he Uniform Commercial Code (UCC) is the body of law that covers the guidelines and rules under which check transactions are settled among the payee, payor and financial institutions. Over the last five years, UCC changes have effectively moved most of the liability for fraudulent check transactions from the bank to the commercial sector of our society. At the time this document was written, check fraud represented 43% of the Financial Crimes Enforcement Network's (FinCEN) suspicious-activity reports and most of its criminal-investigation resources.

Today, following the Sept. 11, 2001 attack on our country, these law enforcement resources have been redirected toward terrorism and leaving members of the commercial sector, especially the retailer, to their own devices to address the problem of check fraud. Most studies on consumer check usage report that POS check writing is either stable or may have peaked and is beginning to decline.

And yet check fraud predictions are forecast for continued growth. With an estimated $12 billion of check fraud in the United States this year and projected to grow to $15 billion by 2004, it is important that processors and ISOs, as "trusted advisors" to their merchant clients, understand the challenges posed by fraudulent checks and how best to protect them from this growing form of loss. In the remainder of this column, I will be summarizing a white paper on how to protect against check fraud from a retailer's perspective.

Executive Summary

This white paper was drafted by a consortium of financial and law enforcement agencies, including the FBI, Federal Reserve Bank, IRS, Office of the Comptroller of the Currency, U.S. Postal Service and U.S. Secret Service, operating together under the Check Fraud Working Group. Before I report the white paper findings and recommendations, it is important to first summarize some of the contributing factors that make check fraud such a challenge for merchants.

Trying to respond effectively to check fraud is difficult for most retailers. The people passing bad checks are employing very sophisticated technology, and often the employees accepting these documents are inexperienced, trusting and being paid at minimum wage with turnover rates of 100% a year. Check fraud is a relatively low-risk crime that can be highly lucrative - especially if conducted by organized gangs that have studied a retailers' fraud-prevention techniques and understand their weaknesses.

The document surveyed national banks and found the most common source of check fraud was checks written against consumer accounts. The most common types of fraud were forgery and checks drawn on closed accounts. About a quarter to a third of fraud was linked to new accounts. The period from October through February is the busiest time for check scam artists.

A few years back, TeleCheck conducted a national survey of fraudulent checks by retailer type. The survey found that check fraud is more prevalent in industries such as gaming, hotels and grocery stores and in stores that sell products that easily can be resold. Bad checks are usually written on the most expensive items that are easily refundable. Criminals passing bad checks will attempt to get a refund from another store in the chain, before the bad check has time to clear and be returned.

Bad checks, from a retailer's perspective, come in two forms: "Good Customer" and "True Fraud." "Good Customers" present bad checks that are either:

• Non-Sufficient Funds (NSF): These are typically made good on representment and also generate a profitable "check handling fee" if the proper signage was displayed at POS.
• Closed Accounts: This type of returned checks typically can be collected by contacting the customer and requesting a replacement check. If the closed-account checks are obtained by criminals, then their use represents fraud and, if cashed, they are virtually impossible to collect.
• Check Incorrectly Written/Procedure Errors: These also are honest mistakes that are caught either before deposit or are returned by the bank for improper completion, signature, payee, pay amount, etc. Again, contacting the customer is typically all that is needed to collect these items.

"True Fraud" checks are:

• Altered MICR: The Magnetic Ink Character Recognition symbols on the bottom of the check have been altered so that funds are drawn from an unsuspecting consumer's bank account.
• Altered Check: The criminal takes a legitimate, completed check and uses chemicals or other means to erase the amount or the name of the payee so that new information can be entered.
• Counterfeit Checks: These are checks presented based upon fraudulent identification or false checks drawn on valid accounts. The more sophisticated criminals will be using electronic publishing equipment, advanced scanners and color copiers to generate checks that can look better than the original.
• Stolen or Lost Fraud Checks: These checks often are taken from businesses' or individuals' check inventory without the rightful party being aware they are missing.
• Identity Fraud: A relatively new form of fraud caused by another individual assuming the identity of an unsuspecting individual. According to the FBI, this is the fastest-growing form of white-collar crime in America. The process occurs when a criminal learns enough information about another individual to misrepresent himself or herself as that person. Various schemes involve changing bank account addresses, transferring funds, requesting new checks and making purchases with those checks.
• Check Fraud by Gangs: Gangs typically go after retailer chains and will cash payroll checks across the country. They will use the latest technology to generate expert-looking paychecks on major employers in a market, often with a scanned signature from an authorized paycheck and false identification.

This Check Fraud Report lists various preventive measures that retailers should make part of their internal controls. In addition to conducting background screening on new hires, employees should be trained to watch for whether:

• The picture ID presented matches the name and address on the check and the signature matches the ID. They should not accept checks without a name and address, and they should be especially careful with low-sequence-number checks for new accounts.
• The check has no perforated edge or has a financial institution typed rather than printed - or includes spelling errors.
• The check is payable to a corporation but is being presented for cashing by an individual.
• The MICR code on the bottom of a check looks shiny or feels raised. True magnetic ink is dull, and legitimate printing produces characters that are flat on the paper.
• The check is being presented at a busy time by a belligerent or distracting customer who is trying to force employees to bypass check-acceptance procedures.
• The check has dollar amounts in numbers and in words that do not match.

Employees need to understand that they always should call over a floor manager to review a suspicious check, and it is recommended that they call the bank the check is drawn on to determine if the check is legitimate.

Author: Check Fraud Working Group

Date: February 1999

Size: 23 pages

Relevance Rating: Medium to high

Web Address: www.diogenesllc.com/checkfraud.pdf

Web Sites for More Information on Check Fraud

www.ckfraud.org/

The National Check Fraud Organization. This is a network of local law enforcement and federal agencies and retailers who are notified by fax or e-mail of known financial and criminal crimes - such as check-passing gangs - that may directly affect them.

www.amcrin.net/

The American Criminal Investigators Network. Amcrin is a network of fraud-investigation services for the public and corporate criminal investigations community. Its CrimeDex system provides case collaboration and data-management tools for members with special emphasis on identifying fraudulent check writers and providing a central clearinghouse for retailers and local law enforcement agencies.

www.acom.com/micr_lib/news001.htm

"Check Fraud, the UCC and You."

www.clev.frb.org/ccca/fo1q96/fraud.htm

"Fed Offers Advice for Fighting Check Fraud," by the Federal Reserve Bank

www.ebanklink.com/articles/positivepay.htm

"Fighting Corporate Check Fraud."

www.ebanklink.com/Images/Winning%20the%20war%20Ck%20Fraud-TMA%20article.pdf

"Winning the War Against Check Fraud," by Rich Love, AcuPrint President and CEO

www.printech.com/resources/checkfraud.shtml

"Anatomy of Check Fraud."

Eric Thomson is Executive Vice President of Profit Source Advisors. He can be reached at etprosc@attbi.com.