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Check Fraud Ed


Check Fraud Ed

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  • pg 1
                                                                       By Frank W Abagnale

The recent growth in check fraud has reached epic proportions, leaving no
individual, company or municipality immune.
                                                                                Risk reduction – best practices

          ore than 1.2 million worthless checks enter the banking system
          each day. According to the Nilson Report, annual check fraud losses       When fighting check fraud, nothing is 100 percent. No feature or pro-
          now exceed US$20 billion –                                            gram can completely eliminate the problem and no prevention system is
up from US$12 billion in 1996 – while                                           foolproof. However, specific practices – just some of which are outlined here
the American Bankers Association                                                – can complicate a criminal’s counterfeiting efforts.
reports that check fraud is growing 25
percent per year. While recent changes                                          Positive Pay
in the Uniform Commercial Code (UCC)                                                 The most effective check fraud prevention tool is Positive Pay (Match
shift sole responsibility for check fraud                                       Pay), an automated check-matching service that is unparalleled in detecting
losses from the bank to both the bank                                           bogus checks. It is offered through the cash management department of
and its customers, losses and related                                           many banks. To use this service, the check issuer sends (transmits) a file of
expenses to both will continue to                                               issued checks to the bank. Positive Pay is extremely effective when the customer
increase unless banks and customers                                             sends issued-check information to the bank the same day checks are issued.
form a strong partnership to prevent                                            Comparisons are made of the account number, check number and dollar amount
and control the problem.                                                        of checks presented for payment against the list of checks authorized and issued
     Banks, companies, and munici-                                              by the company. All three components of the check must match exactly or it
palities face a substantial shared risk from check fraud and financial execu-   becomes identified as an ‘exception item’, causing the bank to contact the cus-
tives must ask themselves how they can best assess that risk. How much          tomer to determine its authenticity. If the check is fraudulent or the dollar amount
financial exposure are they willing to assume, and what real and hidden         was altered, the bank will return the check unpaid, and the forger is foiled.
costs will they bear if they become victims of check fraud? They must           Because recent revisions in the UCC impose liability for check fraud losses on
also consider how might the company’s image and reputation be dam-              both the bank and its customer, it is in everyone’s interest to help prevent loss-
aged and how much it is prepared to spend to reduce the risk. There are         es. When a company uses highly secure checks and works with its bank to imple-
numerous factors the executive must consider in order to make those             ment Positive Pay, the risk of and liability for check fraud will be substantially
tough decisions, and various best practices they can follow to reduce           reduced. Many banks charge a modest fee for Positive Pay, which should be
the risk of falling foul of the fraudsters.                                     regarded as an ‘insurance premium’ to guard against check fraud losses.

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Reverse positive pay
    For organizations or individuals with relatively small check volume,
Reverse Positive Pay should be considered. This service allows an account                  How to practice safe checks
holder to conduct a daily check matching to identify unauthorized checks.
The account holder downloads from the bank the list of paid checks and                         According to the Office of the Controller of the Currency,
compares them to the issued check file. Suspect checks must be researched                  more than 1.2 million fraudulent checks are written every day
and the bank advised of items to be returned. While Reverse Positive Pay                   – more than 13 per second. Losses this year will exceed
provides timely and manageable information on a small scale, for larger opera-             US$20 billion. But there are steps you can take to minimize
tions it is not a worthy substitute for Positive Pay.                                      your risk from external and internal threats of fraud.

Good, but not foolproof                                                                    • Use your bank’s Positive Pay or Reverse Positive Pay. Both
    Positive Pay and Reverse Positive Pay monitor the check number and dollar                 services allow you to make pay/no pay decisions and can
amount, but not the payee name. Neither will catch added or altered payees, or                help protect your company against possible check fraud.
counterfeit checks using legitimate check numbers and dollar amounts with new              • Maintain tight check security. Store checks, check reorder
payees. Several banks are developing Positive Pay systems that compare the                   forms, cancelled checks and signature stamps under lock
payee name, called Payee Name Verification (PNV). PNV identifies the payee line               and key, and restrict employee and cleaning crew access.
through X and Y coordinates on the face of the check, and uses optical character              Examine new checks when they arrive and keep check
recognition software to interpret and match the characters. Matching the payee               boxes sealed until needed.
name, check number and dollar amount will stop most check fraud attempts, but              • Destroy unused checks from closed accounts immediately
it is still not 100 percent effective. It will not prevent added payee names insert-         and thoroughly.
ed above or below the authentic payee name line.                                           • Use highly secure check stock with at least seven security
                                                                                             features. Your best choice is stock containing both overt
Preventing added payees                                                                       safety features (such as watermarks and warning bands)
    Altering or adding a new payee name is the latest scam of sophisticated                   and covert features (such as microprinting and multi-
forgery rings. They fully understand the limitations of Positive Pay and simply              chemical sensitivity). Avoid multiple colors and sizes of
add a new payee name above or below the original name (after removing the                    checks in the same account – they make spotting counterfeit
address). To help prevent added payee names, you should insert a string of                   checks much more difficult.
asterisks above and after the payee name, and use a Secure Name Font. To help              • When laser-printing checks, issue multiple passwords to
prevent altered payees, use highly secure checks to keep the asterisks and                   those responsible for check printing and use check paper
address from being removed.                                                                  with toner anchorage to permanently bond the toner ink
                                                                                             into the paper.
ACH filter or block                                                                        • When typing checks, use a type font of 12 points or larger.
    Forgers have learned that Positive Pay cannot monitor electronic ‘checks’,                Forgers erase smaller type and replace it with larger type.
also known as Automated Clearing House (ACH) debits. Files containing ACH                    Use a fabric, single-strike security ribbon, not type self-
debits are created by a company or municipality and submitted to its bank. The               correcting polymer ribbons, which are easily removable
bank processes the file through the Federal Reserve System and posts the ACH                 with tape.
debit against the designated account. Because paperless transactions pose sub-             • Reconcile your checking account statement as soon as you
stantial financial risk, banks are careful to thoroughly screen any company that              receive it, or use your bank’s Partial or Full Check
wants to send ACH debits. However, some dishonest individuals get through the                Reconciliation. Report losses or suspicious checks to your
screening process and victimize others.                                                      bank immediately.
     To prevent electronic check fraud, ask your bank to place an ACH filter or            • Separate responsibilities for handling checks. Reconcilers
block on your account. An ACH block rejects all ACH debits. However, for many                should not be signers, and vice versa. Your Treasury
organizations a block is not feasible because legitimate ACH debits would be                 Management Sales Representative can review your check
rejected. In this case, an ACH filter should be used. In the electronic debit world,         processes from issuance to reconciliation and recommend
each ACH originator has a unique identifying number. An ACH filter posts deb-                the precise services and products that will help you avoid
its only from preauthorized originators or in preauthorized dollar amounts.                  check fraud.
If your bank does not offer a filter, open up a new account exclusively for
authorized ACH debits and restrict who has knowledge of that account num-
ber. Put a block on all other accounts.                                                ier targets. Highly secure checks should contain at least eight safety fea-
                                                                                       tures, but more is better. Many check manufacturers sell checks that
High security checks                                                                   include a printed padlock icon, suggesting the check is secure, but the pad-
    Using highly secure checks is a critical component in check fraud pre-             lock icon does not mean a check is secure, since only three safety features
vention. One cannot discuss check fraud and ignore this. A highly secure               are required to use it. Some legal experts suggest that the failure of a busi-
check provides the only deterrent to altered payee names and payee dollar              ness to use adequate security features to protect its checks constitutes
amounts by making alterations and replications more difficult. There is sub-           negligence. By using highly secure checks, a company can legally demon-
stantial evidence that highly secure checks motivate criminals to seek eas-            strate that care has been taken to protect its checks.

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The identity crisis
      he Federal Trade Commission reports that nearly 9.9 million        There are also a couple of websites that sell Social Security

T     Americans have been victims of identity theft, costing con-
      sumers US$5 billion and banks and businesses US$48 billion
every year. Because this crime is so simple to commit, I believe
                                                                         numbers for US$49.95. Their advertisements claim that they can
                                                                         tell you anything about anybody. I researched these companies –
                                                                         all you have to provide is someone’s name and address – and
identity theft will become one of the most profitable criminal activi-   they will tell you everything you want to know, including spouse
ties in history. There are endless opportunities for a criminal to       and children’s names. For the identity theft victim, the nightmare
obtain the necessary information to commit identity theft.               has just begun.

     “Identity theft will become
     one of the most profitable                                             Frankly speaking
                                                                                Frank Abagnale is one of the world’s most
     criminal activities in history”                                        respected authorities on forgery, embezzlement and
                                                                            secure documents and has lectured to and consulted
    As a teenager I did things that today, as a husband and father,         with hundreds of financial institutions, corporations
an educator and consultant, I am not proud of. But, recounting              and government agencies around the world for over
one youthful experience may be illustrative. In my old days, when I         25 years.
wanted to establish a new identity (so that I could open a bank                 His rare blend of knowledge and expertise began as a
account and pass bad checks), I would go to the Department of               teenager, when he became notorious as one of the world’s
Vital Records (in any city I was in). I would ask to see the death          most famous confidence men as depicted in his best-
records for 1948, the year I was born. Every fifth or sixth entry           selling book (and more recently, movie blockbuster) “Catch
was an infant who had died at birth. I would write down the death           Me If You Can.”
information and later apply for a birth certificate in that name. I              Today, more than 14,000 financial institutions,
would fill out a form, pay US$10, and obtain a legitimate birth             corporations and law enforcement agencies use his fraud
certificate. I would go to the DMV and get a license with my                prevention programs. To find out more about these
picture, my description, and somebody else’s name. I had 50                 programs and read in more detail how to reduce your risk
legitimate driver’s licenses.                                               of check fraud, please visit www.abagnale.com.
    Now, 35 years later, you can buy a CD ROM with birth and
death records, and can apply for a new birth certificate by mail.

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