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From CBIA News, November 2002


Protect your business from check fraud

It’s the fastest-growing financial crime in America

By Michelle M. Murphy

Free-lance writer in West Hartford

The numbers are staggering: More than 500 million checks are forged each year, reports the accounting firm of Ernst & Young. At least $10 billion a year is lost because of fraudulent checks, according to the National Check Fraud Center, based in Charleston, S.C.

And the problem is expected to get worse. American Banker magazine estimates that check-fraud losses will grow by 2.5% annually.

“Check fraud is the fastest-growing financial crime in America,” says Carrie Harla, project manager in commercial services at People’s Bank in Bridgeport.

“Based on what I see, businesses are losing a lot of money, and that number is growing as people involved in the check-fraud business become more sophisticated and technology makes it easier to do,” says Thomas Nash, senior investigator in fraud prevention for People’s Bank.

The problem has become particularly bad over the past three years, reports the National Check Fraud Center, and is most acute between October and February.

There are four basic types of check fraud:

  • forgery (unauthorized signatures on legitimate checks);
  • issuance of real checks to fake entities;
  • alterations of “good” checks — meaning, the amounts or the names of the payee are changed; and
  • the creation of counterfeit checks.

The last category is the fastest-growing, according to the National Check Fraud Center, primarily because of advances in desktop publishing.

“You go to your local office-supply store, you buy software, a computer, a scanner and a color printer, and for less than $1,000 you’re in the counterfeiting business,” says Nash.

“It’s actually frighteningly easy to do,” confirms Ken Vaccaro, vice president in commercial services at People’s Bank. “And it’s not just the checks. It’s also the IDs needed to cash those checks.”

What can you do?

Experts say the most important thing you can do to protect yourself from check fraud is to be aware of how prevalent it is — and to be vigilant about your own check-writing and check-acceptance policies.

The Better Business Bureau offers the following tips to companies that accept checks:

Set guidelines regarding the types of checks you will accept — personal, two-party, payroll, government or travelers’ checks.

Examine the check very carefully. Insist on proper identification for personal checks — two forms is best, at least one of which should have a photo.

Compare signatures. Be wary of people who take too much time and care with signing their names, or who try to distract you while they’re signing the check or while you’re examining it.

Make a clear check-acceptance policy. Post it prominently, so no customer feels singled out if you ask for ID. And make sure all your employees follow it.

Some of this is easier said than done, of course. “It’s nearly impossible to distinguish a ‘good,’ or sophisticated, bad check from a legitimate one,” Vaccaro says. “There are no signs of alteration.”

“You can look for misspellings of common words, like street names; misspellings of common names; or a ZIP code that doesn’t match the town,” suggests Nash. “But it’s hard. Some of them are very good.”

“Never accept a temporary check, a check with typewritten names and address, or a check that doesn’t match the ID,” adds Vaccaro.

And it doesn’t stop there. The risks of loss are just as great, if not greater, with the checks your company issues. There, the opportunities for fraud are both internal and external.

“It’s always a prudent business practice to separate accounting duties and responsibilities, like check writing and account reconciliation,” says Nash of People’s Bank. “I know that can be hard in a small business. And it’s not that you don’t trust your employees. ... It’s just that people are human, and they can be faced with a temptation that they can’t avoid. You really have to watch your bookkeeper.”

In addition, you should keep close tabs on your checking account, balancing it frequently so that if a discrepancy does show up, you’ll notice it sooner. And, if you don’t have one in place already, you may want to talk to your bank about a cash management service. Many companies use a service called “positive pay,” an automatic check-matching system.

“This service is extremely effective in detecting fraudulent checks,” says Harla of People’s Bank. “The bank compares checks coming in for payment to a list of issued checks a company has provided to the bank. Any mismatches are brought to the company’s attention. This service is normally performed on a daily basis.”

“When it’s used properly, this system is almost foolproof,” says Vaccaro.

But if the worst occurs, and your company does become a victim of check fraud, you need to tell the bank immediately. “A checking account is a contract between the customer and the bank,” says Nash. “The bank is authorized to pay only your check. It’s incumbent upon them to know the signature of their customers. So you’ll have to complete an affidavit of forgery, and after an investigation, the bank will then reimburse your account.”

If you have been paid by a bad check, your first task is to redeposit the check. If it still can’t be honored, you must then send a certified letter to the check writer, explaining the problem. That person has eight days from receipt of the letter to make good on their debt, according to Vaccaro. If they don’t, the onus falls on you to make a report to the local police. For that you’ll need a copy of the returned receipt from the certified letter, a copy of the letter itself and the original check — and then you will need to fill out more forms in order for the police department to open an investigation.

All of which only underscores why it’s better to try to prevent the fraud in the first place.

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