When fighting check fraud, nothing is 100 percent. No feature or program can completely eliminate check fraud and no prevention system is foolproof. However, specific practices can discourage a criminal from attempting fraud and can thwart his counterfeiting efforts. The following are recommendations for reducing the risks associated with check fraud.
#1 – Positive Pay
One of the most effective check fraud prevention tools is Positive Pay. Since its introduction as an automated check-matching service, Positive Pay has been unparalleled in detecting most bogus checks. Positive Pay services are offered through the Cash Management Department of most high-performance banks. To use this service, the check issuer transmits a file containing information about the checks it has issued to the bank. Positive Pay compares the account number, the check number, dollar amount, and sometimes the payee name on checks presented for payment against the list of checks issued and authorized by the company. All of the components of the check must match exactly or it becomes an exception item. The bank contacts the customer to determine each exception item’s authenticity, if the check is fraudulent or has been altered, the bank will return the check unpaid and the fraud is foiled. For Positive Pay to be effective, the customer must send the data to the bank before the checks are released.
Because revisions in the Uniform Commercial Code (UCC) impose liability for check fraud losses on both) the bank and its customer, it is in everyone’s interest to help prevent check fraud losses. When a company uses high security checks along with Positive Pay, the risk and liability for check fraud are substantially reduced. Many banks charge a modest fee for Positive Pay, which should be regarded as an insurance premium to help prevent check fraud losses.
#2 – Reverse Positive Pay
For organizations or individuals with relatively small check volume, Reverse Positive Pay should be considered. This service allows an account holder to review in-clearing checks daily to identify unauthorized items. The account holder downloads the list of checks from the bank and compares them to the issued check file. Suspect checks must be researched and the bank notified of items to be returned. While Reverse Positive Pay provides timely information on a small scale, for larger operations it is not a pragmatic substitute for Positive Pay.
#3 – Positive Pay Is Not Foolproof
Positive Pay and Reverse Positive Pay monitor the check number and dollar amount. Several banks have developed Payee Positive Pay (PPP) services that also compare the payee name. PPP identifies the payee line by X and Y coordinates on the face of the check and uses optical character recognition software to interpret and match the characters. Matching the payee name, check number, and dollar amount stops most check fraud attempts. However, PPP is still not 100 percent effective because of the potential to add payees above the X, Y field. Secure Name Fonts help prevent added or altered payee names. In many cases, altering the payee name allows the forger to circumvent Positive Pay. A Secure Name Font uses a unique image or screened dot pattern in a large font size to print the payee name. This makes it extremely difficult to remove or change the payee name without leaving telltale evidence.
#4 – Preventing Added Payees
Adding a new payee name is a major scam used by sophisticated forgery rings. They understand the limitations of Positive Pay and simply add a new payee name above or beside the original name. To help prevent added payee names, insert a row of asterisks above the payee name, or use a Secure Name Font. To help prevent altered payees, use high security checks like SAFEChecks or the SuperBusinessCheck, and good quality toner to keep the asterisks and Secure Name Font from being removed.
#5 – ACH Filter or Block
Forgers have learned that Positive Pay does not monitor electronic checks, also known as Automated Clearing House (ACH) debits. Files containing ACH debits are created by an organization or company and submitted to the bank for processing. The bank processes the file through the Federal Reserve System and posts the ACH debit against the designated accounts.
Because paperless transactions pose substantial financial risk, most banks are careful to thoroughly screen any company that wants to send ACH debits. However, some dishonest individuals still get through the screening process and victimize others. Banks bear the liability for allowing these lapses.
To prevent electronic check fraud, banks can place an ACH block or filter on customers’ accounts. An ACH block rejects all ACH debits. For many organizations, a block is not feasible because legitimate ACH debits are rejected as well. In this case, the use of an ACH filter can prove beneficial.
In the electronic debit world, each ACH originator has a unique identifying number. An ACH filter allows debits only from preauthorized originators or in pre-authorized dollar amounts. If your bank does not offer an ACH filter, you can accommodate an ACH filter concept by allowing customers to open up new accounts exclusively for authorized ACH debits. The customers can then restrict who has knowledge of that account number. ACH blocks all other accounts.
#6 – High-Security Checks
Check fraud prevention begins with high security checks. The physical check is the first line of defense in helping to prevent altered payee names or dollar amounts. There is substantial evidence that high security checks often motivate criminals to seek softer targets.
High security checks should contain at least 10 safety features; more is better. Many check manufacturers claim that their checks are secure because they include a printed padlock icon. The padlock icon does not make a check secure, since only three safety features are required to use the icon.
Some legal experts suggest that the failure of a business to use adequate security features to protect their checks constitutes negligence. By using high security checks, a company can legally demonstrate that adequate care has been taken to protect its checks.
#7 – Chemically Reactive Checks — Check Washing
Washing a check in chemicals is a common method used by criminals to alter a check. The check is soaked in solvents to dissolve the ink or toner. The original data is replaced with fraudulent information. When a check reacts to many chemicals, the washing can be detected when the check dries. To defend against washing, your bank should encourage customers to use checks that are reactive to many chemicals. Chemically reactive checks become spotted or stained when soaked in chemicals. A Chemical Wash Detection Box on the back of the check warns recipients to look for evidence of chemical washing.
#8 – Prompt Reconciliation
The revised UCC requires an organization to exercise “reasonable promptness” in examining its monthly statements. The UCC specifically cites 30 days from the date of mailing from the bank. Accordingly, banking customers must carefully read their bank’s disclosure agreement that details the length of time they have to report discrepancies on their bank statement. Some banks have shortened the reporting timeframe to less than 30 days. Failure to reconcile promptly is an invitation for employees to embezzle because they know their actions will not be discovered for a long time.
Moreover, there should be a separation of duties within the statement reconciliation process. Specifically, this means that the people issuing checks should not be the same people who reconcile the accounts.
If banking customers are unable to reconcile their DDA accounts on a timely basis, they should consider hiring an outside reconciliation service provider and have their bank statements mailed directly to the service provider.
#9 – Repeater Rule
The repeater rule limits a bank’s liability. If a bank customer does not report a forged signature, and the same thief forges a signature on additional checks paid more than 30 days after the first statement containing the forged check was made available to the customer, the bank has no liability on the subsequent forged checks as long as it acted in good faith and was not negligent.
The one-year rule is another important guide. Bank customers are obligated to discover and report a forged signature on a check within one year or less if the bank has shortened the one-year rule. If the customer fails to make the discovery and report it to the bank within one year, they are barred from making any claim for recovery against the bank. This applies even if the bank was negligent.
#10 – Check Fonts — Alterations
Forgers and dishonest employees can easily erase words printed in small type and cover their erasures with a larger type font. Banking customers can prevent erasure alterations by printing checks using a 12 or 14-point font for the payee name, dollar amount, city, state, and zip code.
#11 – Two Check Colors
Some companies with multiple divisions use a single bank account against which all checks are drawn. To differentiate between locations, some banking customers frequently use different check colors for each location. This is not a good practice. When many colors of checks pay against an account, spotting counterfeit checks by color becomes a difficult task. A bank’s Sight Review Department cannot be expected to identify a fraudulent or chemically washed item when various colored checks are used. Banking customers should use a maximum of two colors for checks in the same account.
#12 – Manually Issued Checks and Ribbons
Every organization occasionally issues manual checks. Some manually prepared checks are typed on a self-correcting typewriter. These typewriters use ribbons that are black and shiny. These black shiny ribbons are made of polymer, a form of plastic. In this way, plastic is typed onto a check.
Forgers can alter manually issued checks with ordinary translucent tape. They simply lay tape over the letters to be removed, rub the tape firmly and lift off the tape. The typed letters are now on the tape, not on the check. Then they type in another payee name and dollar amount and cash the check, with the original signature!
When issuing manual checks, use a single strike fabric ribbon, which uses ink, not polymer. Fabric ribbons can be found in the catalog of major office supply stores. Single strike ribbons maximize the ink driven into the fibers of the paper by the typewriter.
#13 – Check Stock Controls
Check stock must be kept in a secure, locked area. Change locks or combinations frequently to ensure that they have not been compromised by unauthorized individuals. Keep check boxes sealed until they are needed. Inspect the checks when received to confirm accuracy, and then re-tape the boxes. Write or sign across the tape and the box to provide evidence of tampering. Conduct physical inventory audits to account for every check. Audits should be conducted on a regular and frequent basis by two persons, including someone not directly responsible for the actual check printing. When checks are printed, every check should be accounted for, including voided, jammed and cancelled checks, and those used to align the printer.
#14 – Annual Reports and Correspondence
Annual reports should not contain the actual signatures of the executive officers. Forgers scan and reproduce those signatures on checks, purchase orders, and letters of credit.
When possible, do not include account numbers in correspondence. Credit applications sent to a new supplier should include the name and phone number of the company’s account officer at the bank, but not the bank account number. Also, an authorized signer on the account should not sign the correspondence. There are no controls over who handles this information once it is mailed, transmitted, or faxed, and it could be used to commit fraud.
#15 – Wire Transfers
Forgers obtain bank account information by posing as customers requesting wiring instructions. Wire instructions contain all the information necessary to draft against a bank account. To avoid giving out primary account numbers, banking customers should be encouraged to open a separate account to be used exclusively for incoming credits, such as ACH credits and wire transfers. This new account should be placed on no check activity status and made a zero balance account (ZBA). These two parameters will automatically route incoming funds into the appropriate operating account at the end of the business day, thereby preventing unauthorized checks from paying.
#16 – Final Thoughts
Check fraud attempts and bank check fraud losses fell by 95 percent over a three-year period after a West Coast Bank educated their customers and introduced high security checks and the Positive Pay features outlined in this article. Your bank may realize similar results by aggressively implementing the check fraud prevention best practices mentioned above.