Keep fraud in check Featured

8:00pm EDT September 25, 2008

Check fraud is on the rise. Annual losses from check fraud among U.S. businesses are estimated at $10 to $20 billion according to sources cited on the eBankLink Web site, and those experts further estimate that fraud will grow by 2 to 3 percent a year. On one hand, technology has created greater convenience for businesses by providing access to many traditional banking functions online, but technology also makes it easy for trusted employees or criminals to commit fraud by gaining access to bank account information and creating knockoffs of company checks. Executives must take precautions to stave off check fraud losses given today’s high-tech environment.

“Check fraud happens more often than you might think,” says Sherri Cope, vice president of Risk and Operations for Fifth Third Bank, Tampa Bay. “It is often committed by a highly trusted employee, who yields to temptation and takes funds, intending to slowly repay the money. Employers must be aware of the risks and take preventive measures so they don’t become fraud victims.”

Smart Business learned more from Cope about how companies can become victims of check fraud and the best ways to prevent it.

How might a company fall victim to check fraud?

Checkbooks or blank checks left out on an employee’s desk or on a printer stand invite fraud, because, in a matter of minutes, a vendor or visitor can take a few checks out of the middle of the book, without anyone noticing. Sometimes contractors or vendors can wash away the ink on a check and type in any payment amount before cashing it. But in today’s environment, technology is a fraud enabler. Criminals can create realistic copies of your company’s checks if they have your banking information or a sample check to copy; banking passwords can be lifted by employees or visitors if they aren’t protected; and criminals can get access to your online account information by two fraudulent activities called phishing and pharming. The term phishing refers to social engineering attacks to obtain access credentials, such as user names and passwords. Pharming redirects a legitimate Web site’s traffic to a similar-appearing but bogus Web site, so users unknowingly enter their names and passwords.

What are the best practices for preventing fraud?

Create separate accounting functions for payables and receivables and use multiple employees to process transactions. Accounting checks and balances are a safeguard against errors and fraud, and you don’t want employees to become too comfortable, thinking that no one is reviewing their work.

Executives should review the bank statements each month to look for irregularities and compare checks against accounting ledgers. Most banks stipulate that fraud be reported within 60 days, so it’s incumbent upon executives to stay current in their oversight of financial records. Create written procedures directing employees how to secure blank checks and banking passwords and require them to shred cancelled or scrap checks.

Also train employees how to recognize e-mails that are really pharming and phishing attacks in disguise and install network security that screens out suspicious e-mails designed to lure employees into divulging your company’s banking information.

What should executives do if they discover check fraud?

As soon as you realize something is wrong, call your bank and make a police report, because time is of the essence. It’s best to close out the account and reopen a new one, but the decision often depends upon what has been compromised. Companies should immediately notify their vendors, because replacement checks will need to be issued on the new account.

How can a bank help?

First, issue as few checks as possible. Pay vendors and employees electronically and use Internet banking because it gives you a real-time view of what’s happening with your accounts. If you have a high number of transactions, consider positive pay. Positive pay is an automated fraud detection tool offered by the cash management department of most banks. It matches the account number, check number and dollar amount of each check presented for payment against a list of authorized checks issued by the company. All three components of the check must match exactly or the bank will not pay on the check.

Your banking representative should be partnering with you and suggesting proactive systems and procedures to keep your business from becoming a fraud victim.

SHERRI COPE is vice president of Risk and Operations for Fifth Third Bank, Tampa Bay. Reach her at (813) 306 2499 or