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CHECKMATING CORPORATE CHECK FRAUD

Presented by Printech, Inc.

  URL = http://www.printech.com/
Email = info@printech.com

SUMMARY

In recent years, corporate check fraud has been increasing at an alarming
rate.  In 1993, The Wall Street Journal reported that the amount of
counterfeit checks written against corporate accounts totaled at that time
an estimated $1 billion annually.  A substantial portion of those fraudulent
checks are for large dollar amounts.

ABOUT CORPORATE CHECK FRAUD

Why is corporate check fraud reaching epidemic proportions?

Check fraud is a relatively low risk crime with potentially high stakes and
good odds of success.  Check fraud has increased substantially since 1988,
when new regulations were introduced to accelerate check deposit availability.
Under Regulation CC, banks are required to make funds available within two 
days for local checks and within five days for out-of-town checks.  Because
of Regulation CC and competitive pressures to accelerate availability, banks
are increasingly making funds available for checks before those checks have
actually cleared.  This situation makes it easier for criminals to success-
fully negotiate fraudulent checks.

A second major reason for the recent increase in check fraud is thei
availability of low-cost, professional-quality electronic publishing and
copying technology.  Using color copiers, laser printers, scanner and desktop
publishing systems, counterfeiters can easily produce excellent copies of
corporate checks.  Not long ago, the majority of corporate check fraud cases 
involved stolen check stock.  Today, most corporate check fraud involves the 
use of electronic image-processing equipment to produce forged checks, 
duplicate checks, or checks with altered dollar amounts.

This new technology has not only changed the modus operandi for check fraud
but has also led to a new profile for the criminal.  Before electronic 
publishing systems became widely available, check fraud was more often than 
not a crime committed against a corporation or financial institution by 
someone inside the company.  In 1986, for example, 72 percent of the FBI 
check fraud cases involved "insiders."  Today, if your business experiences 
check fraud, the criminal will most likely be someone outside your firm. 

Who is liable for losses resulting from check fraud?

This is a highly complex matter involving legal issues beyond the scope of
this publication.  However, a 1992 US. District Court decision illustrates
how the law governing bank deposits and collections can be interpreted today.
In this particular case, a forger negotiated 13 checks for a total of
$650,000, drawn on the account of a company  that routinely issues about
20,000 checks a month.  The corporation subsequently obtained reimbursement
for the bad checks from its insurance company, which in turn sued the paying
bank to recover its loss.

In many cases involving checks with forged drawers' signatures, the paying 
bank ends up absorbing the loss for the fraudulent checks.  In this case, 
however, the court ruled in favor of the paying bank on the grounds that a 
bank following acceptable commercial standards should not be held liable in 
cases where the forgeries were of high quality.

Regardless of who is held legally liable, all payments systems participants 
ultimately end up sharing the financial burden of check fraud--the losses, 
the legal fees, the higher insurance premiums, and the bank costs.  
Consequently, corporations and their banks should make check fraud 
prevention a high priority.

CHECK STOCK SECURITY

When ordering check stock, what security features should we be considering?

Your first step should be to consult with a reputable check supplier who is 
a specialist in this field and can advise you on the technology appropriate
for your specific check disbursement needs.  The security features to con-
sider include:

  * Safety and chemical reactive papers that show alterations and erasures
  * Papers with watermarks, fibers or embedded security threads
  * Microprinting (text too small to be reproduced by a photocopier)
  * Void pantographs (screen tint backgrounds having a colored pattern in
    which the word "void" is hidden; when photocopied, the hidden word
    appears)
  * Multicolored printing and background patterns that are difficult or
    impossible to duplicate

What type of physical security measures should we employ in our check
production area?

Blank checks should be regarded as an asset to be safeguard, exactly as if it
were cash.  Check stock should be kept under lock and key and require dual
controls to access it.

Audit check stock frequently for missing items.  To facilitate these audits,
use pre-numbered stock so missing checks can be quickly identified.  Have
the check stock shrink wrapped in small multiples so that tampering will be
apparent.

CHECK ISSUANCE AND ACCOUNT RECONCILEMENT

What key anti-fraud controls should we use for check issuance and account 
reconcilement?

Follow these five basic rules:

  * Centralize the check-writing function to the greatest extent possible
  * Limit and control the number of official signers.  Immediately notify
    your bank of any changes in signing authorization.  Use multiple signers
    on checks over a threshold dollar amount.
  * Separate the check-writing and account reconcilement functions
  * Perform reconcilement promptly
  * Reconcile large dollar items on a daily basis

CHECK FRAUD PREVENTION SERVICES

Specialized check fraud prevention services you may want to consider include:

  * Maximum dollar amount accounts.  This type of account lets you specify
    a maximum dollar limit for checks that can be drawn on the account.  Any 
    check exceeding the limit is automatically rejected by the bank's sorting
    machines.
  * Detail reports for large dollar items.  This type of report provides a
    detailed listing of all large dollar items that have posted to your
    account.
  * Positive pay systems.  These systems generate reports identifying
    potentially fraudulent items.  Whenever checks are disbursed, you
    electronically send the bank a file containing information on each
    check--check numbers, dollar amounts, etc.  After checks are processed, 
    the positive pay system generates a report listing exception items that do
    not match your checks issued information.  After reviewing the report, you
    may instruct the bank to return any potentially fraudulent items.

IN CASE OF FRAUD

What steps should a company take in the event of check fraud?

There are no simple, foolproof solutions for dealing with check fraud.  Your 
first step should be to review your options with your bank representative.  
Bank services you may want to use include electronic reporting of checks paid 
information, account reconcilement services, stop payments and physical 
review of paid items on a daily basis.  The strategy you adopt will depend 
on the specific requirements of your situation. 

CHECK FRAUD CHECK LIST

Checks will continue to be the most common method of making payments in
the US. for many years to come.  To safeguard your business against check 
fraud, you need to develop strong internal safeguards and controls.  You 
should also consults with your bank and check supplier on how to limit your 
exposure to check fraud.  Here is a recap of specific steps to take:

  * Use check stock with fraud prevention security features.
  * Keep blank check stock under lock and key.
  * Centralize the check writing function as much as possible to limit
    access to check stock.
  * Limit the number of official signers.  Immediately notify your bank of
    changes in signing authorization.
  * Separate the check writing and account reconcilement functions.
  * Reconcile your account promptly - daily if possible.
  * When possible, use maximum dollar limits on accounts.
  * Set up a separate account for large dollar payments.
  * To help identify fraudulent checks for large amounts, use an information 
    reporting service providing daily reports of checks above a minimum dollar
    threshold.
  * Use an automated positive pay system to help identify potentially 
    fraudulent items.

This publication was one in a series of white papers prepared by
Bank of America on key issues of interest to corporate treasury managers
and it is presented to you courtesy of Printech - developers of the
internationally distributed CheckMark MICR Check Printing System.

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| Printech, Inc., 8402 NW 64th St., Miami, FL 33166         (305) 682-2838 |
| E-mail: info@printech.com                  WWW: http://www.printech.com/ |
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