Copyright held by The John Cooke Fraud Report. Reprint rights are granted with attribution to The John Cooke Fraud Report with a link to this website.
by L. Burke Files
Check fraud and counterfeiting have become the crimes of the 1990s. The US. Justice Department estimates that $10 billion worth of bad checks are passed every year.
Because there is no single standard—and because they can be printed in many different ways—checks are much easier to copy than credit cards. Despite the fact that many large companies attempt to deter some of the fraud they face by printing their own checks with the aid of common technology, payroll check fraud is still rampant. In fact, one Los Angeles gang recently roamed the nation, easily cashing counterfeit payroll checks to the tune of nearly $25 million!
It is intriguing how a criminal mind can slowly and methodically use stealth, guile and technology in order to overcome individual awareness and to thwart those procedures and devices that are suppose to stop the intended crime. Checking should be different, but it isn’t. In either commercial or private hands, modern technology can produce documents that compare favorably with those produced by bankers and check printers. Criminals have learned to use this modern technology to produce reliable and passable documents.
One of the key factors in check fraud or counterfeiting is the person who accepts the check: that is the retail clerks, the bank tellers or the unsuspecting public. Of these three, it would seem that bank tellers and retail clerks would know how to identify a counterfeit check…but sadly, most have not been taught to do so. More than $2 billion worth of counterfeit checks was passed in 1996; and the vast majority of these were passed on clerks or tellers. These employees, who are usually at the lower end of the wage scale, have little or no training in detecting the differences between counterfeit and valid checks.
Attempts to alleviate the problem can be frustrating. In one case, all of the Chambers of Commerce in the Phoenix Metropolitan area were offered a free seminar. Attendees would be taught how to spot counterfeit checks, travelers checks, and credit cards. Surprisingly, none of the Chambers sent anyone to the seminar; however, several did call with membership offers.
In order to understand checks and counterfeiting, it is necessary to know what a check is, including its normal life cycle. A check is a written order—normally using a pre-printed form—evidencing an amount due from the remitter to the payee and directing the remitter’s bank to pay the payee. It is a simple document and it is a simple concept.
There are several basic parts of a check. The remitter is the entity issuing the check. The payee is the entity in whose name the check is issued. The amount is the dollar amount the check was issued for, set forth both numerically and alphabetically. The signature is the unique authorized signature of the remitter. The institution is the bank that is directed to pay the payee for the remitter. The MICR printing is the funny block printing at the bottom of a check that contains information about the institution, check number and account of the remitter. Everything is printed on core stock, also known as blank check stock.
Business checks and personal checks are written by private parties for use in business or general commerce. Certified checks are either business or personal checks that have been certified with “good funds” by the institution the check is drawn against. These “certified” funds are sequestered in that business or personal checking account. Certified checks are not used much any more. Money orders and cashier’s checks are checks that are by and between the issuing bank and the payee. The remitter has paid the bank to issue the check to the payee on behalf of the remitter. Money orders are for less than $400.00 (in most cases) and do not require either the remitter or payee to be filled in at the time of purchase from the bank. A cashier’s check can be for any amount (usually more than $400.00) and both the remitter and the payee must be filled in at the time of purchase.
When an account is opened, checks are ordered from a check printer by the bank. The account owner then uses those checks in transactions. Most checks are deposited in the payee’s bank. This bank then sends the check through the Federal Reserve Bank Check Settlement process. The depositor’s bank is credited with the funds. The check is then sent to the remitter’s bank and his account is debited for the amount of the check. The time difference between crediting the payee’s account and debiting the remitter’s account is the float. Check settlement and processing goes on 24 hours a day all across the country. Hundreds of millions of checks are processed every day. The checks are physically transported by vehicle and aircraft all across the country. Given all of the above, it is truly amazing that the system works as well as it does. One thing this process can not do is detect counterfeit checks. Such detection is usually done by the payee, before the check gets into the system, or by the (alleged) remitter, after the check has already been through the system.
Before the advent of mechanical readers and computers, all checks were produced by hand and had the bank number, check number and account number printed on them: checks contained no mechanically readable features. As mechanical readers came into common use (for speed and efficiency), so did one of the first modern check scams. As the new system was phased in, the forms had both the MICR characters at the bottom of the deposit slip and a location to write in the account number by hand. A few sneaky criminals discovered that they could place deposit slips printed with their own MICR numbers in bank lobbies in place of the blank deposit slips. Other customers would unknowingly use these preprinted forms, fill in their account numbers by hand and present their deposits to the teller. The teller would shove the slip into the mechanical reader and the sums would be deposited into the criminals’ accounts because the MICR reader would read the MICR numbers, not the handwritten numbers on the deposit slip. At the end of the day the criminals would withdraw as much money as they could from their accounts, which were swollen with misdirected deposits. Today the typical check criminal has to work a little harder, but not much.
There are four basic types of check fraud.
1) The bad check. This is a check written by the checking account owner against an insufficient balance. This is the most common form of fraud. Almost every checking account holder has had at least one—either intentionally or by mistake. For the vendor of products or services, this is the most common form of loss. In a low volume/high dollar transaction (such as a car purchase), funds can be verified with the bank during normal business hours or through an automated telephone balance inquiry system after the bank is closed. In a low dollar/high volume operation (like a grocery store), the vendor can purchase insurance through any of a number of check verification or guarantee companies (although it is always more cost effective to train the clerks than to transfer the risk through the purchase of insurance).
The low volume/high dollar business should never find itself stuck with a bad check. With automated account information available over the telephone 24 hours a day, obtaining proper identification of the remitter and making a physical inspection of the check will catch 99.99% of all bad checks. But this does not take into account the vagaries of human nature. People are social creatures—they like to do business with people they like. Hence, the more the clerk likes a customer and the more comfortable the clerk feels with the customer, the more vigilant the clerk should be about verifying the check. Criminals are masterful students of human nature; they know how to gain the clerk’s confidence and make him let down his barriers so that the criminals can move in for a financial score. The second problem is insurance. What was intended as a safeguard has had unintended consequences. It is a fact that those tellers who have “check insurance” through one of the check insurance/ verification companies accept more suspect checks than those who don’t have the insurance. The attitude seems to be “who cares. If the check is bad, the insurance company will deal with it; that’s what they get paid for anyway.” Insurance has the same effect in the checking world that it has in other sectors of risk management.
2) The stolen check. Checks on current accounts are stolen from purses or mailboxes, and old, discarded checks are retrieved from the garbage. Checks stolen from a person though wallet or mail theft are used in a “hot-and-heavy” fashion. These checks are usually written for items that are easily sold for high value. Popular items such as VCRs, TVs jewelry and automobiles are commonly purchased with stolen checks. It is also not unusual for identification to be stolen in conjunction with checks. A driver’s license, credit card or other item can aid the criminal in passing stolen checks. Checks lifted from the garbage are usually on long dead accounts. These “garbage” checks are usually used slowly and just outside of the remitter’s immediate area. The checks are used in the same state, but at a location that is one or two hours away. Items purchased with these checks are usually chosen for easy resale but they rarely cost more than $250.00. Most checks obtained from the garbage are business checks, with only the business name and address. In this case it is easy for the criminal to purchase business cards in the same name and begin circulating these checks without needing fake identification.
One of the most recent scams involves a ring of Nigerians who were employed in hospitals. The Nigerians gained employment as both security guards and maintenance workers—positions that have broad access authority to even the most secure areas of a hospital. When visiting a doctor’s office in the hospital to clean or check on the offices, the Nigerians would peel open the corners of envelopes containing checking account information (either in mail going out to pay bills or on checking statements that were coming in). They viewed the mail through the open corners with an arthroscope and recorded the account information. Counterfeit checks were then created and passed at the alarming rate of ten or more checks per day!
Methods for avoiding a stolen check are very similar to those for avoiding bad checks. The remitter’s identification should be reviewed; suspicion should be raised if the identification is from out of state but the check is from in-state. Another dead giveaway is failure to record information in the check register; after all, criminals don’t care how much is in the account because it isn’t their account. Passers of stolen checks are often impatient and will try to distract the person accepting the check. They will often make a fuss about ID and other formalities. The more indignant they become, the more suspicious the clerk should be.
3) The wiped check. Used checks that have already been through the banking system are taken, usually from either a mailbox or a garbage can. Wiped checks have been common for years, but they are gaining new popularity. The criminal sets up a lab to erase the check information using acids and organic solvents. Once the check has been wiped clear of the payee, the amount and sometimes even the signature, the check is dried and reissued by the criminal.
Wiped checks have certain characteristics. The paper of a wiped check is never as flat and as smooth as the original. The paper fibers absorb water and solvent during the wiping process and subtly shift positions, changing the feel of the check paper. In addition, wiped checks are usually passed as single checks; they are not in a book like normal checks. If they have been bound into a book, the binding material is usually gum, the same material used to bind cheap note pads. Sometimes, all of the pen ink is not removed or the paper has indentations caused by the pen that wrote the original check; in this case, ghost images of the original check can be seen. Many new check printers are treating their check stock to react with the wiping chemicals. The marks left on these altered checks are quite distinctive, depending upon the individual check printer. (See Pictures)
4) The counterfeit check. These checks have usually been copied or printed on a laser printer. They contain all of the account information encoded on the bottom of the checks in the MICR printing. They may or may not resemble the true account holder’s check stock. Checks used to be fairly safe – but as with cash – counterfeiters can now duplicate checks with amazing accuracy. Today, with the advent of even more sophisticated copying machines, check counterfeiting has become the crime of the decade. The U.S. Justice Department estimates that more than $10 billion worth of bad checks are passed every year, with 20% of those being counterfeit checks. Financial fraud is growing, forcing banks and individuals to find new ways to protect themselves. Sophisticated desktop-publishing software, scanners, laser printers and color copiers have contributed to the problem. All a criminal needs to begin is a good check from a business, person or a bank. The key item is the MICR printing on the bottom of the check. Once the criminal has a good account number, the remaining work is done at the desktop. A check is created using various desktop-publishing software and printed on a laser printer. Then, either the printer or the printer cartridge is changed, and the MICR printing is printed on the newly created counterfeit check stock. What began as a way for businesses to safeguard their accounts by printing their own checks has been co-opted by the criminals and turned against the businesses.
There are several steps in identifying bad checks. One characteristic feature of counterfeit checks printed with color copiers or color lasers is the toner. The checks are usually slightly shiny and have a raised feel. A laser printer will lay down toner only where it was required. The check will have ridges and bumps where the toner is located and valleys where there is no toner. Color copied checks will have a complete layer of toner over the entire check and often have a yellowish appearance where there should be a white color. Counterfeit checks are usually printed one at a time on 8 ½-x-11-inch sheets of paper and must be cut to size. Therefore, checks should be examined to see if they are trimmed correctly, cut square and clean. Also neither the color-copied nor the laser-printed check will have any fine line detail, delicate borders, security screens, or micro printing.
The Federal Reserve has also instituted a recent set of standards in the printing of checks based upon Federal Reserve Regulation CC. The resulting features are for ease in processing and identification of counterfeit checks. On many newer checks, a padlock icon and the letters MP are printed somewhere on the front of the check. The padlock icon will instruct the reader of the check to look to the back. On the back of the check, next to the padlock icon, the security features built into and printed on the check will be explained.The MP will be located next to the feature that contains microprinting. (See Side Bar on Security Features Current and Proposed)
However, despite advances in check printing and technological devices designed to make fraud and counterfeiting more difficult, they still occur. These features are not working because the people who are accepting the checks are either ignorant or willfully negligent or both.
One man, a restaurateur and a very intelligent businessman, recently sold an old vehicle of his to a private citizen. The person looked at the car on a Friday morning and told the restaurateur he would buy return with a cashier’s check for the full amount. The buyer did return at approximately 5:30 P.M. on the same day, cashier’s check in hand, and left with the vehicle and the title. The title was transferred the next day (Saturday). The cashier’s check was deposited on Monday. The seller received a call from his bank several days later to advise him that the cashiers check he had deposited was counterfeit and the bank would not honor it. It turns out he was just one of 42 people who lost their vehicles in the very same fashion on that Friday. The 42 cars are now probably either in parts or in Mexico. The seller knew the deal was too good to be true—the “buyer” hadn’t even argued with him about the price of the car! An examination of the counterfeit check revealed it had been produced by a laser printer, and it was only a “B” effort at that. Anyone with 30 minutes of training would have spotted the check from across the room. A major bit of irony in all of this was that the counterfeit cashier’s check had been drawn on the very same bank it was deposited in to, and it still took over three days for the bank to figure it out!
There are no appearance standards that apply to checks; they can be printed in many different ways, making them much easier to copy than credit cards. Many large companies, in fact, print their own checks. Payroll check fraud is rampant, with executives just as vulnerable as corporations to such scams. One Boston gang acquired the names and birth dates of executives from “Who’s Who” listings and applied for credit and loans in the executives’ names. A newly opened account can drain a bank as criminals deposit a phony check and then draw on it before the fraud is discovered. To stop this kind of activity, banks are increasingly requiring at least two pieces of personal identification on each new account. Some also delay checkbook orders and the issuance of ATM cards until the account holder’s references have been verified.
Individuals should benefit from new check guidelines issued by the Financial Stationers Association, a Washington-based trade group for check printers. Among FSA’s recommendations are the use of microprinted data and a lightly printed “security screen’ that can’t be picked up by a color copier or laser scanner. Checks bearing these marks will have the padlock symbol on the front. Some institutions are starting to require that the customer use the bank’s vendor when ordering checks.
Prevention of access to basic information and to check stock is the first step in fraud reduction. The second is to educate all tellers and cashiers on what a good check looks like and the characteristics of a bad check.
The individual and the corporation must be alert, too. Account information must be protected. The amount of personal information that appears in any one place must be limited. Phone numbers or driver’s license number should not be printed on checks. And credit card numbers should not be written on a check even if a sales clerk asks for it. All this information in one place leaves the account holder open to fraud. Checks should be protected as if they were cash. Lost or stolen checks must be reported. Bank statements should be reviewed as soon as they arrive; there is no excuse for being lax about reviewing statements. Criminals will usually tap into a number of accounts, taking a portion of each, but not bleeding any one account dry. Canceled checks should be stored in a safe place. Voided checks should be torn in small pieces before being discarded. Deposit slips and checks received should be handled with care.
A cashier’s check is the easiest thing to fool around with; it’s not a good safeguard anymore. The seller should not accept a cashier’s check from a stranger unless that stranger is willing to walk into the bank and get the cash prior to taking possession of the item. If this isn’t possible, title to the item can be held until the check has been cashed.
ATMs use requires some special care: users should be careful never to leave the receipt near the machine and to use care when entering card numbers into the machine. If not, a “Surfer” can retrieve the account number and make illicit use of the data. When a thief steals a credit card, the account holder is liable for no more than $50. Similarly, consumers are protected from check fraud. If a checking account number has been compromised or if someone has assumed the account holder’s identity or stolen his checks, he is protected; the bank takes the hit. But, it’s much like being rear-ended in a car accident. It may be the other guy’s fault, but it can be quite a bother to rectify the problem.’
It is always difficult to prognosticate about the future with any amount of certainty. But it is possible to extrapolate on current trends. More and more counterfeit checks are going to be passed. It is a growth industry. They will continue to be passed because the recipients are not trained to be observant. The entire check insurance industry is built around this fact. The grocery store or other business that uses these check insurance firms passes the cost along to the consumer. Everybody pays more, much more. Wouldn’t it be nice if retail clerks and bank tellers had better training, and the losses could be cut significantly. But check insurance is a disincentive to training and to individual business risk management or avoidance.
Despite a concerted effort by the American Banker’s Association, with its proposed revisions to Check Security Guidelines X9, and the diligent efforts of the Financial Stationers Association to make counterfeiting more difficult, the beat goes on.. The proposed guidelines of the revision to X9 (X9.51) are good, but they will not stop counterfeiting unless the features are mechanically readable and new mechanical readers are in place. With all of the current features, checks today are actually relatively counterfeit resistant; however, they are often simply being processed with being properly examined. A mechanical reader/verification step in processing is the only workable alternative to better trained clerks.
With rapid advances in technology and with the cost of technology coming down, more and more “casual” counterfeiters will become involved. Just as the students at an Ivy League college found it was easier to copy money with the student copy service’s color copier than it was to earn it; more and more people will turn to check counterfeiting.
The American Bankers Association is promulgating new check printing and clearing voluntary standards for check fraud reduction (revision to X9). It is possible that the checks of the future could contain several anti-counterfeiting measures, including: watermarks; fibers; textures, such as embossing,; foils; additional MICR algorithm features; specialty inks, including hard to reproduce colors; color-shifting inks and ultraviolet inks. (See side bar on anti counterfeiting technology) The checks of the future will have several features to thwart counterfeiting, not just one. The fact remains that the consumer will bear most of the burden since these checks will cost more to print. However, as long as the check accepting public, tellers and cashiers, remain unaware of the anti-counterfeiting and fraud prevention technology already in place or to be put in place, these additional features will probably not work unless they are mechanically readable.
There will be a rise in the use of credit and debit cards, but these aren’t secure either. Also, there will be an increase in direct deposits for employees and regular vendors and customers. This will cut down on the availability of checks to copy and counterfeit.
For check clearing purposes banks will most likely go to an imaged-based clearing method for the electronic clearing of checks before the physical transportation of a check. It will play havoc with those who like to work the float, but will it catch counterfeit and bad checks quicker? Probably not, since the checks will already be in the system in the first place. So it won’t necessarily reduce fraud; it will just catch it quicker. A new clearing system that has been proposed for checks sounds too much like the way MICR coding was sold to the banks and the banks’ customers—it will be more efficient and help reduce fraud. It the same sales pitch for new technology in a different decade.
The technical barriers to checks clearing through image processing are daunting. Everything from image processing and correct image recognition must work without error. A common protocol for data transmission and compression technology will need to be established along with a secure method of transferring this information. This technology is 10 or more years away from widespread use though we may see more of it used by banks for internal check reconciliation.
A bad check is most often stopped by the payee, before it gets into the system and burns the pawn whose account number it is actually drawn on. Check insurance costs money and only applies after a retailer has been taken and only if they have taken the proper protocol steps. Insurance is also not a solution, it is a transference of the risk associated with the crime.
Only the individual awareness of each and everyone who deals with checks, retail clerks and bank tellers included, can stop the fraud. It is not difficult to detect; in fact, it’s easy. Don’t pass the buck to others. The key to prevention is as simple as a little training and education!
The American Bankers Association, The Financial Stationers Association, Deluxe Check Printing Corporation and the John H. Harland Company provided extensive assistance and kind words for this article. They are keenly aware of the problem and agree – a small amount of training would solve a majority of the problem.
L. Burke Files is a Private Investigator specializing in Financial Investigations, an author of many articles on related subjects and a book on financial investigations. Mr. Files lives and works in the Phoenix Metropolitan area of Arizona.
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