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February 22, 2010
Check fraud: Old problem, new approach?
Despite signs of declining check volume and ongoing predictions of checks' imminent demise, check fraud is a growing problem. Industry experts estimate that check fraud will cost billions in 2010. The question now is whether this fraud can be thwarted with traditional mitigation efforts or if something new is needed.
One explanation for the continued proliferation of check fraud is technology. Fraudsters today have increased access to check paper stock, high-quality color printers, and scanners that facilitate the creation of a near-perfect document that can pass for a real check. Industry experts state that compromised online banking accounts also contribute to check fraud because fraudsters are able to view cleared check images which are then used to extract sequence numbers and other pertinent data for subsequent replication.
Recent studies reveal check fraud's persistence
Last month, the Financial Crimes Enforcement Network (FinCEN) released its Suspicious Activity Report (SAR) filings for mid-year. The report revealed that during the first six months of 2009, SAR filings for suspected check fraud increased for all industries required to file SARs under the Bank Secrecy Act (BSA). A breakdown for each industry revealed that SAR filings by depository institutions increased by 19 percent for check fraud and by 36 percent for suspected counterfeit checks. SAR filings by money services businesses for traveler's check fraud increased by 76 percent.
Similarly, the 2009 AFP Payments Fraud and Control Survey found check fraud dominated the overall payments fraud landscape for those surveyed in 2008. The results underscored the importance of specific fraud control measures to mitigate risk and reduce exposure to losses. Of those who responded to the AFP survey, 91 percent indicated they had experienced actual or attempted check fraud.
Types of Fraud Resulting from Using Checks
(Percent of organizations that suffered check fraud in 2008)
|In percentages:||All respondents||Revenue greater than $1 billion||Revenue less than $1 billion|
|Counterfeit checks (other than payroll) with the organization's MICR line data||72||75||68|
|Payee name alteration on checks issued||59||63||50|
|Other||7||5||12||Source: 2009 AFP Payments Fraud and Control Survey, p. 13, available at: http://www.afponline.org/pub/pdf/2009_Payments_Fraud_Survey.pdf.|
Are yesterday's best practices today's best approach?
Check fraud is a decades-old problem that shows persistent signs of survival. Preventive efforts to mitigate check fraud risk range from ceasing all use of checks to using advanced software systems that offer automatic check stock and signature verification and can detect even the most sophisticated counterfeit checks. But can new approaches to check fraud enable a bank's loss prevention team to catch and prevent more check fraud? Or is the fight against check fraud best won through traditional and well-established risk-management practices?
One well-known method for business customers to combat check fraud is through the use of a tool known as positive pay. This bank service allows a company to send to its paying bank an electronic file of check payment information, which the bank then matches against the information provided by its business customer. The paying bank pays checks that match the information provided and dishonors those that do not. Other bank services available to combat check fraud include ACH debit blocks and filters. An ACH debit block works like a stop payment order by automatically returning all ACH debits and credits that, for example, exceed preset dollar limits established by the bank customer. The bank customer can also set filters to permit fund transfers to only preapproved payees.
While there is no "one-size-fits-all" solution, well-established risk-management practices have proven time and again to be successful mitigators of fraud risk. The back-to-basic tools such as segregation of duties, dual controls, and timely reconciliations are just some of the risk-management tools best known for their effectiveness at combating check fraud.
Where do we go from here?
While acknowledging that nothing is impervious, the combination of both new and old techniques can contribute significantly to solving some of the challenges that check fraud presents. Armed with an arsenal of tools, financial institutions can be well-equipped to monitor and maintain a high level of account security effectively.
By Ana Cavazos-Wright, payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed.
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