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Bloomington Hospital

How Protected Are You Against Check Fraud?

Despite the best prevention efforts of banks, businesses and the law enforcement community, check fraud continues to be a very popular (and quite lucrative) criminal activity. Whether itís crooks altering, forging or passing bad checks or internal offenders embezzling cash from employers, check fraud is at the top of the list of Americanís fastest growing financial crimes.

Just how widespread is the problem? Consider this: according to a 2007 survey of U.S. banks conducted by the American Bankers Association, eight in ten banks incurred check fraud losses in 2006. And the total amount of check fraud attempted for the year totaled a whopping $12.2 billion. Worse yet, the ABA goes on to report that check fraud is growing by 25 percent per year. Reports from the business sector are equally troublesome. According to an Association of Financial Professionals survey, nearly two thirds (72%) of all businesses faced attempted or actual payments fraud in 2006. Whatís the total damage? Check fraud estimates from Nilson Reports peg the sum at nearly $20 billion a year.

So while most businesses see the risk from check fraud as a potentially manageable revenue leak, the truth is it can become a slightly out-of-control spigot pretty easily. Fraud is especially attractive to would-be crooks not only because itís potentially very productive, but also because itís relatively risk-free: a 2004 Department of Justice report sites a paltry a 2% imprisonment rate for all check fraud offenses.

All of which makes this a very real threat to your businessís bottom line. Fortunately there are steps you can take to ensure that your organization is better able to sniff out check fraud and protect against potential liability. What are some of the security tools and check safeguards that your organization should have in place?

1). Positive Pay and Reverse Positive Pay
One of the most effective weapons in fighting check fraud, Positive Pay is an automated check matching system that compares the actual payments of an organization with those checks issued by a check issuer. All checks present for payment are evaluated against a list of authorized checks based upon account number, check number and dollar amount.

If any one of these items fails to match up, the check is flagged as an exception and the customer is contacted to verify the checkís authenticity. When a sham transaction is caught, the bank nixes the attempted fraud by returning the check unpaid.

It would probably be pretty fair to think of Reverse Positive Pay as Positive Pay light. Typically used by organizations that issue a relatively small number of checks, under this system the customer is the one doing the actual comparing. It works like this: a bank gives an organization prompt access to a list of paid checks that have yet to be cleared so that they can check it against their issued check file to look for potential payment discrepancies. If a problem is flagged, the customer can then advise the bank of the issue and work out return instructions.

2). ACH Protection
Many organizations have taken steps to control check fraud by turning to Automatic Clearing House (ACH) credits and debits. But while many forgers still focus on paper checks, bank accounts without adequate ACH protection are still extremely vulnerable to fraud. Which is why ACH blocks and filters are becoming an increasingly widespread prevention tool.

An ACH block enables businesses to notify their banks that certain accounts will never be used for ACH transactions and therefore no electronic debit should ever be processed. An ACH filter provides a little more leeway: a company is able to use an account for ACH transactions but provides the bank with a list of organizations that are authorized to debit the account, thereby filtering out all other ACH requests.

3). Check 21 Protection
Check 21 is a U.S. Federal Law that allows the recipient of a paper check to truncate the original document (by scanning both sides), converting it into a digital image that can then be processed electronically. While Check 21 has significantly reduced bank processing costs and the time it takes for funds to clear, it also has unearthed a potentially thorny security concern: whoís liable for the damages caused by a truncated fraudulent check that wouldíve normally been red-flagged if it was in its original paper form?

And the verdict? Quite clear, actually. Companies are only free from liability when they use checks that have special security features designed to protect against fraud, like true watermarks or thermocromatic ink.

4). Check Security Tools
Check security is no longer simply an issue for banks to sort out. New changes to the Unified Commercial Code (UCC) mandate that businesses demonstrate "ordinary care" to reconcile accounts promptly and prevent check fraud. And while itís true that no check is 100% completely fraud-proof, the more secure your checks are, the less chance you could be victimized by fraud. Making forgery more difficult and implementing safeguards that make threat-detection easier are simple, affordable ways to protect against the considerable financial hit that can result from check fraud. In short: diligence pays off.

Fortunately, check security has taken leaps forward in sophistication (and affordability) in recent years. As a rule of thumb, to be considered truly "secure", check stock should contain at least eight safety features (obviously the more features you use, the more secure your checks will be). Some common security features include:

-Customized Check Stock       

-Chemically Reactive Paper

-Microprinting       

-True Watermarks

-Bleed Through Numbering

-Ultraviolet (UV) Ink

-Invisible Fluorescent Fibers

-Holograms

-Laid Lines

-Void Pantographs

-Prismatic Printing

-Boarder Copy Warnings

5). Storage and Printer Safeguards
Obviously a heavy focus on check security is a very good thing. But optimal fraud security should go beyond the document to include stuff like storage and printing safeguards. Check stock should be secured in a special area and audited regularly (by an independent employee) for compliancy. And extra security precautions should be implemented to control laser printers used for check printing purposes.

Using a separate printer for check printing, prohibiting printer access by unauthorized employees, protecting the print server from outside access through password and firewall protection, and turning off printer facsimile signatures are all good printer security precautions. Additional check stock features, like secure fonts and customized check stock also help prevent laser printer fraud.

The Wrap Up: Elite's Here to Help
Hopefully the steps outlined in this article provide a good starting point to help your business manage the threats posed by check fraud. Although no check is beyond-a-shadow-of-a-doubt fool proof against fraud, risk can be significantly reduced if businesses are proactive and diligent. If youíre not sure your checks are up to par and would like to talk with us about the latest security features (or would even like us to visit your offices and assess the safety of you check laser printing capabilities), simply call us toll free at 1.800.276.6456 or email info@eliteps.com to set up a consultation.

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