By Larry La Hue
Check fraud is a problem that is not going away. Changes in federal government regulations and
the growth rate of this particular crime support this. Business owners must be prepared to
look at both internal financial and bank procedures to determine if changes must
be made. Most importantly,
companies must educate themselves on the value of controlled check stock paper
and other check security features.
The Uniform Commercial Code (UCC) contains the regulations
which govern check transactions between the three participating parties: the payee, payor and financial
institutions. The UCC (in the last
ten years) has adopted several rulings which have altered the placement of
liability pertaining to check fraud.
No longer will the bank carry the sole responsibility; but increasingly,
liability will fall on business owners.
and relative standards of care are
relatively new ideas, concerning liability for losses from check fraud. The UCC adopted these changes in 1990
and 48 states ratified the revisions by 1993. Initially the aim was to initiate a team effort (by
businesses and their banks) to battle check fraud. Instead, banks and their corporate counterparts battle each
other (both verbally and legally), seeking to shift liability from one side to
the other in the event of check fraud.
Articles 3 and 4 govern liability for losses from
counterfeit or forged checks.
Originally, when a bank paid a fraudulent check, it bore the loss
resulting from that payment. Under
the revisions, subtle, but important, changes in language and definitions can
act to shift liability for check fraud back to the companies that initially
wrote the checks in question.
The rules have changed under the following key UCC
3-103: corporate customers must use reasonable
commercial standards prevailing in
their area for their industry.
3-406: bank customers must
utilize ordinary care or companies
may not be allowed to seek restitution for check fraud from their banks.
4-406: customers must
reconcile bank accounts in a timely manner and notify the bank of fraud
Today, the bank’s obligation to provide ordinary care may not include signature verification. Statistics say that over 64 billion
checks are cleared in the U.S. each year.
This is accomplished by high-speed reader-sorters that process up to
2400 items per minute. With these
figures in mind, “sight examination” is usually impractical for a bank’s
corporate customers. Most
importantly, the UCC does not see the lack of signature verification as a
guaranteed reason for a charge of bank negligence, if a forged check clears its
Check Fraud is a
problem reaching epidemic proportions. No company is immune.
According to Business Week 1997, check fraud losses
far exceed other types of financial fraud:
Why do criminals turn to check fraud? The incredible amount of money to be
made makes this crime very attractive.
The chance of being caught and prosecuted is fairly low according to
numbers that will be discussed shortly. Banking Information News and the National Association for Banking
Securities provide estimates that specify annual losses in the U.S. to be in
the $13 billion range. Over one million bad checks quite possibly enter the
banking system daily.
The current state of today’s technology has made check
tampering, alteration and counterfeiting a simple matter. Additionally, the situation may worsen
as technology evolves even further.
Business owners need to place fraud prevention at the top of
their “to-do” lists because (please note that some of these may apply in the
banks have lost phenomenal amounts of money over the years, absorbing the
costs of check fraud. As a
result, banks have taken steps (including lobbying for the UCC changes) to
shift forgery and counterfeiting losses to the business community. Now corporate owners bear the responsibility
of implementing current methods to protect themselves against check fraud
and/or to show that ordinary care
was taken to prevent it.
- It has
been said that ignorance of the law is not an excuse. It can, however, make your company
particularly appealing to criminals looking for an easy mark. It is worth the time and effort to
see how you measure up.
firm’s greatest asset is its corporate image. A widely publicized case of check fraud can ruin your
company’s reputation. Customers,
clients and vendors may be reluctant to continue their relationships with
but certainly not least, is the hefty price tag of investigation and prosecution.
Desktop publishing and today’s technology have made office
work simple and efficient.
However, those very resources have had the same effect on the work of
check fraud artists. Anyone with
access to a PC, a scanner, off-the-shelf software and blank check stock can
create forged checks that are very difficult to tell from the original document. Modern check fraud artists utilize the
best: high-end copiers and
chemicals to prevail over most security features. For example:
can be scanned and replicated; artificial watermarks can be duplicated
with a three-percent print screen.
void pantographs can be eliminated on high-end copiers.
wash laser checks in chemicals for 15 minutes and follow with a bleach
bath to eat off the toner and clean the check. The first chemicals prevent the bleach from destroying
For years, scholars and business experts have promised a
paperless, checkless society.
Regardless, check volume still increases. Credit cards, debit cards and direct deposits, have not
replaced checks as predicted, but are seen as welcome additions to the options
consumers and businesses utilize.
The bad news for all of this growth is: occurrences of check fraud will also continue to rise.
A recent Nielsen Report projects that the number of
checks written annually will rise by two to four percent through the year
2020. At the same time, more than 1.2
million worthless checks enter the payment system daily.
that are easy to reproduce using a
that are easy to tamper with
- Easy access to checkbook and/or check stock
volume bank accounts where a fraudulent check can easily slip through
A computer, laser printer, blank
check stock and a criminal mind combine to make a check production “a snap.”
Companies trust their employees,
but that doesn’t change the simple fact that the risk of internal fraud is at
least equal to the danger of external.
Those with access to all phases of the accounting and check printing processes
have ample opportunity to commit check fraud. Others (cleaning crews, maintenance techs, etc.) who have
access to the check printer also represent a risk.
The truth is: primarily, check fraud is so low-risk because
many companies choose not to report it. Further, law enforcement is over-worked
and the courts are backlogged, so prosecutors decline to pursue 75% of bank
check fraud cases. Finally, in
major cities where there is a greater emphasis on using resources to prosecute
violent crime, the number often exceeds 90% (according to the U.S. General
to securely control storage of “check stock” within the accounting
to securely control storage and access to signature stamps/machines
to use internal procedures that prohibit forged signatures or alterations
to supply current documentation to your bank on authorized signers
to promptly reconcile bank accounts for Payroll and Accounts Payable
to verify signatures on “canceled checks” during the reconciliation
to promptly report potential check fraud occurrences to your bank
to implement paper safety features in your check paper stock
This is not an easy job, but there are many processes that,
when jointly implemented, will help reduce your company’s risk from check
fraud. These suggestions to help
you fight check fraud are certainly not exhaustive. And, as stated earlier, no one is immune to check
fraud, but you can
reduce your potential liability.
- Read and understand your bank contracts regarding
liability. Know your
company’s obligations under current UCC regulations.
- Contact your bank about their suggestions for your internal
Ask for a written copy of the bank’s ideas on fraud prevention,
check stock considerations and secure check reconciliation processes.
- Ask your bank about their ordinary care procedures. Familiarize yourself with their processes (including
the possible use of signature verification) and get a written copy of the methods they use to reduce check fraud.
- Use personalized check stock with your own custom colors
and logo. This is an
affordable option for most companies. Pre-printed, generic check stock makes fraud as easy as
filling in the blanks.
Remember though, that a design is no substitute for comprehensive
- Use check stock with security features. Check stock now has its own
security features that help prevent copying or mimicking. Magnetic toner has also made home
printing more difficult and expensive.
- Reevaluate the effectiveness of your check stock
security features. It
is true that the more complicated your security features are, the less
likely a forger would be to tamper with your checks. However, you don’t have to have
all or even most of the security features available. A good mix can be very effective
and still be cost-efficient.
Intelligent combinations of features will deter sophisticated
forgers and expose less-skilled thieves.
- Advise your bank branch officials of the security
features in your checks.
Do this in person or in writing and keep a copy of the letter on
- Use tightly controlled check printing procedures. Ensure that employees not involved
in the check printing process do not have access to check printing
equipment, check stock and/or checkbook. Periodically change keys and entry codes to secured
check and/or check stock storage areas.
- Audit your checks periodically. This can be difficult because
checks are often removed from the middle or bottom of the stack. Verify that boxes have not been
opened and resealed. Check
tops and bottoms of cartons.
Have your checks pre-numbered, whether they are preprinted checks or
blank check stock.
- Review your check issuing process. Be certain it is accurate and
efficient. Internal and
external audits can be very effective in detecting patterns of fraudulent
activity or potential risk areas.
Conduct “surprise audits:” do any employees appear nervous at the
- “Checks” and balances. If you think there is a risk of internal check
fraud, make sure that one person does not have access to the entire
process. Fragment the
procedures so that a person’s activities will only affect part of the process. Utilize background checks when
hiring employees to work in check issuance and reconciliation areas.
- Use separate accounts for special dollar amounts. If you issue a large number of
checks, particularly with a low amount (e.g. rebate checks), open a
separate account and alert the bank staff of an upper limit on that
- Reconcile your bank statement promptly. Now that bank statements are
available online, you can do this as frequently as your situation demands. Make sure authorized signers do
not reconcile bank accounts.
- Enforce mandatory vacation policies. Those employees with access to
financial operations are particularly critical. Large embezzlement schemes often require daily
maintenance and may be discovered during a week’s absence. Do any of these employees appear
to live beyond their means?
- Separate the accounts receivable and banking
functions. Divide processes in the accounting department
between several people. In
Accounts Receivable, receipts and deposits should be done by different
people, ensuring that these balance daily. Likewise, in Accounts Payable and Payroll, the
processing of payments, check disbursement and bank reconciliations should
be separated. A dishonest
employee could issue a check to him/herself, remove the check from the
bank statement and adjust accounting records to hide the
embezzlement. The UCC is
clear, that in these situations, it is the company (issuer) that bears
sole responsibility for the loss, rather than the bank.
- Mailroom personnel should be subjected to background
checks and internal guidelines should be implemented to protect
incoming and outgoing checks.
Returned checks should go to an independent post office box, by
including only that P.O. Box number on disbursement checks. Omit the company name and address.
- Segregate processing of returned checks. A designated employee (different
from the person who disburses checks) should handle any checks that are
returned, either by the Post Office, for wrong address, or by the intended
payee. It is critical that
the person investigating the return not handle other accounting records,
since it is a simple matter to insert another payee’s name—thus altering
the original document (complete with authorized signature).
- Never include account numbers and/or authorized
signatures on any correspondence. Anyone with access to the letter, fax or E-mail can
retrieve this information and use it for his/her own benefit.
- Protect all checks and check stock. Store
all checks, used or unused in a locked location where cleaning crews and
other employees have no access.
Even voided or cancelled checks should be locked up, after stamping
“VOID” and/or “CANCELLED” on the face of the check—and removing the
signature is critical. Employees usually know that a voided
check was replaced and this document will not be missed, if they take it
for fraudulent purposes.
- Control check reordering forms. Remember: a stolen check reorder form
is priceless to a forger. He/she has only to change the
ship-to address and your original checks are in someone else’s possession… Keep them locked away with your
checks and check stock.
- Ruin unusable check stock immediately. When
changing bank accounts or opting for new, more secure check stock, always
shred or destroy checks and/or blank stock as soon as possible. If it is impossible to do so,
maintain these documents in the same locked area as current checks and check
stock. Even though the
account is closed, someone could pass the old to checks to an unaware
third party. The company would
be held liable for its negligence.
- Return unused check stock to the locked location
immediately after the check run. Laser checks left in the printer tray are targeted by
other employees and cleaning crews.
It’s obvious, but often overlooked—lock them up!
- Always mail checks directly to the vendor or payee. Some departments seek to establish
dual accounting controls by mailing their own checks. This is absolutely unnecessary and
creates increased opportunities for fraud.
- Prevent erasure alterations by:
impact printer ribbons at the first sign of wear—the more ink, the harder to
use correctable ribbon when typing or printing checks—plastic tape can lift the
type font of 12 points or larger—small fonts can be easily erased and covered
with larger type font.
- Shred all negotiable documents in the presence of a
witness or use a bonded shredder.
Regardless of the sophistication of a company’s computer
systems, there are times when checks must be issued manually. Forgers know a few simple tricks and
can transform these documents into quick money for themselves.
If checks are typed, it is important to remember #2 under “Preventing Erasures” above. A
disgruntled employee with only a little finger dexterity can place tape over
the plastic type on a check, rub lightly with a pencil and remove either the
payee name or dollar amount. The
new information can be typed in—the authorized signature is already in
place. Fraud was easy, because of
the correctable typewriter ribbon.
Handwritten checks are also simple to alter. Ballpoint ink (even “permanent” ink)
can be quickly dissolved by acetone, without damaging the check, if the check paper isn’t chemically-sensitive.
The best solution is to utilize single-strike, fabric
typewriter ribbon. These are
cheap, usually around $5 and drive the most ink into the paper. Ink cannot be removed with tape, like
plastic type for correctable ribbon.
It can be removed (with difficulty) by using chemicals. Using multichemical-sensitive check
paper can make these fraud attempts obvious.
Many check printers advertise their use of controlled check
paper, but these claims are very often exaggerated. The controlled paper is restricted in both its distribution
and its use by the paper manufacturer.
The manufacturer requires the printer to store the paper rolls in a
locked facility, shred pre- and post-run waste, and in at least one case,
regulates the type of companies that can use the paper. A handful of very large printers
manufacture their own custom paper. Then they undo their good work by
printing millions of laser checks, complete with artificial watermarks, laid
lines and void pantographs, and sell them entirely blank to thousands of
has access to each other’s identical check stock! If forgers obtain
original check paper, they can perfectly replicate the check. Virtually all of the most popular check
papers are available in mail order catalogs. If a check is sold entirely blank by a mail order firm or a
software company, the paper is not controlled.
Legal experts agree that check security features could well
become an important element of the legal definition of ordinary care. Brent
Gorey, an attorney who specializes in the banking industry and the legal
aspects of checks, says, “In appropriate cases, a strong argument can be made
that the failure by a business to use security features to protect its checks
There are a multitude of check security features available
today, with new innovations coming out continually. It may be practical to use as many of the security features
as you can get! The more unique
you can make your check, the less likely it will be duplicated or altered. A good mix of at least seven of
these features will better protect
your company against fraud and liability.
Highly secure check stock should be your first and easiest
fraud-deterrent tool. Inadequate
check security invites forgery and alteration attempts. Insist that your check stock contains at
least seven security features,
including multi-chemical sensitivity. The best check papers are reactant to high polarity solvents (alcohols)
and oxidants (bleaches).
The best approach is to include both “overt” and “covert”
security features. The overt
approach makes it clear to everyone handling your check exactly which features
you have implemented. The outright
effect is to provide bank staff (and yours) with an easy method of identifying
tampering—and to deter would-be crooks!
Covert features are intentionally hidden to surprise and fool criminals.
colors and patterned
backgrounds that inhibit alteration
visible under special UV lights; copiers and scanners have trouble producing
CUSTOM BACKGROUND PATTERNS, “PHANTOMS” OR LOGOS
more unique your check is, the more difficult it will be for a forger to
a hidden word (such as
VOID or COPY) is included in the background pattern screen; becomes visible
only when copied or scanned
printed pattern on back of check that indicates
originality, is difficult for copiers to reproduce
very small type in the
border & signature line(s) that can only be read under a magnifying glass
CUSTOMIZE THE WATER- MARK
use a pattern
created from your company name or logo as the backer on your check
HEAT SENSITIVE INK
red thermochromic ink
that disappears and reappears quickly, with touch or a puff of breath
notice that alerts the
recipient to look for security features that will authenticate the document
visible under special UV
lights; copiers and scanners have difficulty reproducing
PADLOCK ICON & SECURITY WARNING BOX
is located on back of check, detailing specific security features
shiny foil icons or graphics that
are impossible for copiers and scanners to reproduce
the ink contains
a dye that penetrates through the paper to create a reverse image on back of
tampering and/or washing using high polarity solvents (alcohols) and oxidants
(bleaches): produces staining
Popular methods of check fraud are dollar amount and/or
payee alteration by erasing or using various chemicals. Some background inks and some papers
react to these chemicals by disappearing, fading or staining in a very obvious
The most recent wave of fraud was brought on by the advent
of the high-end color copier. These
are terrific for many office functions, but again, they make the fraud artist’s
job easier. As such, security
features currently beyond the copier’s capabilities have been developed. These include:
- Fluorescent Fibers and Ink: Color copiers have trouble
Secure checks may include some printing in fluorescent ink, and/or
fluorescent fibers woven directly into the paper. If your checks contain these
features, a bank’s special UV lights can look for the glow. A forgery produced on incorrect
paper will not glow.
- Visible Fibers: These are utilized for the same reason. Just like in U.S. currency, a
close examination of a copied check will show the absence of these fibers.
- Artificial Watermarks: Depending on the type, this can be a light gray screen
with custom wording or white ink, which can be viewed from one or both
sides of the form when held up to the light at a 45 degree angle. Either type is very difficult to scan,
photocopy or duplicate.
- Void Pantographs: These are messages in the background, printed in a
special way, so as to make them difficult to see with the naked eye. Because of the resolution used on
many copiers, this printed message becomes quite obvious when copied.
- Microprinting: This process uses very tiny text that looks like a fine
line for borders and/or signature lines. Under magnification the lines can be read, but current
copiers cannot reproduce the extremely small letters.
Several types of warnings are available to discourage
criminals and raise alarms that something is wrong. Your checks may have some of these now:
As previously stated, a mix of these and other features (all
of which are either “overt”
or covert”) will help to decrease the likelihood of fraud. Additionally, in the event check fraud does occur, these features will help to shift
liability for the loss from your company, back to the bank.
Check fraud cannot be eliminated. There will always be a clever (devious)
mind out there, who can get around last week’s security innovation. However, at the core of all of the
information presented here are three steps, which when used together, can
vastly reduce the risk of fraud losses. These include:
sight-review procedures at your bank. What good are security features and controlled paper if the
bank doesn’t look at the checks?
You should know what they look for--they
should know what you’re trying to achieve.
good internal controls.
Incorporate as many of the tips listed above, under “Preventing
Fraud” and “Additional In-house Controls” as possible. Do an internal audit of your
company’s accounting AND mailroom procedures. How do you stack up in the battle against fraud?
a high-security check built on using controlled paper. The paper should be chemically
reactant and have security features within the paper itself. The graphics should be difficult
to reproduce and the checks should be pre-numbered, so you can audit your
inventory. (Many of these
features are described in the previous table: Overt/Covert Special Features).
Check fraud is increasing and the UCC has changed its
regulations to shift partial responsibility to the business owner, rather than placing
it solely on the banks.
My viewpoint as a business owner is simply this: You need to implement and use complex
deterrent processes. In addition,
you must be able to prove beyond a reasonable doubt that you have exercised reasonable
and ordinary care regarding your check usage. Companies seek to maximize profits—they must also seek to
Note: If your
company is victimized by check fraud, whenever possible, file a 1099 on the
perpetrators and let them deal with the IRS for the rest of their lives.