, duplicate checks, or checks with altered dollar amounts.
This new technology has not only changed the modus operandi for check fraud but has also led to a new profile for the criminal. Before electronic publishing systems became widely available, check fraud was more often than not a crime committed against a corporation or financial institution by someone inside the company. In 1986, for example, 72 percent of the FBI check fraud cases involved “insiders.” Today, if your business experiences check fraud, the criminal will most likely be someone outside your firm.
Who is liable for losses resulting from check fraud?
This is a highly complex matter involving legal issues beyond the scope of this publication. However, a 1992 US. District Court decision illustrates how the law governing bank deposits and collections can be interpreted today. In this particular case, a forger negotiated 13 checks for a total of $650,000, drawn on the account of a company that routinely issues about 20,000 checks a month. The corporation subsequently obtained reimbursement for the bad checks from its insurance company, which in turn sued the paying bank to recover its loss.
In many cases involving checks with forged drawers’ signatures, the paying bank ends up absorbing the loss for the fraudulent checks. In this case, however, the court ruled in favor of the paying bank on the grounds that a bank following acceptable commercial standards should not be held liable in cases where the forgeries were of high quality.
Regardless of who is held legally liable, all payments systems participants ultimately end up sharing the financial burden of check fraud–the losses, the legal fees, the higher insurance premiums, and the bank costs. Consequently, corporations and their banks should make check fraud prevention a high priority.
CHECK STOCK SECURITY
When ordering check stock, what security features should we be considering?
Your first step should be to consult with a reputable check supplier who is a specialist in this field and can advise you on the technology appropriate for your specific check disbursement needs. The security features to consider include:
- Safety and chemical reactive papers that show alterations and erasures
- Papers with watermarks, fibers or embedded security threads
- Microprinting (text set in type too small to be reproduced by a photocopier
- Void pantographs (screen tint backgrounds having a colored pattern in which the word “void” is hidden; when photocopied, the hidden word appears)
- Multicolored printing and background patterns that are difficult or impossible to duplicate
What type of physical security measures should we employ in our check production area?
Blank checks should be regarded as and asset to be safeguard, exactly as if it were cash. Check stock should be kept under lock and key and require dual controls to access it.
Audit check stock frequently for missing items. To facilitate these audits, use pre-numbered check stock so missing checks can be quickly identified. Have the check stock shrink wrapped in small multiples so that tampering will be apparent.
CHECK ISSUANCE AND ACCOUNT RECONCILEMENT
What key anti-fraud controls should we use for check issuance and account reconcilement?
Follow these five basic rules:
- Centralize the check-writing function to the greatest extent possible
- Limit and control the number of official signers. Immediately notify your bank of any changes in signing authorization. Use multiple signers on checks over a threshold dollar amount.
- Separate the check-writing and account reconcilement functions
- Perform reconcilement promptly
- Reconcile large dollar items on a daily basis
CHECK FRAUD PREVENTION SERVICES
Specialized check fraud prevention services you may want to consider include:
- Maximum dollar amount accounts. This type of account lets you specify a maximum dollar limit for checks that can be drawn on the account. Any check exceeding the limit is automatically rejected by the banks sorting machines.
- Detail reports for large dollar items. This type of report provides a detailed listing of all large dollar items that have posted to your account.
- Positive pay systems. These systems generate reports identifying potentially fraudulent items. Whenever checks are disbursed, you electronically send the bank a file containing information on each checkcheck numbers, dollar amounts, etc. After checks are processed, the positive pay system generates a report listing exception items that do not match your checks issued information. After reviewing the report, you may instruct the bank to return any potentially fraudulent items.
IN CASE OF FRAUD
What steps should a company take in the event of check fraud?
There are no simple, foolproof solutions for dealing with check fraud. Your first step should be to review your options with your bank representative. Bank services you may want to use include electronic reporting of checks paid information, account reconcilement services, stop payments and physical review of paid items on a daily basis. The strategy you adopt will depend on the specific requirements of your situation.
CHECK FRAUD CHECK LIST
Checks will continue to be the most common method of making payments in the US for many years to come. To safeguard your business against check fraud, you need to develop strong internal safeguards and controls. You should also consults with your bank and check supplier on how to limit your exposure to check fraud. Here is a recap of specific steps to take:
- Use check stock with fraud prevention security features.
- Keep blank check stock under lock and key.
- Centralize the check writing function as much as possible to limit access to check stock.
- Limit the number of official signers. Immediately notify your bank of changes in signing authorization.
- Separate the check writing and account reconcilement functions.
- Reconcile your account promptly – daily if possible.
- When possible, use maximum dollar limits on accounts. Set up a separate account for large dollar limits on accounts.
- Set up a separate account for large dollar payments.
- To help identify fraudulent checks for large amounts, use an information reporting service providing daily reports of checks above a minimum dollar threshold.
- Use an automated positive pay system to help identify potentially fraudulent items.
This publication was one in a series of white papers prepared by Bank of America on key issues of interest to corporate treasury managers and it is presented to you courtesy of – developers of the internationally distributed CheckPlus Laser Check Printing System.
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