Check Fraud And Counterfeiting

Because there's no single standard and because they can be printed in many different ways, checks are much easier to copy than credit cards. Even though many large companies try to deter fraud by printing their own checks, payroll check fraud is still rampant. In fact, one Los Angeles gang recently roamed the nation, easily cashing counterfeit payroll checks to the tune of nearly $25 million.

It's intriguing how a criminal mind can slowly and methodically use stealth, guile and technology to overcome individual awareness and thwart procedures and devices that are supposed to stop the intended crime. Checking should be different, but it isn't. With modern technology, criminals can produce documents that compare favorably with those produced by bankers and check printers.

Key factors in check fraud and counterfeiting are the people who accept them: retail clerks, bank tellers, and the unsuspecting public. Bank tellers and retail clerks might be expected to best know how to identify a counterfeit check. Sadly, most haven't been adequately trained to do so. The majority of counterfeit checks pass through clerks or tellers.

Attempts to alleviate the problem can be frustrating. In one case, all of the chambers of commerce in the Phoenix metropolitan area were offered a free seminar. Attendees would be taught to spot counterfeit checks, traveler's checks, and credit cards. Surprisingly, none of the chambers sent anyone to the seminar; however, several did call with membership offers.

To understand checks and counterfeiting, you need to know what a check is, including its normal life cycle. A check is a written order, normally using a preprinted form, showing an amount due from the remitter to the payee and directing the remitter's bank to pay the payee. It's a simple document, and it's a simple concept.

There are several basic parts of a check:

• The remitter is the entity issuing the check.
• The payee is the entity in whose name the check is issued.
• The amount is the dollar amount the check was issued for, written both numerically and alphabetically.
• The signature is the unique authorized signature of the remitter.
• The institution is the bank that's directed to pay the payee for the remitter.
• The unusual block printing at the bottom of a check that contains information about the institution, check number, and account of the remitter is the MICR printing.
• Everything is printed on core stock, also known as blank check stock.

There are different kinds of checks:

• Business and personal checks are written by private parties for use in business or general commerce.
• Certified checks are business or personal checks certified with 'good funds' by the institution the check is drawn against. These certified funds are reserved in that business or personal checking account. Certified checks aren't as commonly used as they once were.

Money orders and cashier's checks are by and between the issuing bank and the payee. The remitter has paid the bank to issue the check to the payee on behalf of the remitter.

• Money orders are for less than $400 (in most cases) and don't require the remitter or the payee to be filled in at the time of purchase from the bank.
• A cashier's check can be for any amount (usually more than $400), and both the remitter and the payee must be filled in at the time of purchase.

When an account is opened, the bank orders checks from a check printer. The account owner then uses those checks in transactions. Most checks are deposited in the payee's bank. This bank sends the check through the Federal Reserve Bank Check Settlement process. The depositor's bank is credited with the funds. The check is then sent to the remitter's bank, and the account is debited for the amount of the check. The time difference between crediting the payee's account and debiting the remitter's account is the 'float.' Check settlement and processing go on 24 hours a day all across the country. Hundreds of millions of checks are processed every day. The checks are physically transported all across the country.

Given all of this, it's amazing that the system works as well as it does. One thing this process can't do is detect counterfeit checks. Such detection is usually done by the payee before the check gets into the system or by the (alleged) remitter after the check has already been through the system.

Before we had mechanical readers and computers, all checks were produced by hand and had the bank number, check number, and account number printed on them; checks contained no mechanically readable features. As mechanical readers came into common use (for speed and efficiency), so did one of the first modern check scams. As the new system was phased in, the forms had both the MICR characters at the bottom of the deposit slip and a location to write in the account number by hand. Criminals discovered that they could leave deposit slips printed with their own MICR numbers in bank lobbies in place of blank deposit slips. Other customers would unknowingly use them, fill in their account numbers by hand, and present their deposits to the teller. The teller would run the slip through the mechanical reader, and the sums would be deposited into the criminals' accounts. The MICR reader would read the MICR numbers, not the handwritten numbers on the deposit slip. At the end of the day, the criminals would withdraw as much money as they could from their accounts, which were swollen with misdirected deposits. Today the typical check criminal has to work a little harder, but not much.

There are four basic types of check fraud.

The Bad Check. This is a check written by the account owner against an insufficient balance. This is the most common form of fraud. Almost every checking account holder has had at least one - intentionally or not. For the vendor of products or services, this is the most common form of loss. In a low volume/high dollar transaction, such as a car purchase, funds can be verified with the bank during normal business hours or through an automated telephone balance inquiry system after the bank is closed. In a low dollar/high volume operation, such as a grocery store, the vendor can purchase insurance through a check verification or guarantee company, although it's always more cost effective to train clerks than to transfer risk through the purchase of insurance.

The low volume/high dollar business should never find itself stuck with a bad check. With automated account information available by telephone 24 hours a day, obtaining proper identification of the remitter and physically inspecting the check will catch 99.99% of bad checks. But this doesn't take human nature into account. People are social creatures - we like to do business with people we like. So the more the clerks like customers and feel comfortable with them, the more vigilant they should be about verifying their checks. Criminals are masterful students of human nature. They know how to gain a clerk's confidence enough to erode barriers so that they can move in for a financial score.

The second problem is insurance. What was intended as a safeguard has had unintended consequences: Tellers whose employers have insurance against bad checks accept more suspect checks than those who don't. Insurance seems to have the same effect in the checking world that it does in other sectors of risk management.

The Stolen Check. Checks on current accounts are stolen from purses or mailboxes. Discarded checks are retrieved from the garbage.

Checks stolen from a person through wallet or mail theft are used in a rapid fashion. These checks are usually written for items that can be easily sold for high value, such as VCRs, TVs, jewelry, and automobiles. It's also not unusual for identification to be stolen along with checks. A driver's license, credit card, or other item can help the criminal pass stolen checks.

Checks lifted from the garbage are usually on inactive accounts. These 'garbage' checks are usually used slowly and just outside of the remitter's immediate area. Items purchased with these checks are usually chosen for easy resale that rarely cost more than $250. Most 'garbage' checks are business checks with only the business name and address. In this case, it's easy for the criminal to purchase business cards in the same name and begin circulating the checks without needing false identification.

A recent scam involved a ring of criminals working in hospitals as security guards and maintenance workers - positions that have broad access authority to even the most secure areas. When cleaning or checking on doctors' offices in the hospital, the thieves would peel open the corners of envelopes containing checking account information (either outgoing bill payments or on incoming checking statements). They viewed the mail through the open corners with an arthroscope and recorded the account information. Counterfeit checks were then created and passed at the alarming rate of 10 or more per day.

Methods for avoiding a check theft are similar to those for avoiding bad checks. Review the remitter's identification. Be suspicious if the identification is from out of state but the check isn't. Another dead giveaway is the remitter's not recording information in the check register; after all, criminals don't care how much is in the account because it isn't their account. Passers of stolen checks are often impatient and will try to distract the person accepting the check. They will often make a fuss about ID and other formalities. The more indignant they become, the more suspicious the clerk should be.

The Wiped Check. Used checks that have already been through the banking system are taken, usually from a mailbox or garbage can. Wiped checks have been common for years, but they're gaining new popularity. The criminal sets up a lab to erase the check information with acids and organic solvents. Once the check has been wiped clear of the payee, the amount, and sometimes even the signature, the criminal dries and reissues the check.

Wiped checks have certain characteristics: The paper of a wiped check is never as flat and smooth as the original. The paper fibers absorb water and solvent during the wiping process and subtly shift positions, changing the feel of the check paper. In addition, wiped checks are usually passed as single checks; they are not in a book like normal checks. If they've been bound into a book, the binding material is usually gum, the same material used to bind cheap note pads. Sometimes, all of the pen ink isn't removed or the paper has indentations from the original writing on the check. In this case, ghost images of the original check are visible. Many new checks are printed on stock treated to react with wiping chemicals, leaving distinctive marks on altered checks.

The Counterfeit Check. Counterfeit checks have usually been copied or printed on a laser printer. They contain all of the account information in the MICR and may or may not resemble the true account holder's check stock. Checks used to be fairly safe, but as with cash, counterfeiters can now duplicate checks with amazing accuracy. The Justice Department estimates that 20% of all bad checks passed are counterfeit.

Financial fraud is growing, forcing banks and individuals to find new ways to protect themselves. Sophisticated desktop publishing software, scanners, laser printers, and color copiers have contributed to the problem. All a criminal needs to begin is a good check from a business, person, or bank. The key item is the MICR printing on the bottom of the check. Once the criminal has a good account number, the remaining work is done at the desktop. They create a check with desktop publishing software and a laser printer. Then they change the printer or the printer cartridge and duplicate the MICR printing on the newly created counterfeit check stock. What began as a way for businesses to safeguard their accounts by printing their own checks has been co-opted by criminals and turned against the businesses.

There are several steps in identifying bad checks. One characteristic feature of counterfeit checks printed with color copiers or color laser printers is the toner. The checks are usually slightly shiny and have a raised feel. A laser printer will lay down toner only where it's required, so the check will have ridges and bumps where the toner is applied and valleys where it isn't. Color-copied checks will have a complete layer of toner over the entire surface and will often have a yellowish appearance where they should be white. Counterfeit checks are usually printed one at a time on 81/2'x11'sheets of paper and must be cut to size, so examine checks to see whether they're trimmed correctly and cut square and clean. Color-copied and laser-printed checks won't have fine line detail, delicate borders, security screens, or microprint.

The Federal Reserve has also instituted a set of standards for printing checks based on Federal Reserve Regulation CC. The resulting features ease processing and identification of counterfeit checks. On many newer checks, a padlock icon and the letters 'MP' are printed somewhere on the front of the check. The padlock icon instructs the reader of the check to look at the back. On the back of the check, next to the padlock icon, is an explanation of the security features built into and printed on the check. The 'MP' is next to the feature that contains microprint.

However, fraud and counterfeiting still occur, despite advances in check printing and technological devices designed to make them more difficult. These features aren't working because the people who accept checks are either ignorant, willfully negligent, or both.

A restaurateur and a very intelligent businessman, recently sold his old vehicle. The buyer looked at the car on a Friday morning and told the restaurateur he'd return with a cashier's check for the full amount. The buyer returned at approximately 5:30 P.M. the same day, cashier's check in hand, and left with the vehicle and title. The title was transferred the next day (Saturday), and the cashier's check was deposited the following Monday. The seller got a call from his bank several days later advising him that the cashier's check was counterfeit and the bank wouldn't honor it.

It turns out that he was just one of 42 people who'd lost their vehicles in the same fashion that Friday. The 42 cars are now probably in parts or in another country. The seller knew the deal was too good to be true - the buyer hadn't even argued with him about the price of the car.

An examination of the counterfeit check revealed that it had been produced by a laser printer, and it wasn't a very professional effort at that. Anyone with 30 minutes of training would've spotted the check from across the room. A major bit of irony in all of this was that the counterfeit cashier's check had been drawn on the same bank it was deposited into, and it still took more than three days for the bank to discover it.

There are no appearance standards for checks. They can be printed in many different ways, making them easier to copy than credit cards. Many large companies print their own checks. Payroll check fraud is rampant, with executives just as vulnerable as corporations to such scams. One Boston gang got executives' names and birth dates from 'Who's Who' and applied for credit and loans in those names.

A new account can drain a bank as criminals deposit a counterfeit check and then draw on it before the fraud is discovered. To stop this, banks increasingly require at least two pieces of personal identification on each new account. Some also delay ordering checkbooks and issuing of ATM cards until the account holder's references have been verified.

Individuals should benefit from check guidelines issued by the Financial Stationers Association (FSA), a trade group based in Washington for check printers. The FSA's recommendations include using microprinted data and a lightly printed security screen that can't be picked up by a color copier or laser scanner. Checks bearing these marks will have the padlock symbol on the front. Some institutions now require customers to order checks from the bank's vendor.

Preventing access to basic information and check stock is the first step in reducing fraud. The second is to educate tellers and cashiers on the characteristics of good and bad checks.

Protect account information and limit the amount of personal information that appears in any one place. Don't have phone numbers or driver's license numbers printed on checks. Credit card numbers shouldn't be written on a check even if a sales clerk asks for it. Having all of this information in one place leaves the account holder open to fraud.

Protect checks as if they were cash, and report lost or stolen checks. Review bank statements as soon as they arrive; there's no excuse for being lax about that. Criminals will usually tap into a number of accounts, taking a portion of each, but not bleeding any one account dry. Store cancelled checks in a safe place, and voided checks should be torn into small pieces or shredded before being discarded. Handle the deposit slips and checks you receive with care.

A cashier's check is the easiest to counterfeit; it's not always a good safeguard. Don't accept a cashier's check from a stranger unless they're willing to walk into a bank and get cash prior to taking possession of an item. If this isn't possible, hold the title to the item until the check has been cashed.

Take special care when using an ATM. Never leave a receipt near the machine, and use care when entering PIN numbers. If you don't, a criminal can steal the account number.

When a thief steals a credit card, the account holder is liable for no more than $50. Consumers are similarly protected from check fraud. Account holders are protected if their checking account numbers are compromised or if someone has assumed their identities or stolen their checks. The bank takes the hit. But it's a lot like being rear-ended in a car accident: It might be the other guy's fault, but fixing the problem can be bothersome.

Despite efforts by the American Bankers Association and the FSA to make counterfeiting more difficult, it won't stop. A mechanical reader/verification step in processing is the best alternative to better-trained clerks.

With rapid advances in technology and its costs coming down, there will be more casual counterfeiters, such as students at an Ivy League college who found it easier to make money with a color copier than at a job.

Checks of the future might have such anti-counterfeiting measures as watermarks, fibers, embossing, foils, additional MICR algorithm features, specialty inks (including hard to reproduce colors), colorshifting inks, and ultraviolet inks. And they'll have multiple features to thwart counterfeiting, not just one. The consumer will bear most of the burden because these checks will cost more to print. And even these advanced features won't stop counterfeiting by themselves; trained people and check-reading technology will still be needed to detect bad checks.

Increased use of direct deposits for employees and regular vendors and customers will cut down on the availability of checks to copy and counterfeit. There will be a rise in the use of credit and debit cards, but these aren't secure either.

Banks will most likely go to an image-based check-clearing method to clear checks electronically before physically transporting them. This won't necessarily reduce fraud; it'll just catch it quicker.

The technological barriers to checks clearing with image processing are daunting. Everything will have to work without error. A common protocol for data transmission and compression technology will need to be established, along with a secure method of transferring this information. Such technology is 10 or more years away from widespread use, though banks may use more of it for internal check reconciliation.

The payee most often stops a bad check, before it gets into the system and defrauds the person on whose account it's drawn. Check insurance costs money and only applies after a retailer has suffered a loss and if they've followed the proper protocol.

The awareness of everyone who deals with checks is the best way to stop the fraud. It's not difficult to detect; in fact, it's easy. The key to prevention is as simple as a little training and education.