SUSHIL TULI
Staff training important
Attempted check fraud at U.S. banks rose to more than $5.5 billion in 2003, up from $4.3 billion in 2001, according to the latest American Bankers Association Deposit Account Fraud Survey Report. While all of the nation’s banks became Check 21-compliant in October when federal guidelines for electronic check processing kicked in, some Massachusetts banks are taking a few extra steps to thwart check fraud.
The ABA said attempted check fraud continued to rise, but actual dollar losses in 2003 remained relatively stable at $677 million, down slightly from the $698 million that banks lost two years earlier.
“While dollar losses decreased, the number of check-fraud cases increased 3 percent to 616,469 cases in 2003,” according to the ABA report. “However, average losses per case went down from $1,163 in 2001 to $1,098 in 2003.”
According to some bankers at both community and regional institutions in the Bay State, check-fraud activity locally has increased. Sushil Tuli, president and chief executive officer of Leader Bank in Arlington, said he has seen a rise in fraudulent checks. The fraudulent check amounts have ranged from a few hundred dollars to a few thousand, Tuli said.
While he has not seen much in the way of forged checks, Tuli said the bank has seen instances where a check has been stolen from a mailbox and a thief will try to open a bank account with that information.
Electronic fund transfers have also been sources of fraud, Tuli said. A person may tell a company to withdraw funds from their account electronically, knowing there are insufficient funds to do so. When the bank tries to contact the bank customer, Tuli said they cannot locate them.
According to the ABA, the most common type of check fraud in 2003 was forgery, with about one-third of fraud losses attributed to forged signatures and endorsements. Insufficient funds or bounced checks that customers never pay ranked second and counterfeit checks ranked third.
At Boston-based Eastern Bank, check fraud has also risen slightly. Eastern Bank spokesman Joseph Bartolotta said the bank is responding to fraud and reminding customers of best practices, like shredding banks statements.
At banks, various fraud-prevention methods are in place. The ABA survey said the use of account-screening software during account openings ranked as the most effective fraud-prevention method by the survey’s participants. Using credit bureau scores at account openings, not cashing checks for non-customers and implementing fraud-management systems were also popular methods of fraud prevention.
The Massachusetts Bankers Association has taken steps to curb check fraud by introducing a new check-cashing thumbprint program to reduce the significant amount of fraudulent checks passed in Massachusetts and elsewhere.
In each branch where it is used, the thumbprint program requires consumers who are non-account-holder check cashers to voluntarily leave an inkless print on the face of the check.
Without the thumbprint, bank tellers will offer to open an account or refuse to cash the check.
“The thumbprint program is designed for non-customers” with whom bank staffers are unfamiliar, said Daniel J. Forte, president of the MBA.
With the program in place, Forte said it creates more check-cashing locations for consumers.
The program began in the second quarter of 2004 and the MBA reports that between 12 and 15 banks have implemented it successfully. The program already exists in 29 other states.
“We had been looking at it for a number of years make sure it worked in other states” before implementing it in Massachusetts, Forte said.
Participating financial institutions are not maintaining files of thumbprints. The prints are made on the checks, which are processed like all other checks. The thumbprint will be used only in those cases where a fraud is evident. The FBI and the Massachusetts State Police have endorsed the program.
A Positive Approach
According to the MBA, a Massachusetts man was recently arrested after collecting money for a fake charity. One of the contributors gave him a check, which he later cashed after providing his thumbprint. Law enforcement officials were able to make the connection to the man and the scheme through the print.
“Of course it is impossible to determine how many fraud cases were prevented because the individuals refused to give their prints,” said Forte. “But thus far the feedback from bankers has been good and check-cashing customers have accepted it.”
The MBA said Check 21, which paves the way for banks to destroy physical checks in favor of retaining electronic images of processed checks, will not immediately impact the thumbprint program. But even as Check 21 becomes fully implemented, the prints will be useable by law enforcement before the checks are destroyed. The thumbprint is considered to be most effective when acting as a deterrent to fraudsters.
Tuli said Leader Bank provides constant training to its employees about check fraud. The bank does not allow third-party endorsed checks and employees are taught to look for suspicious activity.
“Banks need to be careful to limit their losses,” Tuli said.
The most common fraud-prevention practice at banks of all sizes is employee training, followed by new account screening software and signature verification for large-dollar items, according to the ABA survey.
Bartolotta said Eastern Bank also advises its corporate customers about check fraud and offers a program called Positive Pay.
In programs like Positive Pay, a company sends an electronic list of all its written checks to its bank. When a check comes in for payment, the bank electronically compares the check with the electronic list. The check is paid if it matches one on the list. However, if the check does not match, the bank will investigate the check’s authenticity. According to information from the Federal Reserve Bank, which supports Positive Pay, banks approve checks for payment based on whether they are consistent with the usual patterns and practices of the bank customer.
“This has been huge, it is a great service,” Bartolotta said. “Crooks are becoming more sophisticated, but so are the banks.”
Eastern also encourages its corporate customers to stay away from checks with stamped signatures and to assure there is dual control of payment authorization in the company.
Kevin Handly, a bank attorney and partner at Boston-based Goulston & Storrs, advises large corporations to meet with their bank to discuss check fraud.
“Good advice is to meet with your banker to discuss the [check fraud] issue and mechanisms to prevent check fraud,” Handly said. “The quicker it is detected, the smaller the losses.”
Handly said companies should focus on three things to prevent check fraud: assuring that more than one person is cutting checks and checking the company’s books; using banks with programs like Positive Pay; and reviewing company insurance to evaluate the costs and benefits of covering check fraud.
According to the ABA survey, regional banks tended to spend approximately $1 million or more in check fraud operating costs (not including losses). Community banks tended to spend less than $5,000.
“You know you are going to have to invest time and money into various fraud-prevention programs,” said Bartolotta.
Tuli said legislation like Check 21 will help prevent fraud, but said check fraud is something that simply is a cost of doing business and won’t go away entirely.
“People who are going to commit fraud, they are always going to find ways to do it,” Tuli said.
Jennifer Jope may be reached at jjope@thewarrengroup.com.
