Check Fraud and Information Security

Published: 2008-09-27
Last Updated: 2008-09-29 02:51:45 UTC
by Scott Fendley (Version: 2)
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Happy Weekend Everyone.  While watching a movie (“Catch Me If You Can”) this weekend, I did a bit of research on the topic of check fraud and the activities of the main character, Frank W. Abagnale, Jr.   Prior to this weekend reading, I would have gambled that check fraud was one of the crimes that has declined in recent years as consumers use credit and debit cards more often today than they did 10+ years ago.  Additionally, many businesses pay employees through an auto-deposit mechanism or electronic checks through the ACH (Automated Clearing House).  I would have gambled and lost on this assumption.

Check fraud is on the rise and may actually be causing issues for your business or organization.  While I realize that many of our readers are outside of the United States, I hope that you will be educated about some of the risks we are facing and apply it to your specific situation and country.

Each year the Association of Financial Professionals releases a Payments Fraud and Control Survey report each March.  In the 2008 report, they show that almost all organizations, which reported attempted or actual fraudulent activity, were victimized by check fraud.  And according to the Office of the Comptroller of the Currency, more than 1.2 million fraudulent checks are written daily which will result in over $20 billion in losses.    So is your business doing enough to effectively reduce the risk posed by check fraud?

Some of the ways that your organization can reduce the risks are:

•       Use your financial institutions Positive Pay or Reverse Positive Pay system. Positive pay is an automated service that matches checks issued by your organization with checks presented for payment.  This provides an opportunity to review unmatched checks within the return item timeframe.  Reverse Positive Pay provide your company a daily checks paid report that can be matched against internal issue files.  These systems allow you to make appropriate decisions and prevent many forms of fraud.

•       Maintain tight check security.  This should be obvious but limit who has access to the check stock, reorder forms, cancelled checks and signature stamp.

•       Use highly secure check stock that contains multiple security features.  Abagnale and Associates has a number of publications that discuss many of these security features including multi-chemical reactive papers, copy void pantographs, prismatic printing, thermochromatic inks, watermarks, and microprinting among others features.    For information security professionals, the idea of having multiple layers of protections is nothing new to us.  But others may not realize how these multiple factors help provide a great level of security.

•       When using laser-printing checks, issue multiple passwords to those responsible for check printing and use check paper with toner anchorage to bond the toner ink permanently into the paper.

•       Reconcile the bank accounts information as soon as it is received.  Also separate responsibilities for handling the checks.  Do not let the reconcilers also be the signers of the checks or have access to the signers stamps.

•       Be aware that the “substitute checks” created under Check Clearing for the 21st Century act (Check 21) has a different set of risks compared to the paper checks.

•       Set up an ACH filter or ACH Block to help limit or prevent electronic check fraud as the Positive Pay system does not monitor these electronic debits.

•       Protect your employee's bank account numbers appropriate when storing them for future automatic deposits.

•       Liability of paying for checks does not stop when your company does a stop payment.  Holder in Due Course (part of Uniform Commercial Code) may allow the holder of a check to be paid for the check for upwards of 10 years.  If you cause the check to expire by using a “VOID AFTER x DAYS” and then wait x+2 days prior to the re-issuing of lost checks, this may prevent any liability to pay for both checks. (See the court case listed below.)

•       Be cautious what you print on checks.  Most companies should never need to print social security numbers on a check.

More information on all of this is available at the following locations.

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