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Articles 3 and 4 of the UCC outline the responsibility
and accountability for both banks and their customers
regarding check fraud. If a company doesn’t exercise
“ordinary care” as defined by the UCC it
may be held wholly liable for check fraud losses or
it may be partially liable under the “comparative
negligence” principle.
Article 3-103 of the UCC defines “Ordinary
Care” as follows: “Ordinary
care” in the case of a person engaged
in business means the observance of reasonable commercial
standards, prevailing in the area in which the person
is located, with respect to the business in which
the person is engaged.
To minimize your company’s exposure to check
fraud you should exercise “ordinary
care” in your check printing and disbursement
operations. There are many actions that can be taken
to demonstrate responsibility and accountability and
help ensure that you’re exercising “ordinary
care”. Activities to help protection against
check fraud include:
Internal
Corporate Controls
Bank
Services
Check
Stock Security
Check
Stock Paper
Internal
Corporate Controls
While each corporation’s circumstances and operations
may differ there are controls that can be implemented
to increase security of a company’s assets and
information. These controls can minimize risk of losses
from check fraud and help to demonstrate that the
company has exercised “ordinary
care” as defined by the UCC.
Segregation of Duties
Activities should be segregated so that one individual
doesn’t have the ability to initiate and record
check activity. Separate roles for expense approval,
record keeping, check-signing and account reconciliation
should be maintained. At least two employees should
be involved in the check paying process.
Reconcile Bank Accounts
Per the UCC you may be held liable for check fraud
losses if you don’t reconcile your bank statement,
and report fraud, within 30 days of receipt of the
statement. Reconciliation is one of the best means
to identify fraudulent transactions.
Timely Report Fraud
The UCC states that to exercise ordinary care a company
must discover and report unauthorized or altered checks
within a reasonable period of time, no more than 30
days. A Company may, however, have more time to legally
report and attempt to recover losses. Check fraud
is covered by a statute of limitations and thus a
company has up to one year from the occurrence of
the transaction to discover and report a forged or
unauthorized signature, a counterfeit or an altered
check. A Company has three years to discover and report
forged endorsements. However, although the legal right
exists to attempt recovery of check fraud losses within
a one or three year time frame, liability for the
losses may be impacted by the timeliness of reporting
such losses.
Train Reconcilement Employees
Employees who perform the reconciliation process should
be trained on how to identify fraud, from an accounting
perspective as well as how to identify forged and
altered checks. When reconciling fan through the returned
checks, a counterfeit check may stand out because
it was printed on different colored check stock or
the signature and fonts on the check may appear visually
different than your authorized checks.
Timely Reporting of Fraud
The sooner you report fraud the greater the likelihood
of recovery of losses and as per the UCC, if you report
within 30 days, you improve your defense against being
held liable for certain check fraud losses.
Written Policy and Procedure
A formal written policy and procedure should be created
for each checking application (A/P, Payroll, etc.).
The process of creating a policy and procedure will
help to identify potential risk areas in the process.
Some of the policy/restrictions that should be established
are on establishing new accounts, check signers, dollar
authorization limits, ordering and storing check stock.
Periodic audits
A party independent of the process should perform
periodic audits of the check process (A/P, Payroll,
etc.).
Securely Store Facsimile
Signatures, Records, Documents
Signature plates or digital signature files should
be securely stored with limited access. Bank account
information, records and documentation should also
be securely stored with limited access to such records.
Require Multiple Signatures
for Large Dollar Checks
A threshold dollar amount should be established that
requires two signers for all checks that meet or exceed
that threshold. Requiring two signatures helps to
reduce potential fraud by insiders and makes it more
difficult for outsiders. Communicating this requirement
to your bank can also help guard against fraud and
the liability for losses.
Centralize Disbursement Operations
Headquarters location controls disbursement account,
check processing and accounts reconciliation. With
fewer individuals involved in the disbursement process,
the lower the likelihood of unauthorized disbursements.
Idle cash will also be reduced if excess cash is concentrated
from local banks into centralized account(s).
Know Your Employees
It is important that you know the background of the
employees who are responsible for cash related activities.
Reference checking should be performed before hiring
and for selected positions further background checks
may be warranted.
Enforce Mandatory Vacation
Policy
Employees who never take vacations are more likely
to be able to cover up any wrong doings. This is especially
true in smaller operations where proper segregation
of duties may not exist. Forcing an employee to take
a vacation and having another employee perform the
work may uncover fraudulent activities or may uncover
lack of controls or operational inefficiencies.
Bank
Services
Banks can also be held liable for check fraud losses
and in response they offer a variety of services that
can reduce the exposure and liability to check fraud
losses. Partnering with your bank is an excellent
strategy to deterring check fraud.
Positive Pay
The premier bank provided service to combat check
fraud. The bank matches check serial numbers and dollar
amounts against a company provided list of checks
issued and the bank only pays those checks that match.
Electronic Payments
Moving paper based payments to electronic form is
a great way to reduce check fraud. By reducing the
distribution of checks, which contain all the information
(account number, ABA number, etc.) a criminal needs
to create fraudulent checks, you reduce the likelihood
that this information will fall into the wrong hands.
Automated Clearing House (ACH) electronic payments
work very well for repetitive payee applications such
as payroll or T&E (employees) and accounts payable
(vendors ). Working with your bank you can restrict
ACH debit activity on your accounts. Implementing
a policy with your bank to use Fed wires for large
dollar amount payments, can also be an effective way
to reduce exposure to check fraud. Another good procedure
is to open a separate account to only handle incoming
wire transfers. If you accept wires as a form of payment,
especially if you require advance payment, your bank
account information can easily fall into the hands
of criminals. By restricting the account to only incoming
wires, and including a sweep service and no check
writing authority, you can reduce your potential to
check fraud while maximize your operational needs.
Daily Reporting Software
Any opportunity too obtain account information sooner
and in a more comprehensive and analytical format
should be taken advantage of. Using either bank provided
software or the internet, many banks today provide
access to daily account activity. Daily review, and
possibly reconcilement, of accounts greatly improves
your odds of identifying fraudulent transactions.
Account Reconciliation
With either a partial (bank provides list of checks
paid) or full (bank matches checks paid to company
provided list of checks issued) reconciliation a company
can expedite the reconciliation process and potentially
spot fraudulent items sooner.
Maximum Dollar Limits
This is an easy, and no cost, method to reduce your
potential for check fraud. Working with your bank
you can establish a maximum dollar limit for checks
by account. For accounts used with non-check disbursement
you can establish a zero dollar limit on checks thus
reducing your exposure to unauthorized payments.
Multiple Accounts
Your company should maintain separate accounts for
at least each application (A/P, Payroll, etc.) for
each legal entity. While sensible, it is important
to restrict payment types to specific accounts because
each disbursement application can contain varying
types of payments. You can match your company’s
policy to your bank’s services to provide more
robust fraud protection measures. If you limit payroll
checks to a certain dollar limit then you can match
the banks maximum dollar service with this account.
Maintaining separate accounts can help you identify
fraudulent transactions sooner. When an exceedingly
high dollar value check goes through an account with
low dollar value items (such as payroll, T&E, refunds,
etc) it will be much easier to identify than in an
account with both high and low dollar value items
(A/P, claims, etc.). Also, the identity of the payee
may not be consistent with those who are normally
paid from an account (corporate payee in an individual
payee account) which can help in identifying fraudulent
payments.
Stop Payments
Stop payments allow a company to notify its bank with
instructions not to honor certain checks. They can
be especially effective if a company has suffered
a theft of pre-printed check stock.
Sweep Accounts
Idle cash balances are automatically invested in short-term
investments. The reduction in excess cash balances
leaves fewer dollars available for potential check
fraud losses.
Imaging Services
Digitally scanned images of checks can be provided
as a complement to positive pay services providing
a company with a fast and visual image of a presented
check that may be fraudulent. The visual image provides
more information than the MICR line data provided
in positive pay reports, and forgery of signatures,
alteration of payees and other types of check fraud
might be identified upon a visual inspection of the
check.
Controlled Disbursement
Is a bank service that provides same day notification
of the dollar amount of checks that will clear against
the controlled disbursement account that day. This
service helps to reduce idle cash balances and may
help to restrict fraud by providing more control over
the disbursement of funds from these accounts.
Don’t Allow Overdrafts
Based on the accounts you have established and on
your business needs, you may want to instruct your
bank to notify you of all overdrafts before they are
settled or that all overdrafts are to be returned
unpaid. You may have a very good relationship with
your bank and they may elect to “cover”
your overdrafts knowing you’re such a good customer.
However, overdrafts may be the result of a fraudulent
check.
Other
You should understand the products and services your
bank offers as well as the bank policies and procedures
for their services. It is wise to sign a bank agreement
outlining both party’s responsibilities and liabilities
in the event of check fraud. Your company should maintain
adequate and current records and documentation of
bank activity while implementing controls over opening
new accounts and making changes to accounts and services.
It is also important for your company to have a good
relationship with your banker.
Check
Stock Security
To minimize your risk to check fraud and to demonstrate “ordinary care” certain controls and security
precautions should be taken in regards to check stock
and printing, including:
Secure Unused Check Stock
Whether pre-printed or blank check stock is used all
unused check stock should be securely stored with
access limited to authorized employees only. Control
of the check stock should reside with someone other
than an authorized check signer.
Conduct Periodic Audits of
Check Stock
Periodic audits by a party independent of the check
printing process helps to maintain control over the
stock and acts as a deterrent to insider fraud.
Use Reputable Check Printing
Company
When ordering check stock you should use a reputable
check printing company. It is important to use quality
check stock with current security features and to
ensure that distribution of your check stock is restricted
to only addresses that you provide.
Reorder Policy
A reorder policy should be implemented that authorizes
certain employees to reorder check stock and to work
with your supplier so that restrictions are placed
on additions or changes to your “ship to addresses”.
Also, employees should be instructed on procedure
if a reorder is late in arriving or if the reorder
never arrives.
Use Sequential Check Numbering
Whether pre-printed or blank check stock is used a
sequential numbering system should be used for all
checking accounts. Maintaining a standard and sequential
numbering system (can also be alphanumeric) can help
to identify fraudulent checks and aids in the reconciliation
process.
Mutilate Voided Checks
Any checks that are voided should be clearly marked
or mutilated so that they become non-negotiable and
all voided checks should be accounted for in the reconcilement
process.
Avoid Multiple Check Stocks
Use only one check stock for an application such as
A/P, using multiple check stocks for the application
makes detection of fraudulent items harder. The inconsistent
use of check stock for an application makes it much
easier for a criminal to commit check fraud against
your account. You can maintain separate check stocks
for different applications, such as A/P and payroll,
but the use of check stock should be consistent.
Never Use a Rubber Signature
Stamp
Using rubber signature stamps exposes your company
to check fraud because it is much easier to have a
stamp made of a signature than it is to either manually
forge or scan and print on a check an image of a signature.
The use of a stamp signature makes detection of fraudulent
items that much harder because of the inconsistent
application of the stamp to the check.
Do not Publish Executive
Signatures
Companies should be careful not to publish the signatures
of executives; especially those with check signing
authority, in annual or published reports. You greatly
ease the work needed for a criminal by handing them
executive signatures through public records or publications.
Check
Stock Paper
Utilizing high quality secure check stock with anti-fraud
features can reduce the likelihood of incurring altered
check fraud and can reduce or eliminate your liability
if check fraud should occur. In response to the growing
check fraud problem, the check printing industry has
developed security features for checks. The following
are some common security features offered on security
check stock:
Void Pantographs
A design that is not clearly visible until a copy
has been made when such words as “VOID”
or “COPY” become visible making the copy
non-negotiable.
Watermarks
Watermarks are subtle designs of a logo or other image.
Designed to foil copiers and scanners that operate
by imaging at right angles (90 degrees), watermarks
are viewed by holding a check at a 45-degree angle.
Microprinting
A word or a phrase printed on the check so small that
to the eye it appears as a solid line. When magnified
or viewed closely the word or phrase will become apparent.
Copiers and scanners can’t reproduce at this
level of detail so microprinting when copied will
appear as a solid line.
Laid Lines
Unevenly spaced lines that appear on the back of a
check and are part of the check paper. This design
makes it difficult to cut and paste information such
as payee name and dollar amount without detection.
Reactive Safety Paper
Combats erasure and chemical alteration by “bleeding” when a forger tries to erase or chemically alter information
on the check leaving the check discolored.
Special Inks
Highly reactive inks that discolor the ink comes into
contact with erasure chemical solvents.
Color Prismatic Printing
A multi-color pantograph background that is extremely
difficult to duplicate when using a color copier or
scanner.
Special Borders
Borders of the check which have intricate designs
that, if copied, become distorted images.
Warning Bands
Describe the security features present on a check.
These bands alert bank tellers or store clerks to
inspect the check before accepting it. They may also
act as deterrence to criminals.
Thermochromic Inks
A special, colored, ink that is sensitive to human
touch and when activated.
DoubleCheck
Using DoubleCheck
software allows companies of any size to easily and
affordably integrate their accounting software check
files with their bank's required positive pay formats.
No longer will your company be burdened with excessive
integration costs to implement positive pay or to
make changes to your bank information.
DoubleCheck
comes with a library of bank formats that can be selected
so that your implementation process is eased. If your
bank is not listed, it may be available on our website
for download. If not, we will build it for you. The
wizard guides you through the integration process
and intelligently maps your companies check file to
the bank's positive pay format.
Whenever you need to add or change bank accounts or
accounting software you can count on DoubleCheck to
provide the necessary flexibility to handle those
changes. DoubleCheck breaks down the barriers to adopting
positive pay services that formerly existed.
DoubleCheck software eliminates or reduces:
Complex integration
High cost of implementation
IS resources or outside consultants
Custom programming
Check fraud losses
Allowing your company to easily:
Adopt positive pay services
Use for most or all checking accounts
Add bank accounts
Change bank account information
