Check fraud has been an ever-present risk for decades, but the fraudulent use of checks began to steadily skyrocket in the 1980s. Depending on whom you ask, the causes range from the growing availability of professional printing and design hardware/software to the fact that the penalties for check fraud are relatively light compared to other forms of robbery, which carry an assault penalty in addition to theft. Meanwhile, the potential income for a talented check fraud artist can go into the millions.
Most likely, a combination of factors--including easily accessed technology, light sentencing, and high rewards--have all come together to make check fraud the fastest-growing form of theft. For the average business operating an integrated iSeries 400 environment, debating the reasons for increased check fraud is immaterial. The question is this: How much risk does your business face?
To give you an idea of the check fraud "universe," consider the fact that check fraud has reached epidemic levels, with losses ranging over $20 billion per year in the United States alone. These statistics help illustrate the scope of the problem:
- According to the Nilson Report (not to be confused with the Nielsen Report), check fraud now exceeds $20 billion per year, up from $12 billion in 1996 and $5 billion in 1993.
- A recent Nielsen Report projects that the total number of checks written annually will rise by 2% to 4% through the year 2020. At the same time, more than 1.2 million fraudulent checks enter the payment system daily.
- According to a report issued by the American Banker, an industry banking magazine, estimates of losses from check fraud will grow by 2.5% annually.
- KPMG International asked the top 1,000 U.S. companies to rank the crimes that hurt their business the most, both internally and externally. Check fraud made the list approximately 10 years ago, when it ranked ninth. Today, it ranks second.
Like many other white-collar crimes, check fraud continues unabated because most companies don't think it can happen to them. Or, even worse, they think their company has all the safeguards it needs...without actually checking, testing, or updating them. This is just as true for iSeries 400 shops as for any other technology platform.
When you boil down the many reasons for such massive (and increasing) levels of check fraud, you ultimately arrive at the following conclusion: Check fraud flourishes because there's an abundant supply of companies who make getting away with it easy.
The purpose of this article is to provide companies concerned about check fraud with the introductory information they need to take a long, hard look at their current security measures. We'll examine different types of check fraud, discuss the elements of check security, and provide suggestions for increasing security at both the software and hardware levels.
This document will be especially relevant to the many companies that have moved check printing and production in-house or any company that is considering such a move. As more companies take advantage of the cost, productivity, and auditing benefits of in-house check production, the need for enhanced security increases.
We'll also address the issues of cost and complexity. These two issues alone motivate many companies to put off implementing an in-house check printing solution or, even worse, take a fingers-crossed approach to check security in general. In fact, by using the kind of flexible yet secure software, hardware, and check printing supplies offered by a company like Quadrant Software, the average company can drastically decrease their risk levels without inconveniencing or alienating honest customers, vendors, and employees, while simultaneously cutting overall costs associated with check production and printing.
Why You're at Risk: Check Fraud Defined
The good news is that there's a finite number of check fraud methodologies. The bad news is that each method can be spun into an infinite number of variations. Creativity and adaptability are the hallmarks of check fraud perpetrators.
In this section, we'll examine the basic categories of check fraud, but readers should keep in mind that check fraud rarely fits by-the-book definitions. Use these descriptions as a starting point in your security evaluation.
Alteration
Material alterations include any change made to the writing on a check without the approval of the account holder. This can include altering the dollar amount, payee, date, and so on. A popular form of alteration is "check washing." This method involves chemically removing data from the check's fields and entering false information in its place.
Forgery
Check forgery includes any check with a fraudulent signature or endorsement, and it's one of the oldest and most successful forms of check fraud. Most forgeries use legitimate checks (either found or stolen), so the issue becomes spotting a fake signature rather than a fake check.
Check signature forgery can be divided into these subcategories:
- Tracing--Tracing involves placing a legitimate signature over a check and then using carbon paper to trace the signature and transfer it to the check.
- Practice Forgery--This is the method you see on TV a lot. The forger practices writing a legitimate signature over and over until he can convincingly reproduce it on a check.
- Felt-Tip Marker--The forger uses a felt tip marker to camouflage distinctive signature characteristics.
- Non-Simulation--With this method, the forger makes no attempt to copy a signature. The fraud artist relies on a bank or company's lack of attention to detail.
Counterfeiting
This includes any imitation of a legitimate check. However, a counterfeit check does not necessarily need to mimic a specific genuine check. It only needs to look official or genuine. This method of check fraud used to be limited to the most sophisticated criminals. Today, with the broad and affordable availability of scanners, printers, magnetic ink character recognition (MICR) ink, check paper, and graphic design software, counterfeit checks can be produced with much less effort.
Check Kiting
Check kiting may occur in various ways and involve numerous financial institutions. The underlying premise is the criminal's ability to gain access to deposited funds before they are collected from the institution on which they are drawn. One reason why check kiting succeeds is because financial institutions often make exceptions to internal controls for approving drawings against uncollected funds, overdrafts, and wire transfers. The majority of these exceptions do not involve fraud or translate to losses, so it becomes easy for bank employees and management to overlook the risks involved.
Check Security: Where to Start?
The above represents a popular sampling of common check fraud practices that victimize numerous businesses and banks every year. As mentioned, variations to these common examples are limited only by the extensive creativity of the criminals involved.
Because check fraud is a crime with limitless possibilities, spotting fraud in progress involves equal amounts of skill and sheer luck. When it comes to preventing check fraud, the best offense is a good defense. Your goal should be to prevent or discourage any attempt at check fraud from the outset, rather than catch fraud in progress.
To do this, you must examine the four fundamental areas of physical check security and the security options available to you in each area.
Elements of Physical Check Security
Once you understand the four basic elements of check security, you can decide which security measures will work in your particular industry or business.
Paper Security
Many physical security features can be incorporated into the manufacture of the check paper itself. Paper security features include chemical taggants, safety tints, specialty fibers and planchettes, security threads, watermarks, toner adhesion enhancements, and chemical sensitivity, among others.
Some of these features are incorporated as early as the pulping process and others in the paper-finishing phase. Paper security features mainly aim to either increase the paper's uniqueness (making it harder to scan, photocopy, or reproduce) or reveal any attempts at tampering using chemicals, erasures, or screens.
Design Security
Design security features focus solely on check graphics, text, fonts, and layout characteristics. Some design features discourage fraud overtly, while others are covert and only reveal themselves once the copy has been produced.
Both decorative borders and background patterns use detailed graphic designs to make checks harder to copy. A covert variation on background patterns is to also include machine-readable embedded data that appears to be part of the background but actually contains redundant check information or bar codes.
Another semi-covert feature is microprint, which is text set in very small letters (only readable with a powerful magnifying glass) on the check. Microprint prevents reproduction because most photocopiers and scanners are incapable of capturing such small text, yielding only dashes and lines.
Features like security screens, split fountain, void emblems, and void pantographs are all covert features that appear either invisible or decorative on a genuine check, but when reproduced they disappear, reveal a hidden message, or reveal color gradation shifts.
Printing Security
Printing security measures are incorporated by applying special inks, varnishes, and/or embossed print stamps to a genuine check. More importantly, printing security applies to the hardware and software you choose to design and produce MICR checks.
Secure check printing is critical because this is the level at which fraudulent checks can be produced on genuine check paper, using genuine inks, genuine fonts, and genuine signatures. In essence, a criminal who can hijack either your check printing software or your MICR check printer is capable of producing the perfect fraudulent check.
At a minimum, check printing software should be selected based on strict security requirements in which user authority and access is easy to monitor, control, or change. Also, your check printing solution should be able to produce detailed check printing activity reports as well as Positive Pay reports to verify your check transactions with the bank. It's very important to point out that if a company cannot provide Positive Pay reports to a bank, then the company is held accountable for the fraudulent check and it is not insured. So, if the fraud artist passes a check for $1 million and the funds are transferred, the bank has no obligation to make reparations via insurance or any other means. But with Positive Pay reports, the company has a much greater chance of recovering the loss.
MICR check printers also need to be completely secure. Basic security features include lockable ink and paper trays and password-protected access to the control display. And only authorized users should be allowed to access and use the printer from their computer.
Ink security features range from the industry-standard magnetic ink used in the MICR line (these are the numbers you see at the bottom of every check) to more advanced ink technologies. These include chemical taggants, colored inks, fluorescent inks, infrared- or ultraviolet-sensitive inks, and metallic inks, among others. Most of these inks reveal their special characteristics under certain conditions and are very hard to reproduce in any fraud attempt.
Printing security also makes use of reactive inks that bleed, discolor, smudge, or reveal special characteristics when subjected to chemicals, water, heat, rubbing/scratching, or any other abusive treatment.
Miscellaneous Security
Paper, design, and printing security cover the vast majority of the protective characteristics that can be incorporated into your check production processes, but a small number of safeguards do not easily fall into any of the above categories.
Heat- or pressure-transferred foil stamping, embossing patterns, special imaging (hologram, kinegram, pixelgram, etc.) all fall into this category and can be very effective deterrents. All of these features discourage fraud by adding another layer of protection against reproduction.
Protect Yourself: Select Secure MICR Check Printing Solutions
Once you've examined the many varieties of check security, the most obvious question arises: Which features should you use?
The answer depends on your business, your budget, and your priorities. Generally, checks become more expensive to purchase and produce as you add more and more security features. While gauging check security is an inexact science, one existing benchmark is that your checks must have at least three industry-recognized security features before they can be registered with the Check Payment Systems Association and carry their fraud deterrent icon.
Perhaps the smartest place to begin examining check security is at check printing and processing. As mentioned before, this is the point at which you can take the highest level of control over who has access to your legitimate checks and therefore prevent the creation of "perfect" fraudulent checks. Cost and efficiency benefits are the other reasons why many careful companies start analyzing their check printing security processes at this point.
Unlike many forms of check security, using the best and most secure check printing solutions allows most businesses to save significant time and money. These savings can then help cover the cost of other required security features, and very often there's still profit left over.
To select a truly secure check printing solution, certain software and hardware criteria must be fulfilled:
Software Criteria
Check printing software solutions allow users to create, customize, and map spool data to MICR check and direct deposit receipt designs that are ready to accept spooled output.
- User Authorities--The software should allow the administrator to define who can access design and print/merge functions. Top-level solutions also assign authority levels to different stored signatures based on check amount.
- Blank Check Protection--This prints "VOID" on the check if something other than the check amount appears in the check amount location in the spool file.
- Audit Logs and Positive Pay--Track all check printing activity, including time, user identity, amounts, check numbers, and other detailed information. A check printing software solution must also produce the Positive Pay reports that banks use when negotiating check fraud issues.
- Signature Security--Signature security provides the ironclad safe storage of scanned signatures and designates who has the ability to print checks using that signature. The best solutions allow signatures to be stored on removable devices that can be locked away if necessary.
Hardware Criteria
Hardware criteria applies almost entirely to MICR printer selection.
- Secure Location of Printer--Protect the printer by locating it in a locked, secure area away from where it can be misappropriated.
- Encrypted Data Stream--Add encryption to the data stream between the terminal and the printer to protect against data interception.
- Locked Access to MICR and Paper Trays--It's imperative that the MICR printer you choose possess locks that prevent unauthorized users from tampering with paper and ink. Any other printer will need to be locked in a secure room during check printing operations.
- Password-Protected Control Panel--This feature ensures that only authorized users can modify printer specs and functionality controlled from the printer itself.
- Disable on Paper Jam--When a standard printer jams, it automatically reprints the last page once the jam is clear. This function, when combined with MICR ink and printable check stock, presents the opportunity to steal the reprinted check page. Secure MICR printers disable completely when a jam is encountered, allowing only authorized users to reset the print job.
- Added Signature Security--Printers designed specifically for secure MICR check printing can connect to a Resource Bank or dual in-line memory module (DIMM) card containing stored signatures.
- User-Defined MICR Timeout--MICR functions are automatically disabled after a set period of inactivity.
Beyond Security: The Benefits of a MICR Check Printing Solution
As mentioned, a top-quality iSeries 400 check printing solution does a lot more than increase security. It also yields significant benefits in efficiency and cost savings, and it minimizes human error. Consider the following factors, and implementing a check printing solution becomes a win-win scenario from any angle:
- Eliminate expensive and risky blank checks--Many check printing solutions require that you purchase and store high-risk blank checks--that is, checks possessing all the printed fields and design elements, including MICR lines, logos, blank numeric and written check amount fields, and sometimes even preprinted signatures. In essence, all the hard work in creating a fraudulent check has already been completed. The check fraud artist simply needs to fill in an amount. Not only are these checks expensive to order, but having just one of these checks falling into the wrong hands can be catastrophic. A more secure MICR check printing solution utilizes unprinted check stock with absolutely no printed fields or design elements. The software generates everything--from the MICR line to the company logo--according to the user's specifications. In addition, unprinted check stock is much cheaper to order.
- Print checks securely to remote locations--A check printing solution that only works on local printers may be fine for a small business, but if you have more than one location, mailing checks can be both risky and expensive. A MICR check printing solution should grow with a company, which requires being able to deliver secure print jobs to multiple remote locations.
- Design and modify checks easily and efficiently--Another reason blank checks are expensive is that a simple area code change or company name/logo alteration can transform thousands of expensive checks into thousands of flimsy bookmarks. A check printing solution using unprinted check stock allows the user to design checks from scratch, and that means having the ability to make minor or major modifications in a few moments and at zero cost.
The Threat Is Real
Check fraud is an increasing threat in the business community. Small and large companies are at risk, and there's no technology platform that is immune to the threat.
While there's no 100% secure solution against check fraud, the people who commit this crime are opportunists who constantly seek out companies that have let their guard down. Perhaps the best way to prevent check fraud at your business is to send out clear signals that your company is not an easy mark. This will discourage the majority of unscrupulous employees and career criminals.
As you've read, check security comes in as many varieties as check fraud itself. Picking the security measures that are right for your company requires careful planning and research. From both a budgetary and a security perspective, starting your evaluation at the implementation of a top-quality MICR check printing solution makes a lot of sense. Assuming you make the right choice, such a solution is easy to implement, increases security across the check production process, and saves both time and money.
If you have any further questions about check security as well as MICR check printing solutions, please contact Quadrant Software. We offer hardware, software, and check supplies (MICR ink, blank security stock, etc.) that fulfill all of the security and quality requirements listed in this article. You can reach us at 800.258.3399 or
Gary Langton is the co-founder and president of Quadrant Software, a leading technology company specializing in electronic document distribution (EDD) and MICR check printing solutions for the iSeries 400 enterprise. Quadrant Software has been an IBM Business Partner since opening its doors in 1990. Gary and his partner, CEO Peter DePierro, have built Quadrant Software into a successful venture with worldwide presence that has won every major iSeries industry award for product and service excellence.
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