Preventative Measures

 

Protection from Check Fraud and Losses

by occ.treas.gov
2006

 

DoubleCheck Solution

Articles 3 and 4 of the UCC outline the responsibility and accountability for both banks and their customers regarding check fraud. If a company doesn't exercise "ordinary care" as defined by the UCC it may be held wholly liable for check fraud losses or it may be partially liable under the "comparative negligence" principle.


Article 3-103 of the UCC defines "Ordinary Care" as follows: "Ordinary care" in the case of a person engaged in business means the observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged.


To minimize your company's exposure to check fraud you should exercise "ordinary care" in your check printing and disbursement operations. There are many actions that can be taken to demonstrate responsibility and accountability and help ensure that you're exercising "ordinary care". Activities to help protection against check fraud include:

-   Internal Corporate Controls
-   Bank Services
-   Check Stock Security
-   Check Stock Paper


Internal Corporate Controls

While each corporation's circumstances and operations may differ there are controls that can be implemented to increase security of a company's assets and information. These controls can minimize risk of losses from check fraud and help to demonstrate that the company has exercised "ordinary care" as defined by the UCC.


Segregation of Duties

Activities should be segregated so that one individual doesn't have the ability to initiate and record check activity. Separate roles for expense approval, record keeping, check-signing and account reconciliation should be maintained. At least two employees should be involved in the check paying process.


Reconcile Bank Accounts

Per the UCC you may be held liable for check fraud losses if you don't reconcile your bank statement, and report fraud, within 30 days of receipt of the statement. Reconciliation is one of the best means to identify fraudulent transactions.


Timely Report Fraud

The UCC states that to exercise ordinary care a company must discover and report unauthorized or altered checks within a reasonable period of time, no more than 30 days. A Company may, however, have more time to legally report and attempt to recover losses. Check fraud is covered by a statute of limitations and thus a company has up to one year from the occurrence of the transaction to discover and report a forged or unauthorized signature, a counterfeit or an altered check. A Company has three years to discover and report forged endorsements. However, although the legal right exists to attempt recovery of check fraud losses within a one or three year time frame, liability for the losses may be impacted by the timeliness of reporting such losses.


Train Reconcilement Employees

Employees who perform the reconciliation process should be trained on how to identify fraud, from an accounting perspective as well as how to identify forged and altered checks. When reconciling fan through the returned checks, a counterfeit check may stand out because it was printed on different colored check stock or the signature and fonts on the check may appear visually different than your authorized checks.


Timely Reporting of Fraud

The sooner you report fraud the greater the likelihood of recovery of losses and as per the UCC, if you report within 30 days, you improve your defense against being held liable for certain check fraud losses.


Written Policy and Procedure

A formal written policy and procedure should be created for each checking application (A/P, Payroll, etc.). The process of creating a policy and procedure will help to identify potential risk areas in the process. Some of the policy/restrictions that should be established are on establishing new accounts, check signers, dollar authorization limits, ordering and storing check stock.


Periodic audits

A party independent of the process should perform periodic audits of the check process (A/P, Payroll, etc.).


Securely Store Facsimile Signatures, Records, Documents

Signature plates or digital signature files should be securely stored with limited access. Bank account information, records and documentation should also be securely stored with limited access to such records.


Require Multiple Signatures for Large Dollar Checks

A threshold dollar amount should be established that requires two signers for all checks that meet or exceed that threshold. Requiring two signatures helps to reduce potential fraud by insiders and makes it more difficult for outsiders. Communicating this requirement to your bank can also help guard against fraud and the liability for losses.


Centralize Disbursement Operations

Headquarters location controls disbursement account, check processing and accounts reconciliation. With fewer individuals involved in the disbursement process, the lower the likelihood of unauthorized disbursements. Idle cash will also be reduced if excess cash is concentrated from local banks into centralized account(s).


Know Your Employees

It is important that you know the background of the employees who are responsible for cash related activities. Reference checking should be performed before hiring and for selected positions further background checks may be warranted.


Enforce Mandatory Vacation Policy

Employees who never take vacations are more likely to be able to cover up any wrong doings. This is especially true in smaller operations where proper segregation of duties may not exist. Forcing an employee to take a vacation and having another employee perform the work may uncover fraudulent activities or may uncover lack of controls or operational inefficiencies.


Bank Services

Banks can also be held liable for check fraud losses and in response they offer a variety of services that can reduce the exposure and liability to check fraud losses. Partnering with your bank is an excellent strategy to deterring check fraud.


Positive Pay

The premier bank provided service to combat check fraud. The bank matches check serial numbers and dollar amounts against a company provided list of checks issued and the bank only pays those checks that match.


Electronic Payments

Moving paper based payments to electronic form is a great way to reduce check fraud. By reducing the distribution of checks, which contain all the information (account number, ABA number, etc.) a criminal needs to create fraudulent checks, you reduce the likelihood that this information will fall into the wrong hands. Automated Clearing House (ACH) electronic payments work very well for repetitive payee applications such as payroll or T&E (employees) and accounts payable (vendors ). Working with your bank you can restrict ACH debit activity on your accounts. Implementing a policy with your bank to use Fed wires for large dollar amount payments, can also be an effective way to reduce exposure to check fraud. Another good procedure is to open a separate account to only handle incoming wire transfers. If you accept wires as a form of payment, especially if you require advance payment, your bank account information can easily fall into the hands of criminals. By restricting the account to only incoming wires, and including a sweep service and no check writing authority, you can reduce your potential to check fraud while maximize your operational needs.


Daily Reporting Software

Any opportunity too obtain account information sooner and in a more comprehensive and analytical format should be taken advantage of. Using either bank provided software or the internet, many banks today provide access to daily account activity. Daily review, and possibly reconcilement, of accounts greatly improves your odds of identifying fraudulent transactions.


Account Reconciliation With either a partial (bank provides list of checks paid) or full (bank matches checks paid to company provided list of checks issued) reconciliation a company can expedite the reconciliation process and potentially spot fraudulent items sooner.


Maximum Dollar Limits

This is an easy, and no cost, method to reduce your potential for check fraud. Working with your bank you can establish a maximum dollar limit for checks by account. For accounts used with non-check disbursement you can establish a zero dollar limit on checks thus reducing your exposure to unauthorized payments.


Multiple Accounts

Your company should maintain separate accounts for at least each application (A/P, Payroll, etc.) for each legal entity. While sensible, it is important to restrict payment types to specific accounts because each disbursement application can contain varying types of payments. You can match your company's policy to your bank's services to provide more robust fraud protection measures. If you limit payroll checks to a certain dollar limit then you can match the banks maximum dollar service with this account. Maintaining separate accounts can help you identify fraudulent transactions sooner. When an exceedingly high dollar value check goes through an account with low dollar value items (such as payroll, T&E, refunds, etc) it will be much easier to identify than in an account with both high and low dollar value items (A/P, claims, etc.). Also, the identity of the payee may not be consistent with those who are normally paid from an account (corporate payee in an individual payee account) which can help in identifying fraudulent payments.


Stop Payments

Stop payments allow a company to notify its bank with instructions not to honor certain checks. They can be especially effective if a company has suffered a theft of pre-printed check stock.


Sweep Accounts

Idle cash balances are automatically invested in short-term investments. The reduction in excess cash balances leaves fewer dollars available for potential check fraud losses.


Imaging Services

Digitally scanned images of checks can be provided as a complement to positive pay services providing a company with a fast and visual image of a presented check that may be fraudulent. The visual image provides more information than the MICR line data provided in positive pay reports, and forgery of signatures, alteration of payees and other types of check fraud might be identified upon a visual inspection of the check.


Controlled Disbursement

Is a bank service that provides same day notification of the dollar amount of checks that will clear against the controlled disbursement account that day. This service helps to reduce idle cash balances and may help to restrict fraud by providing more control over the disbursement of funds from these accounts.


Don't Allow Overdrafts

Based on the accounts you have established and on your business needs, you may want to instruct your bank to notify you of all overdrafts before they are settled or that all overdrafts are to be returned unpaid. You may have a very good relationship with your bank and they may elect to "cover" your overdrafts knowing you're such a good customer. However, overdrafts may be the result of a fraudulent check.


Other

You should understand the products and services your bank offers as well as the bank policies and procedures for their services. It is wise to sign a bank agreement outlining both party's responsibilities and liabilities in the event of check fraud. Your company should maintain adequate and current records and documentation of bank activity while implementing controls over opening new accounts and making changes to accounts and services. It is also important for your company to have a good relationship with your banker.


Check Stock Security

To minimize your risk to check fraud and to demonstrate "ordinary care" certain controls and security precautions should be taken in regards to check stock and printing, including:


Secure Unused Check Stock

Whether pre-printed or blank check stock is used all unused check stock should be securely stored with access limited to authorized employees only. Control of the check stock should reside with someone other than an authorized check signer.


Conduct Periodic Audits of Check Stock

Periodic audits by a party independent of the check printing process helps to maintain control over the stock and acts as a deterrent to insider fraud.


Use Reputable Check Printing Company

When ordering check stock you should use a reputable check printing company. It is important to use quality check stock with current security features and to ensure that distribution of your check stock is restricted to only addresses that you provide.


Reorder Policy

A reorder policy should be implemented that authorizes certain employees to reorder check stock and to work with your supplier so that restrictions are placed on additions or changes to your "ship to addresses". Also, employees should be instructed on procedure if a reorder is late in arriving or if the reorder never arrives.


Use Sequential Check Numbering

Whether pre-printed or blank check stock is used a sequential numbering system should be used for all checking accounts. Maintaining a standard and sequential numbering system (can also be alphanumeric) can help to identify fraudulent checks and aids in the reconciliation process.


Mutilate Voided Checks

Any checks that are voided should be clearly marked or mutilated so that they become non-negotiable and all voided checks should be accounted for in the reconcilement process.

Avoid Multiple Check Stocks

Use only one check stock for an application such as A/P, using multiple check stocks for the application makes detection of fraudulent items harder. The inconsistent use of check stock for an application makes it much easier for a criminal to commit check fraud against your account. You can maintain separate check stocks for different applications, such as A/P and payroll, but the use of check stock should be consistent.


Never Use a Rubber Signature Stamp

Using rubber signature stamps exposes your company to check fraud because it is much easier to have a stamp made of a signature than it is to either manually forge or scan and print on a check an image of a signature. The use of a stamp signature makes detection of fraudulent items that much harder because of the inconsistent application of the stamp to the check.


Do not Publish Executive Signatures

Companies should be careful not to publish the signatures of executives; especially those with check signing authority, in annual or published reports. You greatly ease the work needed for a criminal by handing them executive signatures through public records or publications.


Check Stock Paper

Utilizing high quality secure check stock with anti-fraud features can reduce the likelihood of incurring altered check fraud and can reduce or eliminate your liability if check fraud should occur. In response to the growing check fraud problem, the check printing industry has developed security features for checks. The following are some common security features offered on security check stock:


Void Pantographs

A design that is not clearly visible until a copy has been made when such words as "VOID" or "COPY" become visible making the copy non-negotiable.


Watermarks

Watermarks are subtle designs of a logo or other image. Designed to foil copiers and scanners that operate by imaging at right angles (90 degrees), watermarks are viewed by holding a check at a 45-degree angle.


Microprinting

A word or a phrase printed on the check so small that to the eye it appears as a solid line. When magnified or viewed closely the word or phrase will become apparent. Copiers and scanners can't reproduce at this level of detail so microprinting when copied will appear as a solid line.


Laid Lines

Unevenly spaced lines that appear on the back of a check and are part of the check paper. This design makes it difficult to cut and paste information such as payee name and dollar amount without detection.


Reactive Safety Paper

Combats erasure and chemical alteration by "bleeding" when a forger tries to erase or chemically alter information on the check leaving the check discolored.


Special Inks

Highly reactive inks that discolor the ink comes into contact with erasure chemical solvents.


Color Prismatic Printing

A multi-color pantograph background that is extremely difficult to duplicate when using a color copier or scanner.


Special Borders

Borders of the check which have intricate designs that, if copied, become distorted images.


Warning Bands

Describe the security features present on a check. These bands alert bank tellers or store clerks to inspect the check before accepting it. They may also act as deterrence to criminals.


Thermochromic Inks

A special, colored, ink that is sensitive to human touch and when activated.


DoubleCheck

Using DoubleCheck software allows companies of any size to easily and affordably integrate their accounting software check files with their bank's required positive pay formats. No longer will your company be burdened with excessive integration costs to implement positive pay or to make changes to your bank information.


DoubleCheck comes with a library of bank formats that can be selected so that your implementation process is eased. If your bank is not listed, it may be available on our website for download. If not, we will build it for you. The wizard guides you through the integration process and intelligently maps your companies check file to the bank's positive pay format.


Whenever you need to add or change bank accounts or accounting software you can count on DoubleCheck to provide the necessary flexibility to handle those changes. DoubleCheck breaks down the barriers to adopting positive pay services that formerly existed.


DoubleCheck software eliminates or reduces:

-  Complex integration
-  High cost of implementation
-  IS resources or outside consultants
-  Custom programming
-  Check fraud losses


Allowing your company to easily:

-  Adopt positive pay services
-  Use for most or all checking accounts
-  Add bank accounts
-  Change bank account information

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