How To Prevent Check Fraud

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1 Electronic Banking, Check Fraud, and Positive Pay Check Fraud - Overview Check fraud statistics According to the FBI, fraud costs consumers, banks and businesses $18 to $20 billion per year. In a 2003 survey of member banks, the ABA found that losses from check fraud cases totaled $677,000,000. American Bankers Association (ABA) states that an average of 1.2 million fraudulent checks enter the system each day and losses are growing 2.5% annually in spite of declining check volume. A 2007 Association for Financial Professionals (AFP) survey sheds light on the nature and frequency of payment fraud during 2006 and the internal measures and bank services used to control check, ACH and wire fraud 39% of the respondents reported increased fraud attempts over /4 of organizations were targets or attempted of actual fraud Checks were most often the vehicle for fraud with ACH second More losses from fraud occurred in 2006 Organizations that were victim of attempted ACH fraud were more likely to suffer a loss because they did not use defenses available from financial institutions or failed to follow best practices Why are fraud losses on the rise? Organized and professional fraud rings are becoming more prevalent and sophisticated. Fraud rings are now global enterprises with key organizers residing in uncooperative countries Cyber-crime advances make it possible to compromise large quantities of data Desktop publishing makes counterfeiting checks relatively cheap and easy. Some utilities are delivered through non-criminal websites The potential victims of fraudulent checks include millions of consumers Lottery scams, internet job postings, work-at-home opportunities Regulation CC availability requirements have decreased the window of opportunity for banks to identify and return suspicious checks. 1

2 Types of check fraud Alterations Forged endorsement Counterfeit and forged signature Third-party bill payment services Check kiting Closed account fraud Liability for check fraud The laws governing checks are found primarily in Federal Regulation CC and Articles 3 and 4 of the Uniform Commercial Code (UCC). The 1990 revisions of the UCC, which were adopted by most states, provide for a comparative negligence standard when determining liability for a loss. This means that banks are no longer responsible for one hundred percent of the loss regardless of the level of a customer s negligence. Another key provision of the UCC is the requirement that the customer must examine their bank statement within a reasonable time and notify the bank of any unauthorized items resulting from alteration or forged signatures. This creates a window for the customer to notify their bank of a potential fraud, during which chances of recovery are reduced as time progresses. Liability for check fraud (cont d) Regulation CC provides bank customers access to their funds in a short period of time, (e.g., local checks within two days, nonlocal checks within four days). Criminals often alter a check s routing and transit numbers creating an inconsistency regarding the true paying bank. The result is confusion in the collection process which may delay the time when notice of dishonor is given to the bank of first deposit. When the fraudulent item is returned to true paying bank, the deposited funds have usually been withdrawn. Corporate customers may be found to be negligent if they fail to maintain sufficient controls for check storage, issuance and reconciliation notify the bank in a timely manner when fraud occurs review the bank statement reconcile accounts in a timely manner use standard fraud protection offerings (i.e., positive pay) 2

3 Understanding ACH fraud Automated Clearing House (ACH) debit fraud risk is the risk that a transaction will be initiated or altered in an attempt to misdirect or misappropriate funds. Although ACH fraud risk does occur, the frequency is relatively low when compared to other payment systems. Any ACH may debit post to your account. No authorization is required by the customer. Critical elements of ACH fraud account and routing numbers that can be obtained from any given check The number of days after which a customer may recover a fraudulent ACH transaction is: 60 days for Web and telephone-initiated transactions Two days for business-to-business transactions Electronic Banking, Check Fraud, and Positive Pay Check Fraud - Prevention Tools Positive pay Positive pay A tool to authorize payment or return of exception items that offers a significant safeguard against loss from fraudulent check activity Positive pay provides the ability to make pay or return decisions on checks presented against an account that do not match an issue record (exception item). Fraud risk is reduced through tighter controls and the ability to choose either to authorize payment or return the check prior to the return deadline. Payee verification An enhancement to positive pay that also matches the payee line of the check presented for payment to the payee name provided on the issue file from the customer. Provides fraud protection against payee name alterations. Teller Line protection Checks presented at a banking center are matched against your positive pay file. If the check appears on the file, it will be honored. If the check is not on the file, the teller will not pay the item and the presenter will be directed to contact the originator of the check. 3

4 Positive pay how does it work? Check issuers provide their bank with a data file containing check amounts and serial numbers on a daily basis. Bank matches the information from checks presented for payment against the check issue data. Each business day, check issuers receive a report detailing discrepant checks. Instructions are provided to Bank to either pay or return the discrepant items. Payee name positive pay protection As an enhancement to the standard positive pay service, payee names can be matched to the payee name provided on the issue file. Discrepancies are also reported to the customer for decisioning. ACH Debit Blocking ACH debit blocking service guards corporate accounts against unauthorized ACH debit transactions. Benefits Security no unauthorized ACH transactions will be posted. Fraud protection eliminates outside access to your account. Reduced effort your staff spends less time reconciling and investigating debit transactions. Filtering criteria selected by clients Block all debits Block all debits over a certain dollar threshold Block all debits except from specific originators Allow all debits except from specific originators Electronic Banking, Check Fraud, and Positive Pay Check Fraud - Your Role 4

5 What can you do to prevent check fraud? Convert as many payments as possible to electronic delivery such as ACH, EDI or wire Use online reporting and reconcilement services for faster reconcilement Limit number of official signers Secure check stock and signature plates Document and enforce procedures Update account and bank records Implement positive pay Implement payee verification What can you do to prevent check fraud? (cont d) Segregate duties writing checks and reconciling accounts Separate accounts collection and disbursement activity payroll and accounts payable disbursements high-volume accounts and low-volume petty cash or emergency payments that have to be monitored manually Awareness and training Screen new employees and temporary help Know who you do business with Vendors Customers Maintenance staff Electronic Banking, Check Fraud, and Positive Pay Electronic Banking 5

6 MONEY ORDER Pay to $ General Online Banking Services Information Reporting Paperless Bank Statements Electronic Funds Transfer Internal Transfers Wires ACH Collections and Disbursements Payables Management Account Reconciliation Fraud Prevention Check Imaging Stop Payments Simplify cash flow and reporting Remote Deposit Capture Remote check deposit enables you to scan deposit items and use the images to make deposits electronically into your checking account. You can scan personal checks, business checks, US Treasury checks, travelers checks and money orders. Streamline your paper check deposit process Save time and expense by reducing trips to the bank Deposit checks later in the day Clear checks more efficiently and predictably Maximize the availability of your deposited funds HOW IT WORKS Personal checks, commercial checks, and money orders processed via substitute checks and image exchange Online Payment Collections An online payment initiation and collection solution can help you reduce expenses and streamline processes while providing your customers with convenience, payment flexibility and self-service capabilities. Your customers can make online payments by electronic check (ACH), credit card or debit card. Lower costs, increased efficiency, reduced returns and delinquent payment follow-up Increase customer satisfaction arising from payment flexibility and convenience Accelerate receivables and perform more accurate cash forecasting based on streamlined processes 6