Protect yourself Featured

8:00pm EDT June 25, 2009

As the economy struggles to recover and technology continues to advance, the probability that your business will experience fraud increases.

Check fraud is one of the largest challenges facing businesses that issue and accept checks. The fact is that any type of business can be a victim of fraud, and fraudsters often look to take advantage of businesses with multiple accounts and large balances.

It is estimated that, in 2008, businesses experienced $994 billion in losses from internal and external fraud. Internal fraud losses can be traced back to anyone who has the opportunity and rationalizes the fraud.

External fraud, on the other hand, is conducted by very sophisticated, organized criminal groups that know the banking system and are extremely resourceful. With external account fraud, the funds are typically electronically transferred in large sums.

What can a business or organization do to mitigate fraud? According to the 2009 Association for Financial Professionals “Payments and Fraud Control Survey,” 82 percent of those surveyed said that using Positive Pay has helped alleviate fraud and losses.

Positive Pay is an automated service offered by most banks that matches the account number, check number and dollar amount of each check presented for payment against a list of checks previously authorized and issued by the company. All three components of the check must match exactly, or the bank will not pay.

“When a company experiences check fraud, it usually has to close bank accounts and order new checks, essentially recreate its banking relationship,” says Judy Hill, senior vice president of Chicago-based MB Financial Bank. “It’s unfortunate and unnecessary because Positive Pay can deter check fraud and prevent companies from enduring that sort of pain.”

Smart Business spoke with Hill about how adopting Positive Pay — especially before a loss is experienced — can help your business avoid check fraud losses and the resulting administrative headaches.

How does Positive Pay work?

Positive Pay aims to prevent check fraud by matching a company’s record of issued checks against the bank’s record of checks paid. Here’s how most Positive Pay systems work:

  • Within 24 hours of issuing checks, your company transmits an issue file to your bank through its secure Positive Pay portal. Issue files include customer account number, check serial number, check amount, issuance date and a description of the payment or the payee name.
  • Each night, the bank then matches all the checks that clear your account against the issue items you have provided. The bank fixes any items with encoding errors to eliminate them as suspect.
  • By the next day, the bank sends you a notification and photocopies of any remaining suspected fraudulent items by e-mail or fax.
  • Your company responds by fax with a pay or return decision that same day. If necessary, you can stop payment on any check.

Why should a business employ this protection?

In recent years, advances in desktop publishing equipment have made counterfeiting easier and more accessible. All a criminal needs to produce high-quality counterfeit checks is a personal computer, a scanner and a high-resolution laser printer or color copier.

As a result, check fraud continues to be a growing problem, with industry estimates of annual losses in the billions of dollars.

Furthermore, banks are no longer willing to shoulder the entire burden of these losses, and companies face increased liability when they are in a position to prevent check fraud losses and fail to take any action.

For any company that issues checks, Positive Pay is the way to go because it’s a seamless way to work with the bank to combat check fraud.

Besides leveraging Positive Pay, what are some additional best practices to help prevent fraud?

In addition to using Positive Pay, businesses need to support fraud-prevention efforts by instituting some basic internal controls. For instance, you should:

  • Maintain tight check security. Store checks, check reorder forms, cancelled checks and signature stamps under lock and key.
  • Purchase high-security checks. Safety features such as watermarks, microprinting, dual imaging and warning bands complicate the criminal’s task and act as a deterrent.
  • Reconcile bank statements promptly upon arrival. The Uniform Commercial Code requires you to reconcile bank statements within a reasonable time and report unauthorized checks immediately.
  • Separate financial duties within your organization. Individuals responsible for issuing checks should not be allowed access to bank statements until after they have been reconciled. Reconcilers should not be signers on the account.
  • Take precautions with manually-issued checks. They should be laser-printed or typed using a fabric ribbon, which doesn’t allow ink to be lifted off with Scotch tape. Checks should not be hand-written.
  • Use electronic payment services. To reduce the number of checks your company issues, consider using Automated Clearing House (ACH) services for payroll, tax, trade and some other payments, and wire transfers for large-dollar, time-sensitive transactions.

Judy Hill is a senior vice president at MB Financial Bank. Reach her at (847) 653-1974.