Your organization, its members and employees should learn these five primary types of check fraud and take steps to combat them:
Counterfeiting - This can range from creating fake checks using easily acquired sophisticated desktop publishing equipment or simply duplicating checks with advanced color photocopiers. Once vendors or employees have a check, they have all the information they need to create a counterfeit in seconds.
Alterations - Scammers use chemicals and solvents such as acetone, brake fluid and bleach to remove or modify such information as the name of a payee or the amount of a check. Criminals can either alter small areas of a check, known as spot washing, or alter the full check, a process called check washing. By simply covering the signature with Scotch tape, the check can be “washed” of everything but the signature—and then altered with any payee and amount.
Forgery - For businesses, check forgeries typically involve employees issuing a check without authorization, forging an official signature and making the check payable to themselves or an accomplice. Forgeries also occur when checks are stolen and fraudulently endorsed to someone other than the intended payee.
Even scarier, today a fraudster can merely scan your actual signature and create an ‘authentic’ signature stamp with a 3-D printer available at Costco!
Kiting - This fraud involves opening checking accounts at two or more institutions and covering checks drawn on one account with deposits of checks from the other account that does not have funds. By relying on the float time involved in processing checks, the fraudster carefully times deposits of the worthless checks to artificially inflate the balance of an account.
Closed accounts - Also known as paperhanging, this fraud involves intentionally writing checks from accounts that are closed and contain no funds.
To detect and prevent check fraud, your company should focus on both internal and external efforts:
Review your organization's controls related to receiving, storing and issuing checks. Among other things, your business should reconcile bank statements in a timely manner, segregate check writing duties from account reconciliation, and limit the number of employees with signing authority. You may want to get a professional assessment of your organization's controls.
Talk to your bank about ways it can help protect your account. The cost may depend on the size of the bank and the volume of checks your business issues.
One defense most banks offer is called positive pay. In its simplest form, this service consists of the bank matching the account number, check number, payee and dollar amount of each check against a list of checks your company has authorized and forwarded to the bank. The bank will not cash any check unless it matches your pre-authorized list.
By becoming more educated regarding the risks and by taking some simple and low-cost actions, your organization can now be better prepared for detecting and combating check fraud.
Author:Richard C. Gordon, CPA/ABV/CFF, CFE, CGMA, Director of Forensic and Valuation Services