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Check Fraud Incidence Is Rising
According to federal agencies, more than 2 million fraudulent checks are written in the United States each day, and check fraud now outpaces credit card, loan and ATM fraud.
The widespread availability of desktop publishing technology has made check fraud much easier to perpetuate, said Evan Davis, assistant vice president of Fifth Third Bank.
A lot of organizations print their own checks and the same check printing software is available to criminals, Davis pointed out. For $40 anyone can buy more than 100 blank checks at an office supply store.
Who’s negligent in check fraud? The risk is allocated to the party that was in the best position to prevent the fraud, and what it usually comes down to is that the company was in the best position, Davis said. The company’s bank is liable only to the extent of its responsibilities as spelled out in the account agreement.
What can a company do to protect against check fraud? Currently, 40 percent of check fraud is internal, perpetuated from within by employees, agents or others frequenting company offices. Internal risks can be mitigated by securing the company’s check stock, careful auditing and hiring practices and, most importantly, timely account reconciliation, Davis said.
“Timely reconciliation is going to save you every time. How often do you review your account activity and how detailed do you get?” Davis asked. “Is it a once-a-month or quarterly process?
“Who’s writing the checks? Does the same person who controls the check stock and has authority to write checks also have the responsibility for reconciling the bank statement? That’s step A, B and C right into check fraud. You want to take a look at separation of duties.”
Whether it’s preprinted or blank check stock, the key is to buy check stock that’s difficult to alter. Common check security features include watermarks, foil printing, holograms, void pantograph, alteration-sensitive paper, color staining and thermal ink.
Davis recommends that companies that print their own checks use a combination of security features.
Banks have a tool that can help reduce the risk of check fraud. Fifth Third’s “Positive Pay” service uses daily account reconciliation for early detection of fraud.
It’s not a check fraud prevention tool, Davis said, because there’s no silver bullet in the industry that will prevent a criminal from printing checks using a stolen company account number.
The Positive Pay system detects check fraud the day it occurs. Every check that clears the company’s account is compared against the check registers the company has sent to the bank, Davis explained.
“The bank is acting as one of your agents. We’re doing the comparison for you — not the person who wrote the check, but a third party. We detect check number and encoding errors. The goal is to identify suspect activity on your account. That suspect activity is reported to you on a daily basis.”
The average number of fraudulent checks that will clear on an account when fraud occurs is 14, he noted.
Automated Clearing House (ACH) — or electronic funds transfer — fraud is expected to increase, too, said Beth Cronenweth, an assistant vice president and e-business product representative.
In the third quarter of 2002, nearly 1.5 billion electronic transactions were processed through the ACH network. Of those, 97.5 million were e-check or check conversion transactions.
Every check conversion application developed thus far has been consumer based, but there’s a lot of discussion in the industry about check conversions for corporate accounts, Cronenweth said.
Under ACH rules, if a bank receives a transaction posted to an account number, it doesn’t have to review the name of the person who conducted the transaction. As long as the account and routing numbers are correct, that’s all the bank is liable for reviewing and posting, she explained.
“It does offer some ways that consumers can perpetrate fraud against business accounts that did not exist before. We don’t have good statistics on ACH fraud but we do track the unauthorized transactions that are returned through the ACH network. The return for unauthorized activity is extremely low.”
Right now it’s low, but NACHA, the nonprofit trade association that governs the ACH network, recognizes that people are getting smarter about electronic transactions, Cronenweth said. She said any bank experiencing a high level of unauthorized transactions for electronic payments had better start tracking them to figure out who originated and who received them.“Those rules are being put in place as we speak. We have to be careful of what’s coming up.”