Fighting check fraud

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

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

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

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

TRISH HERSKOVITZ is senior treasury management adviser for Capital One Bank in Dallas. Reach her at (972) 855-3945 or
[email protected]