Check 21 Featured

1:12pm EDT May 24, 2004
With the advent of the Check Truncation Act (Check 21), it is important to understand how this legislation will impact the financial controls of your business. Failure to do so could leave your company vulnerable to financial fraud.

Check 21 will lead to dramatic changes in the payments industry by encouraging banks to reduce the amount of paper in the banking system. Instead of paper checks, banks will exchange electronic images. However, check fraud can still occur if you do not take simple steps to mitigate the risk.

The Association of Certified Fraud Examiners' Report to the Nation found that fraud and abuse cost U.S. organizations more than $400 billion annually. The report also found the most costly abuses occurred in organizations with fewer than 100 employees. Increased affordability of personal computers, laser printers, color copiers and scanners enable criminals to easily perpetuate check fraud.

Losses not only include the amount of the fraudulent check(s), but also administrative time and paperwork, considerable aggravation and worry, and the cost of any efforts to recover lost funds. A single incident of check fraud is likely to cost a business more than the basic fraud prevention measures that could help avoid it.

Recent changes to the law make it extremely important for a company to actively protect itself against check fraud. Businesses now share responsibility for preventing fraud. For example, if checks are stolen from a company and cashed, the company may have to absorb the loss.

Businesses that can demonstrate actions have been taken to prevent fraud are better protected against liability in loss disputes.

There are several steps you can take to lessen the risk of fraud. Here are a few.

* Know your employees. The Report to the Nation found that the average organization loses about 6 percent of total annual revenue to fraud and abuse committed by its own employees. Regular open communication between managers and employees about how fraudulent activities can be prevented can significantly reduce losses from check fraud.

* Maintain a secure location for all checks, deposit slips and monthly bank statements, and restrict who has access to them.

* Find a reputable check printer that offers security features such as a basic watermark. Do not use generic blank check stock, which can be duplicated easily by fraud artists. Your financial institution can recommend trusted vendors.

Check 21 will make it even more important to have the proper type of checks printed to enhance the electronic image of the check you will receive from the bank.

* Ensure strong internal accounting controls are in place. Separate check writing and reconciliation responsibilities so that one person does not have access to the entire process.

* Reconcile your bank accounts each month. If a discrepancy is discovered long after the check was issued, your company could be liable for the loss. Talk to your banker about how you will receive your check and account information, since eventually paper checks will not be part of the reconciliation process due to Check 21.

* Set dollar limits on checks, and require more than one signature on high-dollar checks.

* Watch for checks made out to cash or checks that are cashed out of sequence, which could indicate there are renumbered, counterfeit checks.

* Shred documents that contain account numbers or other sensitive financial information.

Bank partnerships

There are also fraud prevention steps you can take through a partnership with your bank. Positive Pay is an automated service that monitors checks written and detects unusual or unauthorized activity. The bank reports any suspicious or unauthorized items to the business customer, who determines if a check should be paid. Historically available to larger organizations, Positive Pay is now also available to small businesses through online banking programs.

Consider direct deposit. Direct deposit of payroll will lessen the possibility of an employee losing a paycheck that can later be used to craft a counterfeit check, and will reduce the number of checks issued by your company. And direct deposit is much more cost-effective than issuing payroll checks.

Prevention is a small business owner's best weapon against fraud. Understanding the impact of Check 21, taking simple steps and investing in a few effective tools to fight fraud will pay big dividends in the long run. Ryan Burgess is Vice President of Corporate Treasury Management and Public Funds for Fifth Third Bank. Reach him at (614) 744-7583 or ryan.burgess@53.com.