Criminals today have a number of tools to aid them in committing check fraud. Sophisticated new technology, including computers, color copiers, and scanners, can easily be used to forge or counterfeit checks or alter payee names and amounts. To the untrained eye, these checks appear genuine and are often considered valid and cashed. Criminals will also go to great lengths to obtain personal or corporate financial information such as account numbers and check styles that make counterfeiting a simpler task. Some common methods include stealing checks, or working with bank insiders or dishonest employees of check cashing merchants who are willing to provide this confidential information. In most cases, by the time the criminal act is detected, the criminal(s) involved is long gone.

Who is to blame for losses associated with financial fraud? Since the revision of the Uniform Commercial Code (UCC), banks are no longer 100% liable for check fraud incidents. UCC Section 3-406 introduced the term "ordinary care." Under this section, the accountholder is restricted from seeking restitution if their failure to exercise ordinary care (e.g., in their internal processes and procedures) contributed to the forged or altered check. In UCC Sections 3-406(b) and 4-406(e), the concept of "comparative negligence" could place liability on the accountholder, in many cases the employer itself. The liability is allocated according to the degree to which the bank and accountholder failed to provide "ordinary care." This means that employers can be held accountable if their actions (or inaction) to prevent check fraud fail and result in a monetary loss to employees or the bank. For a summary of the Uniform Commercial Code regarding check fraud, go to www.law.cornell.edu/ucc/.

The Target: Payroll Checks
The most common checks written are payroll checks, making them the greatest target for check fraud. Most employers do not make special arrangements for their employees to cash their paychecks because it may not always be easy to implement. Furthermore, most banks don't want to be in the business of cashing payroll checks because it means extra foot traffic in their facility by people who are not accountholders. They want their own accountholders to have fast, easy access to their tellers. Check cashing arrangements are typically reserved for the bank's top clients, or the bank may opt to offer this service with a high premium charge that makes the service unappealing.

So how can employees cash their paychecks?

There are a number of options available: they can go to a bank where they have an account, a retail store, a supermarket, a convenience store, or a check-cashing store. Consider how many of your employees are paid by check and how many different places they can go to cash their paychecks. It becomes apparent that many people actually handle or have access to your company's paychecks. At any of these places, there could be an unethical employee who copies paychecks to obtain access to bank accounts, the company logo, and/or facsimile signatures. So even if a company deploys some form of internal fraud precaution when processing payroll, it is still at risk externally.

In light of this, employers and other businesses are changing the way they view security procedures for paychecks and the procedures for cashing them. For example, individuals who attempt to cash paychecks at banks where they are not customers will have a difficult time doing so without providing a finger or thumbprint. Finger/thumb printing is a common practice in many financial institutions. The print is pressed near the signature line so if the financial institution is defrauded, it can provide the check along with the fingerprint to law enforcement authorities. Retail stores, national chain stores, and supermarkets have also started to invest in security systems such as biometric applications to minimize their financial risk. Many retail outlets are using TeleCheck, a program that allows merchants to search a national database of check records and view account history to weigh the risk of honoring a check being presented for cash. Businesses utilizing these options have made a conscious decision to minimize their exposure to check fraud.

Check Fraud Prevention
With check fraud on the rise and accountholders, including employers, in danger of being held accountable for incurred losses, each business must consider ways to protect itself. Outlined below are some suggestions on how companies can fight against check fraud with varying degrees of assertiveness. Businesses can choose to monitor the check cashing process with "positive pay" or take their security to the next level with specialized check stock. Every organization should determine its own level of security.

Positive Pay
Positive pay, sometimes referred to as "matching pay," is still the leading check fraud deterrent. There are two methods to this technique: positive pay and reverse positive pay. With positive pay, the company transmits a file of issued checks to the bank. The bank compares the account number, the check number, and the dollar amount of every check presented for payment against the list of checks the company provided. Reverse positive pay works the opposite way. The company as accountholder maintains the list of issued checks and receives a bank file of checks approved for payment. It is thecompany's responsibility to research questionable checks and provide the bank with approved payments.

However, positive pay and reverse positive pay don't provide 100% protection against check fraud since the technique does not require the bank to look for a payee name match. Therefore, if a criminal adds a payee name, alters a payee name, or presents a counterfeit check with a new payee name, the fraudulent act could go undetected. As a result, more banks are enhancing their positive pay systems to match on payee name to reduce check fraud attempts. However, positive pay does not afford absolute protection and can still fail. 

Direct Deposit
Direct deposit is an effective method to deter check fraud. If a paycheck is never produced, it can't be altered, forged, or replicated. Direct deposit does present some difficulties; however, companies must provide the option for employees to enroll in it, and employees must maintain a bank account. Unfortunately, many employees cannot enroll in direct deposit because they do not maintain a bank account to which their paychecks can be deposited.

For these unbanked employees, another option for delivering payroll without producing a check is through the implementation of a paycard system. Paycards enable employers to automatically load their employee's net pay onto a card that looks similar to a credit or debit card. The difference is that the card only maintains the value of the balance loaded onto it, which is updated each payday, meaning employees can't exceed their balance. Employees can use their paycards to conveniently withdraw cash from automated teller machines (ATMs) or as debit cards for point-of-sale purchases. Using a paycard also eliminates the need to sacrifice up to 10% of earnings to check cashing services and alleviates the security issues associated with these services.

Paycheck Security Features
In addition to the previously mentioned methods for deterring check fraud, businesses should also consider incorporating fraud prevention into paychecks by using check stock with security features. The industry standard is to implement at least eight security features. However, the more features put into practice, the more difficult it will be for criminals to replicate the check. Using protected check stock increases the chances that criminals will see the work involved in replicating a check and will seek out an easier target.

The latest check security feature is optical variable ink (OVI). OVI is a special ink containing small flakes of film that change color as it is viewed from different angles. An example of OVI can be found on certain U.S. currency denominations. In 1996, the U.S. added additional security features, including OVI, to protect against advanced replication technology used by counterfeiting rings. This special ink is not easily obtained, making it expensive and difficult to counterfeit.

Employers wanting to take the next step in check security can ask their check suppliers to develop a customized check stock that incorporates a combination of check security features, such as OVI and thermochromatic ink. Thermochromatic ink is heat sensitive and will fade and eventually disappear as the temperature increases. Similarly, as the temperature decreases from the raised level, the ink will reappear. For a detailed description of check security features, go to the publications section of the Web site www.abagnale.com and download Check Fraud and Identity Theft Volume II.

Implementing secure check stock will incur additional costs but is worth the investment compared to the potential losses associated with check fraud. If secure check stock is cost prohibitive, there is always the option to outsource payroll to a reputable service provider that uses a secure check paper. For example, ADP incorporates multiple levels of security features within each paycheck it provides. ADP has a customized, highly secure check stock that was designed specifically for ADP. One of the many security features incorporated into ADP's check stock is the use of thermochromatic ink. ADP's Check Services require no fee for the use of its secure check stock, which is a standard feature of the service. All check printing materials such as check stock, cancelled checks, reorder forms, and signature stamps should be stored in a secure, locked environment that limits access to employees and cleaning or maintenance personnel.

Minimizing Risk
According to the FBI's 2002 Financial Institution Fraud and Failure Report, 47% of all suspicious financial activity investigations involved check fraud. There is no doubt that every business,  individual, and financial institution is at risk to some degree. By using a combination of security precautions, employers can effectively minimize their exposure to check fraud.

Now is the time to ask, "Is my company currently employing appropriate preventive measures as outlined in this article?" The answer lies within your organization. Weigh the risks associated with check fraud and take appropriate action. No infallible solution exists for stopping check fraud; however, there are ways to significantly reduce risk. Deciding how to minimize the risk is up to you.

This article is intended for informational purposes and is not providing legal advice. For legal advice pertaining to check fraud, you should consult a licensed attorney.

For more information, contact nas_facs@adp.com.