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From CBIA News, November 2002
SMALL BUSINESS
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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