Check Fraud - Businesses
What is Check Fraud?
Check fraud is one of the largest challenges facing businesses and financial institutions today. With the advancement of computer technology it increasingly easy for criminals, either independently or in organized gangs, to manipulate checks in such a way as to deceive innocent victims expecting value in exchange for their money.
A significant amount of check fraud is due to counterfeiting through desktop publishing and copying to create or duplicate an actual financial document, as well as chemical alteration, which consists of removing some or all of the information and manipulating it to the benefit of the criminal. Victims include financial institutions, businesses who accept and issue checks, and the consumer. In most cases, these crimes begin with the theft of a financial document. It can be perpetrated as easily as someone stealing a blank check from your home or vehicle during a burglary, searching for a canceled or old check in the garbage, or removing a check you have mailed to pay a bill from the mailbox.
Types of Check Fraud:
- Forgery: For a business, forgery typically takes place when an employee issues a check without proper authorization. Criminals will also steal a check, endorse it and present for payment at a retail location or at the bank teller window, probably using bogus personal identification.
- Counterfeiting and Alteration: Counterfeiting can either mean wholly fabricating a check --using readily available desktop publishing equipment consisting of a personal computer, scanner, sophisticated software and high-grade laser printer -- or simply duplicating a check with advanced color photocopiers.
Alteration primarily refers to using chemicals and solvents such as acetone, brake fluid and bleach to remove or modify handwriting and information on the check. When performed on specific locations on the check such as the payee's name or amount, it is called-spot alteration; When an attempt to erase information from the entire check is made, it is called-check washing. For further information regarding this subject, visit HERE.
- Paperhanging: This problem primarily has to do with people purposely writing checks on closed accounts (their own or others), as well as reordering checks on closed accounts (their own or others).
- Check Kiting: Check Kiting is opening accounts at two or more institutions and using "the float time" of available funds to create fraudulent balances. This fraud has become easier in recent years due to new regulations requiring banks to make funds available sooner, combined with increasingly competitive banking practices.
Signs for bad checks:
- The check lacks perforations.
- The check number is either missing or does not change.
- The check number is low (like 101 up to 400) on personal checks or (like 1001 up to 1500) on business checks. (90% of bad checks are written on accounts less than one year old.)
- The type of font used to print the customer's name looks visibly different from the font used to print the address.
- Additions to the check (i.e. phone numbers) have been written by hand.
- The customer's address is missing.
- The address of the bank is missing.
- There are stains or discolorations on the check possibly caused by erasures or alterations.
- The numbers printed along the bottoms of the check (called Magnetic Ink Character Recognition, or MICR, coding) is shiny. Real magnetic ink is dull and non glossy in appearance.
- The MICR encoding at the bottom of the check does not match the check number.
- The MICR numbers are missing.
- The MICR coding does not match the bank district and the routing symbol in the upper right-hand corner of the check.
- The name of the payee appears to have been printed by a typewriter. Most payroll, expenses, and dividend checks are printed via computer.
- The word VOID appears across the check.
- Notations appear in the memo section listing "load," "payroll," or "dividends." Most legitimate companies have separate accounts for these functions, eliminating a need for such notations.
- The check lacks an authorized signature.
Check Fraud Tips for Businesses
Businesses as Check Fraud Victims
It is widely believed that businesses are the primary targets of check fraud professionals - especially by organized rings of criminals. As far as counterfeiting and alteration, payroll checks appear to be a favorite although all forms of business checks are targets from time to time and all forms of fraud techniques are practiced as well.
Uniform Commercial Code - Who is responsible?
It is clear now that businesses must play a role in ensuring their checks are secure. Recently revised UCC regulations add the onus of shared responsibility for check fraud on the business. For example, if a bank offers their customer check stock that containins security features that could have prevented a specific case of fraud, the bank can claim that the customer was negligent and therefore at least partially liable for the fraud loss.
Check Fraud Tips:
Issuing and reconciling checks:
- Order checks and deposit slips wisely
- Use an established, respectable source, especially those recommended by your bank, to ensure your checks will process easily through the bank’s clearing system.
- Make sure that your checks include Security Features that will help combat counterfeiting and alteration.
- Make sure you notify your check supplier (and financial institution, if necessary) if a new check order has not been received within a reasonable amount of time after you ordered them.
- Maintain adequate physical security of your checks, deposit slips, etc.
- Secure all reserve supplies of checks, deposit slips and other banking documents in a locked facility. Keep blank checks locked up at all times and limit the number of people with access to your checks. If your checks fall into the possession of unscrupulous employees, you could be liable for substantial losses.
- Change the locks on your facility when an employee leaves your employ
- Never leave checks or bank records unattended in order to assist customers
- Assign accounts payable functions to more than one person and make each one responsible for different payment areas. This division of responsibility makes it more difficult for employees to tamper with checks and payments.
- Limit the number of official signers. The fewer check signers you have, the lower your chances are of being defrauded.
- Require more than one signature on large dollar check amounts. In this way, any losses you may incur will be low denominations only.
- Immediately notify the bank of any change to your accounts payable process and personnel. You don¹t want former employees who may have secreted some checks from your business to retain authorization to sign them after they have left your employ.
- Separate the check writing and account reconcile functions. Try not to have the same person who balanced the bank statement issue checks. This provides greater safeguards against an employee writing fraudulent checks and covering it up. The reconciler would be able to prevent the crime unless the employees are in collusion.
- Reconcile your account promptly and regularly -- quick fraud detection increases the likelihood of recovery. Businesses and personal consumers who do not balance their accounts monthly and don’t find the discrepancies until months have passed, can become liable for losses.
Fraud Prevention Services (provided by the bank):
- Use maximum dollar amounts on accounts to limit large denomination losses by authorized or unauthorized persons.
- Set up a separate account of large dollar payments to keep fraud losses at low denomination levels.
- Request detail reports for large dollar items to stay better informed. Increase fraud detection opportunities to find out whether you have a corrupt employee.
- Use Positive Pay. This type of payment system records pertinent information about each check such as the amount, the check number, bank information and date, and then transmits it to the bank to be verified, before the check can be paid.
Employee relations policies:
- Make sure you know who you are hiring to handle your money. Diligent reference and background investigations on all prospective employees are important so you know that you are not hiring someone with a past record of financial abuse.
- Conduct random audits and enforce vacation policies.
- Have your employees bonded.
Tips For Detecting Counterfeit Checks:
- COLOR - By fanning through a group of returned checks, a counterfeit may stand out as having a slightly different color than the rest of the checks in the batch.
- PERFORATION - Most checks produced by a legitimate printer are perforated and have at least one rough edge. However, many companies are now using in-house laser printers with MICR capabilities to generate their own checks from blank stock. These checks may have a micro-perforated edge that is difficult to detect.
- MICR LINE INK - Most, but not all, forgers lack the ability to encode with magnetic ink the bank and customer account information on the bottom of a check. They will often substitute regular toner or ink for magnetic ink, which is dull and non-reflective. Real magnetic ink applied by laser printers is the exception and may have a shine or gloss.
If a counterfeits MICR line is printed or altered with non-magnetic ink, the banks sorting equipment will be unable to read the MICR line, thus causing a reject item. Unfortunately, the bank will normally apply a new magnetic strip and process the check. This works to the forgers advantage because it takes additional time to process the fraudulent check, reducing the time the bank has to return the item. But banks cannot treat every non-MICR check as a fraudulent item because millions of legitimate checks are rejected each day due to unreadable MICR lines.
- ROUTING NUMBERS - The nine-digit number between the colon brackets on the bottom of a check is the routing number of the bank on which the check is drawn. The first two digits indicate in which of the 12 Federal Reserve Districts the bank is located. It is important that these digits be compared to the location of the bank because a forger will sometimes change the routing number on the check to an incorrect Federal Reserve Bank to buy more time.
Check Fraud Tips for the Consumer
- Make sure your checks are endorsed by your financial institution and incorporate security features that help combat counterfeiting and alteration.
- Store your checks, deposit slips, bank statements and canceled checks in a secure and locked location. Never leave your checkbook in your vehicle or in the open.
- Reconcile your bank statement within 30 days of receipt in order to detect any irregularities. Otherwise, you may become liable for any losses due to check fraud.
- Never give your account number to people you do not know, especially over the telephone. Be particularly aware of unsolicited phone sales. Fraud artists can use your account without your authorization and you may end up being responsible.
- Unless needed for tax purpose, destroy old canceled checks, account statements, deposit tickets, ATM receipts (they also frequently have your account number and worse yet, your account balance). The personal information on it may help someone impersonate you and take money from your account.
- When you receive your check order, make sure all of the checks are there, and that none are missing. Report missing checks to your bank at once. Should you fail to receive your order by mail, alert your bank. Checks could have been stolen from mail box or lost in transient.
- If your home is burglarized, check your supply of checks to determine if any have been stolen. Look closely, because thieves will sometimes take only one or two checks from the middle or back of the book. The longer it takes to detect any of your checks have been taken, the more time the criminal has to use them successfully.
- If someone pays you with a cashier's check, have them accompany you to the bank to cash it. If at all possible, only accept a check during normal business hours so you can verify whether it is legitimate. Make sure you obtain identification information from the individual
- Do not mail bills from your mailbox at night. It is a favorite location from which a criminal can gain possession of your check with the intent to defraud you. Criminals will remove a check from your mailbox and either endorse it using bogus identification, photocopy and cash it repeatedly, scan and alter the check, or chemically alter it. The Post Office is the best location from which to send your bill payment.
- Limit the amount of personal information on your check. For example, do not include your Social Security, driver's license or telephone numbers on your check. A criminal can use this information to literally steal your identity by applying for a credit card or loan in your name, or even open a new checking account.
- Don't leave blank spaces on the payee and amount lines.
- The type of pen you use makes a difference. Most ballpoint and marker inks are dye based, meaning that the pigments are dissolved in the ink. But, based on ink security studies, gel pens, like the Uniball 207 uses gel ink that contains tiny particles of color that are trapped into the paper, making check washing a lot more difficult.
- Don't write your credit card number on the check.
- Use your own pre-printed deposit slips, and make sure the account number on your slip is correct. Thieves occasionally alter deposit slips in the hope you won't notice and the money goes into their account.
- Don't make a check payable to cash. If lost or stolen, the check can be cashed by anyone.
- Never endorse a check until you are ready to cash or deposit it. The information can be altered if it is lost or stolen.
Theft of your Mail
If you have had your mail stolen from your mailbox then you have become a victim of mail fraud, a federal crime. It is important to report this crime immediately and to take steps to protect your assets and credit rating. Here's a checklist of actions you should take:
- Notify your local postal authority: Ask to fill out Form 2016, available at your local post office, or by mail.
- Call your local police agency: Report the theft to police or the sheriff's department, particularly if you suspect that checks or other valuables were stolen. Local law-enforcement authorities have caught some thieves by circulating lists of stolen checks to local banks, then nabbing suspects who showed up to clear out a victim's bank account.
- Close accounts: If you suspect the thief obtained a credit card, checks or bank statement, cancel your accounts immediately and notify creditors both by telephone and in writing.
- Take action on missing checks: If a check payable to you is stolen, ask the sender to stop payment and issue a new one. Give police the stolen check number.
- Protect your credit: Make a list of creditors and see if any bills are overdue to arrive. Call creditors and obtain duplicate copies to avoid late payments, which could damage your credit rating-or worse. Be sure to pay your mortgage payment and car payment to avoid the risk of foreclosure or repossession. Don't forget other bills that could be missing, such as an annual insurance premium, property-tax levy or income tax refund.
- Determine what else is missing: Contact professional organizations to learn if you've missed meeting notices or dues statements. Ask friends and relatives if they've mailed anything to you recently. Were you expecting a new driver's license? If so, contact your state Division of Motor Vehicle (DMV) promptly.
- Talk to neighbors: Find out if their mail was stolen. Ask if anyone saw a strange person around your home or an apartment mailbox, then pass any information along to postal and law enforcement authorities.
Safety Measures to Follow
- Lock your mailbox: If your postal carrier is willing, you can buy a padlock for your mailbox. Place it unlocked inside your mailbox. When the carrier delivers your mail, he or she locks the box. This works well with rural-delivery style boxes with a hole to accommodate a lock, or you can drill holes in a wall-mounted box. The method is not foolproof, however. Persistent thieves have been known to use hacksaws to remove locks; some smash open mailboxes with baseball bats -- or even steal the mailbox, lock and all.
- Replace a wall-mounted mailbox with a mail slot: If you have door-to-door delivery, ask your local Post Office if you can replace your mailbox with a mail slot on your front or garage door. The postmaster needs to approve any changes in delivery. If you add a mail slot, make it large enough to accommodate catalogs and boxes of checks. Mail slots are not allowed, however, in rural delivery areas or newer neighborhoods with cluster boxes
- Buy a security mailbox: Check the yellow pages under "mailboxes" for listings of companies that sell tamper-resistant mailboxes. Heavy-duty metal boxes are available in both wall-mounted and free-standing models (the latter may be sunk in concrete to prevent vandalism.) Security mailboxes typically have a slot for the carrier to deliver mail. Mail goes down a chute and into a locked compartment.
- Ask your apartment manager to improve security: If you're a renter and your mailbox lock doesn't work, insist that the management repair the damage. Counterfeit keys are another problem in rental communities, since often the same key opens all the boxes. Managers can counter these problems by installing security cameras or moving mailboxes into a mail room where residents must use an access key to get inside.
- Get a post office box: If theft is a concern, the cost of renting a post office box may be worth the investment, since thefts from such boxes are rare, according to postal authorities.
- Consider a parcel locker: If you own a home-based business and receive frequent shipments of valuable goods, you may wish to invest in a parcel locker. If you use multiple delivery services, however, you'll need one for postal deliveries and a separate locker for others, such as Federal Express or United Parcel Service.
- Pick up mail promptly: Mail thieves often follow carriers on their routes, striking within 15 minutes after delivery. If you're home during the day, pick up mail as soon after delivery as possible. If you're not home, ask a trusted neighbor to get your mail.
- Keep your mailbox visible: Trim shrubbery to keep your mailbox as visible as possible, eliminating hiding places for thieves.
Protecting outgoing Mail
- Don't leave outgoing mail in your mailbox: That little red flag is an invitation to thieves. Take outgoing mail to your office, or mail it at a post office or mailing outlet store.
- Don't mail holiday gifts from home: They'll not only steal your package, they'll peel off the stamps and use those, too.
- Don't put mail in street mailboxes: The highest rate of mail theft locally is from those big, blue Postal Service mailboxes located on street corners and at other public places.
- Send valuables via registered mail: Registered mail is kept under lock and key, and it is signed for every time it changes processing centers.