Fraud losses Featured

7:00pm EDT January 29, 2008

All companies, regardless of sector or size, can be affected by fraud. In fact, a recent survey conducted by the Association for Financial Professionals shows that 72 percent of organizations experienced attempted or actual payment fraud in 2006, with checks being the preferred target of thieves. In today’s environment, any company that issues checks is subject to fraud and must take appropriate precautions. Preventing check fraud requires diligence and resolve, but new technology solutions are easing the process.

“We advise our clients to move to electronic transactions in an effort to remove small-dollar check transactions from the paper-based accounts payable process,” says Jim Dineen, senior product manager, vice president for PNC Bank.

Smart Business spoke with Dineen about fraud loss, how to develop a prevention strategy and the benefits of a positive pay service.

What types of companies are most susceptible to fraud loss?

Companies that use low-dollar-value business-to-consumer checks are the most susceptible because there is a higher volume of paper and there are more opportunities for perpetrators. In the business-to-business world, the majority of checks are going to secured environments, like lockboxes, so the ability to intercept checks is not as high.

The size of a company can play a factor as larger companies tend to write more checks, which increases their risk. Companies that are decentralized are also more susceptible to check fraud because they manage a broad distribution versus a centralized distribution and have more cogs in the wheel that can be compromised.

What are the best practices for developing a protection strategy against fraud loss?

First and foremost, you should conduct an audit of your practices. Also, it is important to document your practices and test them on a regular basis. If you have developed control systems for, let’s say, accessing your reporting system for reviewing checks or placing stop payments, you need to document these procedures and test them on a periodic basis to make sure that your employees are adhering to the established practices.

An additional best practice is to separate your accounts. Rather than having a ‘beall’ account, in which the depository and disbursement account activity is lumped together, it is best to isolate each account by function so that you can more easily implement appropriate controls. Check-based disbursement accounts should be blocked from accepting electronic transactions, such as ACH (Automated Clearing House) or wires. If it is a check writing account, you want to make sure that no ACH debits get processed against the account. Conversely, if it is an ACH account, you want to put in place controls to prevent checks from being posted to the account.

How can companies protect themselves against check fraud?

Perpetrators can create fraudulent checks easier than they could in the past because of readily accessible desktop publishing software, so it is important to secure your check stock. Check printers have a variety of security features available including watermarks, microprinting around the border of checks and a detailed list of security features on the back of checks. If not secured sufficiently, checks become easier to alter or wash, which involves the lifting or ‘washing’ of data from a check.

Also, it is important to utilize the appropriate level of controls at the bank level. Positive pay should be standard for most medium to large check issuers. There are two forms of positive pay: traditional positive pay, which involves matching MICR (magnetic ink character recognition) line data from the check to company supplied check issue record [check number and amount], and payee positive pay, which involves comparing the image of the payee name on the check to the payee name included on issue information provided to the bank.

What specific benefits does a positive pay service provide to businesses?

When a fraud attempt occurs, the best way to mitigate the impact is through timely identification so that the suspected check may be returned and recovered. Positive pay provides early detection of potential fraud by identifying suspect items during the presentment process.

If a fraudulent transaction is suspected, what course of action should a business take?

Time is of the essence so you should notify your disbursement bank as soon as possible to start the recovery process. <

This article was prepared for general information purposes only. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Opinions expressed herein are subject to change without notice. © 2008 The PNC Financial Services Group, Inc. All rights reserved.

JIM DINEEN is senior product manager, vice president for PNC Bank. Reach him at (412) 762-3271 or