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By James “Rick” Youngblood, CFE
Check counterfeiting has become the number one problem facing financial institutions today. For an investment of only $5,000 or so, an individual or a group of people can become gainfully employed in the counterfeit check business. The initial $5,000 investment will purchase a quality computer, a color printer, a scanner, check paper stock, magnetic ink and the necessary software to print a number of quality checks. All the budding entrepreneurs require then is the necessary MICR Line information, containing the account number and the bank routing number.
Making the business of check counterfeiting even easier, there are very few standards that govern the appearance of a check. Proper MICR Line formatting and the endorsement block on the reverse of the check are the only compliance standards necessary to make the document valid. Blank check stock can be purchased, already properly formatted and requiring only a payee name, a dollar amount, a company’s (or individual’s) name and logo and the MICR Line information. The various software programs that are available will provide sequential check numbering.
As the threat of check counterfeiting continues to grow, business owners need to understand some of the cost savings and prevention measures that are available. Today’s checks are completely different from the checks of yesteryear. Check stock can be purchased with numerous safety features, from watermarks to void pantagraphs to holograms, etc. As each feature is added to the check stock, however, the overall price of the checks increases; and from a security and investment standpoint, the increased cost of these check security measurements does not help deter check counterfeiting. If a company’s check stock is supposedly copy or scan proof, the counterfeiter will simply develop an item that is similar to the original. The company’s name, logo and address can be placed on the document via computer check software, creating a completely new item. Any safety feature wording on the original item will be omitted from the counterfeit, or the counterfeiter will use paper stock containing the desired safety features. Remember, the only information a counterfeiter needs to produce a successful counterfeit check is the proper MICR Line information. Banks don’t know or care what each and every separate business’s check face looks like; they only care about proper account and routing numbers.
So, what does this all mean to the businessman who wants to avoid losing money to a counterfeit check artist? It means that although check stock can be purchased with a large variety of copying and scanning safety features, the businessman’s time and money would be better spent on security awareness and proper account control rather than in expensive check stock.
One common problem area is that of authorized signatures. A large majority of businesses have developed arrangements with their respective financial institutions to pay their business checks over an automatic signature. This type of relationship is helpful in that the account signers do not have to sign large numbers of checks by hand each and every day. The authorized signature can even be computer generated, providing a savings in both time and effort. The problem with this system is that the automatic signature can be easily scanned and placed on the face of a newly counterfeited check. If the signature is scanned from the original item and is the same quality, a true and accurate signature can be placed on the face of a counterfeited check. If the bank pays over a good signature, no forgery has taken place.
To help guard against the possibly of such loss through check counterfeiting, hand signed signatures should be required on each and every business check. If the volume of checks is too large, the business should consider implementing a direct deposit type system. Direct deposit not only decreases the number of checks to be signed, it places fewer company checks in circulation throughout the banking and check cashing system. Each check issued by a business, once presented for encashment or deposit, is seen or handled by a number of people prior to being returned in the account statement. The larger the number of individuals who handle the check, and the larger the number of checks in circulation, the larger the potential for counterfeiting.
The information needed to counterfeit a check can also be obtained from sources other than a check issued by a business. Businesses receive customer checks for the purchase of items sold or services offered. When these checks are processed for payment, they are often stamped “For Deposit Only” with the business’s name and account number. The checks are eventually returned to the customer with his bank statement. A dishonest customer now has the information necessary to counterfeit the organization’s checks. On the reverse of the canceled check will be the business’s account number, the depository bank’s name and the routing number. This will fulfill the requirements for the MICR Line information.
A business can protect against this scenario by maintaining separate operating accounts. Any business operation or payroll checking accounts should be different from the depository accounts. The organization’s depository account should be set up so that no checks can be written against it nor any bank counter withdrawals made. The necessary transfer of funds can be arranged through your financial institution to cover the checks written.
Once a counterfeiter has the MICR Line information, the only other important information he needs is the current sequence of check numbers. This information is only needed though if the organization has not made arrangements with its financial institution to refuse payment on checks that are out of sequence. Such a system is known as a positive pay arrangement. A positive pay system can be set up to run either on-line or through an end-of-the-day transmission. These systems track current check number sequences and can be tailored around set dollar amounts and repetitive dollar amounts. Multiple check numbers can also be detected via positive pay. This type of system provides a benefit to both the individual organization and the respective financial institution.
What is the bottom line? Businesses that want to continue operating without the headache of counterfeit checks need to become aware of the many threats to their financial stability posed by counterfeiters and to develop the appropriate prevention measures to counter the threat.
James “Rick” Youngblood, CFE, is President of JRY & Associates, an organizational security consulting firm.
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