|
Check Fraud, The UCC and You
Under Latest UCC Regulations, Banks May Have an “Out” in Check Fraud Losses
CHECK FRAUD…A GROWING PROBLEM
Check Fraud, once the criminal specialty of professional forgers,
has emerged from relative obscurity to become the “Crime of the
Nineties” and beyond. According to recent studies, more than 500
million checks are forged annually, with losses totaling more than
$10 billion, and growing at a rate of about 2.5% annually.
What’s the reason for the increase in check fraud
incidents?
The American Bankers Association (ABA) attributes the
increase in check fraud to the availability of sophisticated, lowcost
technology – desktop computers, scanners, laser printers
and desktop publishing software programs. Color copiers have
provided the criminal element with the ability to mass-produce
any type of check in the market.
How does check fraud occur? And who are the principal
targets of check fraud activity?
Check fraud occurs in a number of ways. Checks are easily
copied or otherwise reproduced, amount and payee information
is changed, and checks are cashed with phony identification
cards or other media. Gangs are deeply involved in this activity
and account for major fraud activity in larger metropolitan areas,
sometimes making as many as 40 to 50 bogus checks from a “good check” copy that has a valid signature and other
corporate data and logo information on it. Corporate payroll and
accounts payable departments are great targets. All types and
sizes of companies, companies with remote offices -- out of
state or within the state -- are targets. Large banks are
particularly hard hit, but fraud occurs in every size and type of
business and in every size of bank. Fraud is on the increase,
and every company must prepare to defend itself against the
damage that lack of “ordinary care” procedures may cause
within their organization.
THE UNIFORM COMMERCIAL CODE (UCC)
The current UCC code outlines specific responsibilities for
banks and companies in the handling of check fraud cases.
The UCC document itself was not substantially updated until
1993, when major revisions were developed as a result of major
increases in check fraud incidents and dollar losses.
Since that time, the UCC has been adopted by all fifty (50)
states, and legal precedents have been established that have
shifted some of the burden of check fraud prevention to
businesses and corporations, where before, banks had 100% of
the responsibility in check fraud incidents. This includes dollar liability
for some incidents.
The term “ordinary care” was introduced in the updated
regulations, and it is important that you contact your bank and
learn what your bank defines as your firm’s responsibilities in
exercising ordinary care to prevent check fraud. Your bank
defines ordinary care as it pertains to your company and their
security standards.
Why is my firm potentially liable for a fraud incident?
Some reasons for potential liability are:
- Lack of security control for the storage of check stock within
your company’s document storage area. Check stock must
be stored in a secure, locked environment with controlled
access only by authorized personnel.
- Lack of timely bank account reconciliation for payroll and
accounts payable accounts.
- Lack of secure control over storage and access to signature
stamps or signature machines.
- Lack of signature verification on canceled checks during the
reconciliation process.
- Lack of timely reporting of potential check fraud
occurrences to your bank.
- Lack of paper safety features in your check paper stock.
- Lack of procedures within your organization to inhibit the
forging of signatures or alteration of amount.
- Failure to supply current documentation to your bank on
authorized signers.
HOW CAN I PROTECT MY COMPANY AGAINST
CHECK FRAUD?
Unfortunately, there is no absolute method available to protect
your company against check fraud, BUT the following
suggestions are recommended to you as a start.
- Contact your bank and ask for a written copy of their
suggested procedures for preventing check fraud, check
stock considerations, and check reconciliation processes
t hat they expect you to follow.
- Ask your bank for the written procedures that they follow to
reduce check fraud. (Their back office procedures, the “ ordinary care” activities that they follow.)
- Ask your bank if they have a “Positive Pay” program. Ask
for details of the program and the processing cost, if any.
Some banks do not charge for “Positive Pay.” (See the last
section of this document for additional information.)
- Consider the following “Internal Procedures” for
i mplementation within your company.
- Review all hiring procedures. Utilize a background
check for employees working in vendor assignment,
check issuance or check reconciliation areas.
- Ensure that at least two people are responsible for
accounts payable, and ensure that the mailroom
personnel and procedures are sound.
- Keep all check stock or cash equivalents in a secure
and locked facility. Verify that tops and bottoms of
check boxes have not been opened and resealed.
- Change keys or entry codes periodically to prevent
routine access to storage areas.
- Enforce mandatory vacation policies, particularly for those
with financial access. Be alert for employees living beyond
their means.
- Conduct surprise audits. Do any employees appear
nervous? Have you noticed a substantial change of
lifestyle?
- Read and understand your bank contracts regarding
liability as well as your company’s liability for fraud
under the current UCC Regulations.
- Consider the following “External Procedures” for
implementation within your company.
- Use bank services like “Positive Pay,” expedited return
information, and signature verification systems to
protect your accounts payable, payroll and accounts
receivable activities.
- Purchase blank safety paper or specially designed
check stock from established vendors or banks that
offer this stock for your check printing operations.
- Reconcile check disbursements and deposits regularly.
Prompt account reconciliation is a must!
- If you discover a check with a fraudulent payable
amount, close the account as soon as possible.
- Be cautious when using refund accounts, such as
rebates for subscriptions. This is another target for
check fraud since the checks are relatively easy to
obtain and can be used for check fraud.
- Find ways to replace paper documents with electronic
payments, devices, and complete printing systems that
control not only the creation of checks from blank safety
stock, but which also include Positive Pay for the
processing of your issued checks by the bank
electronically.
- Store or dispose of canceled checks properly and
safeguard new checks. Do not disclose checking
account numbers to individuals you do not know, even
if they claim they are from your bank.
- Compare payroll checks with your current employee
records.
- Question funds that are transferred between bank accounts;
verify new business vendors and their associations with
your company.
- Review cancelled checks and endorsements on a
monthly basis.
ACOM SOLUTIONS, INC.
Based in Long Beach, California, ACOM is the leading "single
source" provider of electronic payments and MICR laser check
processing solutions, deemed by experts to be the most
effective methods for deterring check fraud.
Running host-resident in the Windows or IBM iSeries (AS/400)
operating environments, ACOM's EZPayManager Suite is an
electronic payments and MICR laser check processing solution
that enables users to generate corporate payments from a
single software application. Using electronically stored form
templates, users can send payments electronically through the
banking systems ACH network, or print checks on a MICRenhanced
secure laser printer (a single pass through the printer
generates all the corporate information, logos, amounts and
signatures). ACOM's EZPayManager is compatible with all
financial management software systems, ranging from legacy
and general business systems such as Oracle Financial
Applications, and JD Edwards, to specialized vertical packages
such as WLT (healthcare) and PDS (payroll).
ACOM's integrated payment solutions provide unprecedented
security, efficiency and control in disbursement-processing
operations.
Elements of ACOM's Total Solution include:
- EZPayManager dispersement-processing software (including
modules for e-payments, MICR laser checks, forms design, and
Check Fraud Alert for positive pay)
- Xerox Network Laser Printers (MICR-enhanced by ACOM)
- Post-processing equipment for folding
- Blank security check stock (including watermarks, void
pantographs, micro-printing, toner grip, and sequential
numbering)
- Consumables (including MICR toner engineered to the
specifications of each printer, fusers, etc.)
- Toll free tech support
ACOM customers tell us that our "single source" approach
saves them time, money and confusion, since they only have to
go to one place for:
- Hardware (printers and post-processing equipment)
- Software
- Installation
- Training
- Supplies
- Tech Support
ACOM has been in business since 1983, and currently has
more than 3,000 active customers.
REFERENCES
- Security Documents - On Guard, FORM Magazine, Susan
Keen, (703) 836-6225
- Balancing Act, WASHINGTON Business Journal, Fred O.
Williams
- Articles of the Uniform Commercial Code, Legal
Information Institute, Cornell Law School
- Open Doors with Software Compatible Forms and Checks,
Business Products Professional
- Check Fraud, Cardinal Business Media, Survey 1087
- Client Service Bulletin, Frank W. Abagnale & Associates
- Fraud Prevention and the Management, Management
Accounting, Richard Turpen, CPA & Frank Messina, CPA
- What Is Negligence, Garon & Associates Co., L.P.A.,
Cleveland, OH 44113
- Strategies to Reduce the Potential for Check Fraud at Your
Company, IOMA, Managing Accounts Payable
- Check Fraud: A Guide to Avoiding Losses, Office of the
Comptroller of the Currency, United States Government
- Check Fraud – Liability and Defenses, Articles 3 & 4 –
UCC, Brent S. Gorey & Daniel S. Bernheim
This document is for informational purposes only. It is not intended for
usage as a legal reference. All information has been obtained from noted
third party reference source and material. ACOM assumes no liability for
the information contained herein.
For more information about ACOM’s solutions:
|
Download PDF 
