Attempted Check Fraud Doubles to $4.3 Billion

Attempted check fraud at the nation's banks surpassed $4.3 billion in 2001, doubling for the second time in four years, according to the latest American Bankers Association Deposit Account Fraud Survey Report.

While attempted check fraud losses continued to rise, actual dollar losses remained relatively stable at $698 million, up slightly from the $679 million that banks lost in 1999, the last year of ABA's biennial survey. Banks' check fraud prevention systems were credited with keeping actual losses significantly lower than the attempted fraud numbers. Attempted fraud totaled $2.2 billion in 1999.

Since the last survey, the number of check fraud incidents increased 34 percent to 600,085 cases in 2001. However, average losses per case went down from $1,518 in 1999 to $1,163 in 2001.

Large banks' share of losses fell from 60 percent in 1999 to 55 percent in 2001. Although they continue to have the largest number of attempts, large banks also have the best record in loss avoidance, preventing more than 80 percent of check fraud attempts.

On the other hand, community banks' share of losses doubled - rising from six percent in 1999 to 13 percent in 2001 - signaling a shift in crime to community and mid-sized institutions. Community banks prevented a little more than half of their attempted fraud.

Losses remained relatively stable at mid-sized and regional banks.

"This survey has become the industry benchmark for deposit account fraud," said Richard J. Clausen, member of the ABA Fraud Prevention Oversight Council and senior vice president, liability risk management, Bank of America. "Sharing loss information and best practices for preventing losses with peer banks is crucial to the banking industry's check fraud prevention efforts. Banks across the country use this data to determine where to target their resources in check fraud prevention."

SOURCE OF CHECK FRAUD
Regardless of bank size, the most common type of check fraud in 2001 was forgery, with about one-third of fraud cases and fraud losses attributed to forged signatures and endorsements. Insufficient funds (NSFs), or bounced checks that customers never pay, ranked second and counterfeit checks ranked third. While a significant proportion of community banks' losses were from NSFs and closed accounts, larger institutions were more likely to have losses due to counterfeit checks.

FRAUD PREVENTION METHODS
All participants ranked "positive pay," a computerized check number matching program between banks and corporate customers, as the most effective fraud prevention method. Others included online customer authentication for new accounts, a rules-based automated system for deposited items in the back office, and a centralized fraud management program for the entire institution.

The most common fraud prevention practices at banks of all sizes were employee training, signature verification systems and the use of new account screening software. Other methods mentioned in the report included reporting check-related losses to national databases, having a funds-availability policy that takes advantage of the hold periods permitted by Reg. CC, and working with law enforcement on fraud-related issues.

CHECK FRAUD OPERATING COSTS
Losses are not the only expense banks incur from check fraud. The amount of resources that banks devoted to check fraud prevention, detection, investigation and prosecution increased with bank size.

One in five money center banks spent more than $20 million each in check fraud-related operating expense (not including actual losses). The median expense per bank fell in the range of $5 million to $20 million for money center banks, between $250,000 and $1 million for regional banks, from $10,000 to $50,000 for mid-size banks and less than $5,000 for community banks.

DEBIT CARD FRAUD LOSSES
According to survey results, banks lost a total of $157.1 million in 444,317 cases of debit card fraud with signature-based transactions comprising three-fourths of losses. Signature-based debit card losses totaled $106.3 million in 343,358 cases. Personal Identification Number (PIN) based debit card losses totaled $50.8 million in 100,959 cases.

If compared with the card portfolio size or transaction volume, signature-debit card fraud losses ranged from 83 cents to $1.70 per card annually, or 1 to 3 cents per transaction. PIN-based debit card losses ranged from 57 to 67 cents per card annually, or 1 to 2 cents per transaction. These benchmarks generally increased with bank size.

ABA's biennial Deposit Account Fraud Survey Report was conducted during the first and second quarters of 2002. ABA surveyed a national probability sample of 4,884 banks with 439 respondents reflecting appropriate proportions in each size category. To order, call ABA at 1-800-BANKERS.