Educate yourself on the dangers of check fraud and the precautions you can take to significantly reduce your chances of being victimized.

Check fraud is a major problem for everyone today, including businesses, banks, and consumers.  The costs of check fraud continue to spiral upward.  Last year, actual losses were approximately $677 million. Plus, in 2003 the amount of attempted check fraud increased to $5.5 billion.

The U.S. Treasury has stated that 65 million fraudulent checks are written every year.  Of course, your best defense is to eliminate check fraud by not using checks in the first place.  The electronic paycard is quickly becoming the payment instrument of choice to avoid check fraud.  However, we all know that checks are still required to do business.

In October 2004, the Check Clearing Act for the 21st Century took effect.  But experts were concerned that mass fraud could still occur because check handling and collection would be expedited.  Under the act, banks are allowed to send check images instead of paper checks.  Thus, new image archiving and fraud protection will be required.  However, the infrastructure for “checkless” banking is not yet in place on a widespread basis.

Make payment a priority.  Check fraud wouldn’t be a problem if debit cards, direct deposit, and electronic funds transfer were the preferred methods of payment.  But even though electronic payments exceeded checks for the first time in 2003, checks are still popular among most businesses.  Therefore, we must employ technology and good accounting practices to protect ourselves.

While technology has given us high quality color printers, scanners, and copiers that make our lives easier, these items also provide the same conveniences to thieves.  Furthermore, thieves can create counterfeit checks through desktop publishing, chemical alteration, and data scanning.  If you are unsure how to protect yourself from these threats, consider what payroll colleagues are doing.

There are many ways to lessen or eliminate the possibility of check fraud.  The first defense is the use of “positive pay”, which takes security one step further since counterfeiters have access to the same technology and secure check stock as everyone else.

What is positive pay?  Positive pay is a service through which your bank will verify each check presented against your account with a file you provide usually containing the check date, number, and amount.  The bank will hold payment on any item that does not match the data in the positive pay file while the check’s validity is verified with you.  If the check is not valid, it is returned unpaid by your bank.

Every employer can aggressively defend against check fraud by encouraging and promoting direct deposit and mandating it in the states where allowed.  Other relatively simple deterrents to check fraud include the use of fonts specifically designed for check printing and, in particular, for printing the amount for which the check is payable.

Implement internal controls.  Protect your company against check fraud by using these sound internal control procedures:

1. Blank checks.  Check stock should be stored under lock and key, and limit the number of people who have access to checks.
2. Security features on check stock.  Make sure checks have security features such as watermarks and void pantographs to thwart counterfeiting and alteration.
3. Keep track of check stock.  Verify that all checks ordered have been received. If a new order has not been received in a timely manner, notify your check supplier and financial institution.
4. Canceled checks.  Canceled check should be kept in a secure location.  Destroy these checks using a cross-cut shredder at the end of the record retention time frame.
5. Stale dated checks.  According to the Uniform Commercial Code, a stale dated check is six months past the date it was written.
6. Division of responsibility among employees.  Have separate functionalities for employees who create checks and those who reconcile bank accounts.
7. Background checks.  Conduct these on all employees who handle checks.
8. Limit the number of check signers.  This will lower your risk of fraud.
9. Large dollar amounts.  Require more than one signature for large-dollar checks.
10. Reconciliation of bank statements.  Implement a company requirement that all bank statements must be reconciled within 30 days or you may be liable for fraudulent checks.
11. Positive pay.  The employer provides pertinent information about every check, including the amount, check number, date, and bank information.  This information is verified when transmitted to the bank before the check is paid.  Some banks now also require the name of the check recipient.
12. Random audits for payroll checks.  Conduct unannounced payoffs where auditors hand out paychecks to employees instead of the regular distribution procedure. Each employee must provide photo identification before receiving a check.  This could reveal phantom employees.

Protect yourself.  On an individual level, you can take several steps to protect yourself against heck fraud:

1. Do not mail checks from your home mailbox.  Use the U.S. Postal Service collection boxes or go to the post office.  Thieves watch for mailboxes where the raised flag indicates outgoing mail.  They take your check and launder it to change the amount and recipient.  Now they have your signature, too.
2. Do not have your Social Security number or Driver’s License number printed on your checks.  This will give a thief enough information to apply for a credit card or bank account in your name.
3. Reconcile bank statements right away.  This is to identify if you have been a victim of fraud.  This increases the possibility of recovery.
4. Guard your checkbook.  Report lost or stolen checks immediately.
5. Verify that all check orders have been received.  If a new order has not been received in a timely fashion, notify your financial institution.
6. Use dark ink when writing checks.  Do not use an erasable pen.
7. Do not make checks payable to “cash”.  If lost, it can be cashed to anybody.
8. Do not endorse checks ahead of time.  Only endorse checks when you are ready to deposit or cash them.
9. Use a shredder.  Shred canceled checks, unused deposit slips, old bank statements, and ATM receipts using a cross-cut shredder.
10. Do not throw financial information in the trash unless it is shredded.  Once your trash is at the curb, it is fair game for thieves.

By educating yourself on the dangers of check fraud and taking a few precautions, you significantly reduce your chances of being victimized by thieves who perpetrate check fraud schemes.

Check fraud information on the Internet.  The following websites contain valuable information about check fraud:

1. www.ckfraud.org/ckfraud.html:  Provides a good overview of the topic.
2. www.occ.treas.gov/chckfrd/chckfrd.pdf:  A booklet providing tips for avoiding check fraud.
3. www.bbb.org/alerts/article.asp?ID=352:  Information from the Better Business Bureau.
4. http://retailindustry.about.com:  Retail industry tips for preventing check fraud.
5. http://crimeprevention.rutgers.edu/crime/checkfraud/checkfraud.htm: Information on protecting crimes against businesses.
6. www.fraud.org/: Tips to avoid telemarketing and internet fraud.

1. www.usps.gov/websites/depart/inspect:  Tampering with U.S. mail is a crime.
2. www.consumer.gov/idtheft/:  Tips from the Federal Trade Commission on dealing with identity theft.