Banking and Finance

Fighting check fraud

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Trish Herskovitz
Senior treasury management adviser
Capital One Bank

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Check fraud has reached an all-time high thanks in part to advanced desktop publishing technology and, therefore, companies are more at risk than ever.

“Partnering with a bank that has multiple safeguards against check fraud, however, can ease companies’ worries,” says Trish Herskovitz, senior treasury management adviser for Capital One Bank in Dallas.

Smart Business spoke with Herskovitz about what banks’ and companies’ roles are in preventing and/or minimizing check fraud.

How prevalent is check fraud in business today?

Check fraud is a major problem today, thanks in part to desktop publishing technology that makes it fast, easy and inexpensive to forge checks. More than 1.2 million checks are forged daily, which amounts to $27 million in losses to United States businesses, according to the Office of the Comptroller of the Currency. Annual losses according to the Nilson Report were $20 billion in 2002, $12 billion in 1996 and $5 billion in 1993. The American Bankers Association says that it’s increasing by 25 percent annually. Sources include desktop publishing software, color printers and copiers, scanners, MICR encoding equipment and fraudulent mail order/telemarketing.

Is prevention the responsibility of the company, the bank or both?

The burden has shifted from banks to a shared responsibility between banks and companies. The Uniform Commercial Code (UCC) stipulates that ‘ordinary care’ must be exercised when maintaining control of negotiable instruments, and if a company’s own negligence contributes to fraud, the company must assume responsibility.

In regard to a bank’s role, the UCC says ‘reasonable commercial standards’ no longer require banks to examine signatures on every check. A bank can help a company minimize its risk through prudent cash management tools. One such available tool prevents check fraud for items presented through clearings as well as at the teller window. A company transmits a file of checks issued to its bank. The bank then matches serial numbers and dollar amounts and pays only those checks that match. Items that don’t match are sent to the company for a pay/return decision. This service minimizes losses, detects fraud at the time of presentment, enhances check issue control and improves account reconciliation.

What are some basic steps a company can take to minimize or eliminate check fraud?

A company should do the following things: maintain sufficient controls for check storage, issuance and reconciliation; notify the bank immediately upon learning of a fraud attempt on an account; reconcile bank statements in a timely manner; segregate duties, such as check writing and reconcilement; secure access to check stock; reconcile bank statements monthly; automate reconciliation; limit the number of official signers and keep current with the bank; audit key functions (policy and procedures are enforced); screen new employees and temporary help; know who it does business with (vendors, customers, maintenance staff).

What is an ACH debit?

An ACH debit is an electronic withdrawal sent via the automated clearinghouse network. These debits can be authorized in writing (usually an agreement or contract), on the Internet, over the telephone, via a bill remittance sent through the mail, or at the point of sale.

Fraud with ACH occurs because stolen company checks or stolen glances at company checks provide criminals with all the information they need to initiate a fraudulent ACH debit. Also, Internet-based authorization to illegally obtain services or merchandise is another source of ACH fraud. Criminals use a company’s payroll or dividend account as their own for these purchases.

According to ACH rules established by NACHA — The Electronic Payments Association — a company receiving an unauthorized ACH debit can charge back the entry for immediate credit only if it requests return within 24 hours after posting. Any dispute after 24 hours must be handled directly between the company that sent the ACH debit and the account holder.

What is the bank’s and company’s role in preventing ACH fraud?

The bank should provide the company with the ability to view reports of daily ACH debit activity and offer a service that automatically blocks unauthorized ACH activity. The company should monitor all business accounts on a daily basis, alert the bank immediately when an unauthorized debit is detected (must be done within 24 hours of the item posting) and submit a ‘statement of unauthorized ACH debit activity’ form for each item returned.

TRISH HERSKOVITZ is senior treasury management adviser for Capital One Bank in Dallas. Reach her at (972) 855-3945 or trish.herskovitz.@capitalonebank.com.