It requires little more than a personal computer, scanner and software to commit check fraud. In an Association of Financial Professionals survey, 71% of organizations surveyed experienced attempted or actual fraud in 2010. Per the survey, check fraud was the most prevalent. Elevating its frequency is the fact that employees and parties external to organizations perpetrate check fraud. It is projected that $5 billion or more in check fraud occurs yearly in the United States and only 2% of those committing such crimes receive prison sentences. Maybe some crimes do pay when compared to the punishment?
Common types of check fraud include:
- Counterfeiting – fabricating or duplicating a company’s checks
- Alteration – modifying the amount and/or payee on legitimately issued checks
- Forgery – stealing and then endorsing checks
For dealerships, the use of checks remains highly desirable, resulting in the industry being overly susceptible to check fraud. However, technology does provide several means to combat such fraud. Driven by check-fraud losses, dealerships can guard against this type of fraud by subscribing to a service called "positive pay." Positive pay is an automated detection tool with which banks require business customers to provide electronic check information off their check disbursement system (i.e., payee name, date, check number and amount) on issued checks. The file is typically submitted daily to the bank. All four components of the check (or three if the bank doesn’t offer the payee match option or the business chooses not to purchase the enhanced service) extracted from the customer’s file must match exactly to the check presented for payment or it will not be processed. For suspended checks, the bank transmits the information to a designated individual at the dealership to review the transaction(s) and instruct the bank to pay or return the check. This has become the most-effective means to deter check fraud and save businesses from theft loss. Service fees do apply at most banks for this service.
Organizations that elect to forgo this service may be liable for losses from check fraud if unable to demonstrate “ordinary care” was applied in protecting their organization from such fraud. The Uniform Commercial Code defines "ordinary care" as applying "reasonable commercial standards" exhibited in the respective industry or business to protect against the fraud (i.e., stated otherwise, the care that a reasonable person would exercise under the circumstances; the standard for determining legal duty). Currently, only a small percentage of businesses have subscribed to the service due to implementation costs (e.g., software, check expenses) and ongoing service fees.
In lieu of or in conjunction with positive pay, dealerships can reduce susceptibility to check fraud through the implementation of sound internal controls. Such controls include logging and locking check inventory, diligently reviewing bank statements activity, limiting the number of individuals who have access to generate checks and reviewing cancelled checks and the disbursement and payroll registers for suspicious transactions.
Knowing your obligations and responsibilities to ensure effective monitoring practices are in place to mitigate check-fraud can greatly reduce a company’s exposure to loss.
For more information, please contact Donald R. Owens, Director, Internal Audit and Risk Advisory Services, at (614) 586-7257.
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