The art of fraud prevention Featured

8:40am EDT January 24, 2005
As the saying goes, "It takes a thief to catch a thief." So fittingly, when the federal government needs to consult a fraud expert, it commonly taps into the mind of a convicted felon, many times trading assistance for shorter sentences and plea agreements.

With on-the-job training, professional criminals have the industry knowledge and hands-on expertise that law enforcement needs to help design prevention strategies.

A perfect example of the success of this unique collaboration is Frank Abagnale. A former federal prison inmate, Abagnale joined forces with the FBI more than 30 years ago, agreeing to teach others his proficiency in bank fraud in exchange for a reduced sentence. As a result, a generation of legal and business professionals have studied Abagnale's fraud prevention methodology.

At a recent Frist Center of the Arts presentation in Nashville, Abagnale spoke on the subjects of check fraud, identity theft and embezzlement, passing on tips to preventing fraud. Surprisingly, the master plans of a criminal can be easily foiled by utilizing a few proven best practices and common-sense logic.

The cost of doing nothing

In the United States, financial fraud and identity thieves rob billions of dollars a year from unsuspecting companies. The most popular tactic, check fraud, is estimated to account for more than $20 billion each year and, according to the American Banker Association, is growing at a rate of 25 percent a year.

In addition, recent Uniform Commercial Code (UCC) amendments have challenged businesses with the burden of prevention, requiring businesses to improve their internal controls and create and implement meticulous fraud prevention procedures into their everyday practices. On top of requiring added internal controls, the new UCC regulations restrict a company's possibility of legal retribution. Companies that fail to meet these new standards are left to face the consequences of their actions.

Due to this, Abagnale stresses the importance of thoroughly analyzing all contracts with banks, especially the fine print contractual agreements often explicated on signature cards and disclosures. Often, policies outlined in these contracts limit the time permitted to report discrepancies.

Leveraging the fine print of these contracts, a bank can limit its liability, even when it is at fault, so companies need to be aware of and adhere to these legal guidelines.

The best defense is a great offense

Abagnale recommends several tried-and-tested fraud prevention techniques. Positive Pay, a check-matching program offered by many banks, provides, in his opinion, the strongest defense.

The system compares account and check numbers, dollar amounts and other customer data against the applicable checks, identifying discrepancies before payment. This authenticates the check's quality and accuracy, and functions as a final checkpoint in the payment process.

But no one system can warn off determined intruders. Thus, the best defense includes a combination of best practices. Abagnale encourages the use of checks with multiple security features that are hard to modify or reproduce, especially in light of the recent passing of the Check Clearing for the 21st Century Act (Check 21), which allows substitute checks in the form of electronic images.

Under this law, the bank may be liable for losses caused by a substitute check. Security features that do not transfer to the check image can serve as evidence of the bank's liability.

Other recommendations include reviewing bank statements carefully and promptly, using caution when distributing manual checks and avoiding self-correcting ink, inserting asterisks around the name of payee so additional names cannot be added, storing check inventory and other bank-related documents in a secure area where they can be consistently monitored, excluding officers' signatures from annual reports and filing fraud reports using Form 1099.

Many of these safeguards are easy to identify and implement, and can make it difficult for someone to steal from your company's valuable resources. In addition, incorporating best practices into your company's internal controls can reduce the risk of costly fines associated with noncompliance. The bottom line is clear -- the consequences of ignoring these proven policies can be a costly mistake for any company.

Reach Mari Reidy at (312) 899-7005 or