Check fraud is one of the largest challenges facing businesses and financial institutions today. With the advancement of computer technology, it is increasingly easy for criminals, either independently or in organized gangs, to manipulate checks in such a way as to deceive innocent victims expecting value in exchange for their money.

It is widely believed that businesses are the primary targets of check fraud professionals, especially by organized rings of criminals. As far as counterfeiting and alteration, payroll checks appear to be a favorite although all forms of business checks are targets from time to time and all forms of fraud techniques are practiced as well.

Check Fraud

A significant amount of check fraud is due to counterfeiting through desktop publishing and copying to create or duplicate an actual financial document, as well as chemical alteration, which consists of removing some or all of the information and manipulating it to the benefit of the criminal. Victims include financial institutions, businesses who accept and issue checks, and the consumer.

Forgery

For a business, forgery typically takes place when an employee issues a check without proper authorization. Criminals will also steal a check, endorse it and present for payment at a retail location or at the bank teller window, probably using bogus personal identification.

Counterfeiting and Alteration 

Counterfeiting can either mean wholly fabricating a check using readily available desktop publishing equipment consisting of a personal computer, scanner, sophisticated software and high-grade laser printer or simply duplicating a check with advanced color photocopiers.

Alteration primarily refers to using chemicals and solvents such as acetone, brake fluid and bleach to remove or modify handwriting and information on the check. When performed on specific locations on the check such as the payee's name or amount, it is called-spot alteration. When an attempt to erase information from the entire check is made, it is called-check washing.

It has been estimated that the annual losses due to check fraud are in the billions of dollars and continue to grow steadily as criminals continue to seek ways to earn a living by defrauding others.

Uniform Commercial Code - Who is responsible?

It is clear now that businesses must play a role in ensuring their checks are secure. Recently revised UCC regulations add the onus of shared responsibility for check fraud on the business. For example, if a bank offers their customer check stock that contain security features that could have prevented a specific case of fraud, and the customer does not use it, the bank can claim that the customer was negligent and therefore at least partially liable for the fraud loss.

A combination of precautions that a business might undertake could greatly reduce the likelihood of check fraud. Poor internal controls may lead to collusion between employees or third parties who copy, steal, alter and forge checks. Make sure you know who you are hiring to handle your money. Diligent reference and background investigations on all prospective employees are important so you know that you are not hiring someone with a past record of financial abuse.

Check Fraud Prevention Tips

• Order checks and deposit slips wisely. 
• Use an established, respectable source, especially those recommended by your bank, to ensure your checks will process easily through the bank's clearing system.
• Make sure that your checks include Security Features that will help combat counterfeiting and alteration.
• Make sure you notify your check supplier (and financial institution, if necessary) if a new check order has not been received within a reasonable amount of time after you ordered them.
• Maintain adequate physical security of your checks, deposit slips, etc. Secure all reserve supplies of checks, deposit slips and other banking documents in a locked facility. Keep blank checks locked up at all times and limit the number of people with access to your checks. If your checks fall into the possession of unscrupulous employees, you could be liable for substantial losses.
• Change the locks on your facility when an employee leaves your employ.
• Never leave checks or bank records unattended in order to assist customers.
• Assign accounts payable functions to more than one person and make each one responsible for different payment areas. This division of responsibility makes it more difficult for employees to tamper with checks and payments.
• Limit the number of official signers. The fewer check signers you have, the lower your chances are of being defrauded.
• Require more than one signature on large dollar check amounts. In this way, any losses you may incur will be low denominations only.
• Immediately notify the bank of any change to your accounts payable process and personnel. You don't want former employees who may have secreted some checks from your business to retain authorization to sign them after they have left your employ.
• Separate the check writing and account reconcilement functions. Try not to have the same person who balanced the bank statement issue checks. This provides greater safeguards against an employee writing fraudulent checks and covering it up. The reconciler would be able to prevent the crime unless the employees are in collusion.
• Reconcile your account promptly and regularly-quick fraud detection increases the likelihood of recovery. Businesses and personal consumers who do not balance their accounts monthly and don't find the discrepancies until months have passed, can become liable for losses.
• Use maximum dollar amounts on accounts to limit large denomination losses by authorized or unauthorized persons.
• Set up a separate account of large dollar payments to keep fraud losses at low denomination levels.
• Request detail reports for large dollar items in order to stay better informed. Increase fraud detection opportunities to find out whether you have a corrupt employee.
• Use Positive Pay. This type of payment system records pertinent information about each check such as the amount, the check number, bank information and date, and then transmits it to the bank to be verified, before the check can be paid.