Getting To Know The Ins And Outs of Check Fraud

Corporate check fraud is rampant, and proof is in the numbers.

Check fraud is projected to represent a multi-billion dollar threat to the economy as 65 billion checks move through U.S. financial systems annually. The costs of investigation and recovery outweigh the cost of the fraud in many cases, and banks would rather absorb the loss as the price of doing business. The check fraud dilemma is so serious that banks don't like to report the extent of their losses.

A recent Nilson Report projects that the number of checks written annually will rise by 2% to 4% through the year 2020. And, more than 1.2 million worthless checks enter the payment system daily. In other words, the hurdles have been low enough for counterfeiters to cash in. Whether by simple individual counterfeit or sophisticated collaboration, banks and their customers fall victim at a high cost.

An Easy Target

How is corporate fraud committed so easily? Once counterfeiters acquire a "good" account they can create check fraud at will. A good account is one that is 1) open against a corporation in good credit standing, 2) absent from the check verifier's negative account list or 3) registered on the positive account list. These accounts are readily available to accept one or more fraudulent events undetected by check verification companies.

The shopping list for a counterfeiter is short and rather inexpensive, considering the anticipated payout. All that's required are a computer, color laser printer, scanner, inexpensive check printing software, blank check stock, desktop publishing software and false identification cards.

There are, at minimum, three different approaches that a counterfeiter will consider when committing corporate check fraud. These approaches are no big secret. The Internet has served as a convenient vehicle for criminals to share success stories and learn case studies for committing easy check fraud.

Simple Steps

In the first approach, it's a one-person job where corporate account information is simply captured and replicated. Counterfeiters will buy a product or service from the company that can be paid for by check. When the check is returned in a statement, it will have the company's account number located on the reverse side. A knowledgeable counterfeiter will purchase blank corporate size check stock versus personal check stock, and fine-tune a corporate logo for the tampered version.

In order to spoof the Positive Pay system, the counterfeiter will not deposit it at the bank of origin, and will remove funds from the deposit the same or the following day to ensure that the erroneous funds are withdrawn before detection.

The second approach involves collaborating with someone on the inside of a lockbox operation of a bank. These internal individuals easily can find company names, bank fractions and MICR lines of checks deposited from different companies and bank accounts. Once acquired, checks can be created the same way.

While some corporations use Positive Pay as a method to detect check fraud, relying on Positive Pay alone presents many limitations. There is limited MICR line information and lack of payee information. Positive Pay doesn't protect against forged endorsements or against multiple check copies. Positive Pay poses labor-intensive processes for the bank and its corporate customer. To avoid detection by Positive Pay, counterfeiters will ensure that they deposit or cash the check at a location other than the bank of origin.

The third and most difficult approach involves collaborating with someone on the inside of a check printing operation. Such individuals can provide company names, bank fractions, MICR lines, and more importantly, valid check number ranges of checks deposited from different companies and bank accounts. Counterfeiters ensure that checks are delayed such that that the fraudulent checks clear any Positive Pay system before the authentic checks are mailed.

No bank can afford to let down their guard when it comes to check fraud prevention. It is imperative to raise the bar on check security to thwart criminal attempts at the very first point of presentment.

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William "Billy" Meadow is the founder, chairman, and CEO of Payformance Corporation, a Fla.-based company providing secure payment systems and check verification technology. He can be reached at [email protected].

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This guest column, a regular feature in Bank Systems & Technology, allows industry executives and experts to discuss a key bank technology topic. If you would like to contribute, please send requests by e-mail to Steven Marlin, BS&T executive editor, at [email protected].