Rise in Check Fraud Puts Banks on Guard
UNITED STATES commercial banks lost at least $568 million from fraudulent checking activity in 1991.
That worries bankers. In the last few years the falling costs and growing sophistication of desktop publishing equipment, including computers, laser printers, and document scanners, has made check fraud easier.
Banks must build stronger defenses against such fraud, says Robert McDonald, executive vice president of Riggs National Bank in Washington, D.C. Some are doing so.
Sean Hastings, a document-security expert with Standard Register Company's Wellesley, Mass., office, describes the check-fraud danger using car-theft analogy: "The key is in the ignition and the car is left running and ready to go." Bank losses probably much higher
"Our exposure is a lot higher than our experience," says Mr. McDonald, who headed a recent study of bank fraud by the American Bankers Association. The $568 million figure cited in the study, he says, is "very conservatively low" since "many of the respondents didn't even have a mechanism for tracking check-fraud losses."
In addition to high-tech manipulation of documents, the fraud also includes check "kiting," writing a check against nonexistent funds for fraudulent purposes, or using illegally obtained checks to make purchases.
The study calls for banks to take several steps:
* Communicate closely with each other and with regulators about the scope and nature of problems and preventive actions taken.
* Work with equipment vendors to develop machines that can detect substandard checks. Federal laws force banks to clear checks quickly so money gets promptly into recipients accounts. But this makes fraud-detection more difficult.
* Work with standards' committees on security features for checks. Many checks can be fairly easily forged by scanning them into a computer, altering them, and printing them out on a laser printer (complete with the magnetic ink used on checks as a protection device). Sophisticated checks make alteration difficult
More-sophisticated checks, such as those made by Standard Register, make alteration more difficult.
A few of the tricks: complex printed patterns and microscopic words that cannot be matched by copier machines or laser printers; chemically treated paper that causes the word "void" to appear on the check if ink-eradicating chemicals are used; background designs that, when photocopied, reveal the word "void" or "copy."
Convincing customers to switch to checks with advanced security features could be difficult, McDonald says. But the cause will likely get a boost from a recent court decision involving the bank he works for. Banks and clients share responsibility
Riggs National Bank was sued for failing to notice bad checks written against one of its corporate account-holders. The company's insurer sued Riggs to try to recover the losses, but Riggs won the case last year in part because the corporation wrote so many checks each month. Thus banks and their clients share responsibility for preventing fraud.
Mr. Hastings says that businesses are a more popular target than individuals, since "there's more to be gained in a shorter period of time."
Some companies give their banks daily lists of check numbers and amounts, so the bank will only honor those checks. Other companies establish a maximum limit with the bank on each of its accounts, based on what the account is used for and the historical value of checks written in that account.