All companies, regardless of sector or
size, can be affected by fraud. In fact,
a recent survey conducted by the Association for Financial Professionals
shows that 72 percent of organizations experienced attempted or actual payment fraud in
2006, with checks being the preferred target
of thieves. In today’s environment, any company that issues checks is subject to fraud
and must take appropriate precautions.
Preventing check fraud requires diligence
and resolve, but new technology solutions
are easing the process.
“We advise our clients to move to electronic transactions in an effort to remove small-dollar check transactions from the paper-based accounts payable process,” says Jim
Dineen, senior product manager, vice president for PNC Bank.
Smart Business spoke with Dineen about
fraud loss, how to develop a prevention strategy and the benefits of a positive pay service.
What types of companies are most susceptible to fraud loss?
Companies that use low-dollar-value business-to-consumer checks are the most susceptible because there is a higher volume of
paper and there are more opportunities for
perpetrators. In the business-to-business
world, the majority of checks are going to
secured environments, like lockboxes, so the
ability to intercept checks is not as high.
The size of a company can play a factor as
larger companies tend to write more
checks, which increases their risk.
Companies that are decentralized are also
more susceptible to check fraud because
they manage a broad distribution versus a
centralized distribution and have more
cogs in the wheel that can be compromised.
What are the best practices for developing a
protection strategy against fraud loss?
First and foremost, you should conduct
an audit of your practices. Also, it is
important to document your practices
and test them on a regular basis. If you
have developed control systems for, let’s
say, accessing your reporting system for
reviewing checks or placing stop payments, you need to document these procedures and test them on a periodic basis
to make sure that your employees are
adhering to the established practices.
An additional best practice is to separate
your accounts. Rather than having a ‘beall’ account, in which the depository and
disbursement account activity is lumped
together, it is best to isolate each account
by function so that you can more easily
implement appropriate controls. Check-based disbursement accounts should be
blocked from accepting electronic transactions, such as ACH (Automated
Clearing House) or wires. If it is a check
writing account, you want to make sure
that no ACH debits get processed against
the account. Conversely, if it is an ACH
account, you want to put in place controls
to prevent checks from being posted to
the account.
How can companies protect themselves
against check fraud?
Perpetrators can create fraudulent checks
easier than they could in the past because of
readily accessible desktop publishing software, so it is important to secure your check
stock. Check printers have a variety of security features available including watermarks,
microprinting around the border of checks
and a detailed list of security features on the
back of checks. If not secured sufficiently, checks become easier to alter or wash,
which involves the lifting or ‘washing’ of data
from a check.
Also, it is important to utilize the appropriate level of controls at the bank level. Positive
pay should be standard for most medium to
large check issuers. There are two forms of
positive pay: traditional positive pay, which
involves matching MICR (magnetic ink character recognition) line data from the check to
company supplied check issue record [check
number and amount], and payee positive pay,
which involves comparing the image of the
payee name on the check to the payee name
included on issue information provided to
the bank.
What specific benefits does a positive pay
service provide to businesses?
When a fraud attempt occurs, the best
way to mitigate the impact is through timely identification so that the suspected
check may be returned and recovered.
Positive pay provides early detection of
potential fraud by identifying suspect items
during the presentment process.
If a fraudulent transaction is suspected, what
course of action should a business take?
Time is of the essence so you should notify
your disbursement bank as soon as possible
to start the recovery process. <
This article was prepared for general
information purposes only. The information set forth herein does not constitute
legal, tax or accounting advice. You
should obtain such advice from your own
counsel or accountant. Under no circumstances should any information contained herein be used or considered as an
offer or a solicitation of an offer to participate in any particular transaction or
strategy. Opinions expressed herein are
subject to change without notice. © 2008
The PNC Financial Services Group, Inc.
All rights reserved.
JIM DINEEN is senior product manager, vice president for PNC Bank. Reach him at (412) 762-3271 or [email protected].