Check fraud on the rise

Northwestern Financial Review, Jan 15, 2001

[chronicle]

Attempted check fraud at the nation's commercial banks has doubled in the past two years, exceeding $2.2 billion in 1999, according to the latest American Bankers Association Deposit Account Fraud Survey Report.

While attempted check fraud losses exceeded $2.2 billion, actual dollar losses in 1999 were $679 million, up from the $512 million the banks lost in 1997, according to ABA's previous study. Banks' check fraud prevention systems are credited with keeping actual losses significantly lower than the attempted fraud numbers.

"Potential check fraud losses are as threatening to the banking industry as actual check fraud losses," said Richard J. Clausen, member of the ABA Fraud Prevention Oversight Council and senior vice president, liability risk management, Bank of America. "They indicate how severely banks could be hit by fraud if their systems and procedures are not in check. With every large bank and a growing number of small banks reporting check fraud losses, no bank can offord to let down their guard."

Since the last survey, the number of check fraud cases rose more than 60 percent, totaling 447,342 cases in 1999, yet losses per case went down. Average losses per case were $1,518 in 1999 compared with $1,775 in 1997.

Large banks were hardest hit by check fraud in 1999, accounting for 90 percent of total check fraud losses. Yet within this category, some losses had migrated from money center banks to regional banks in the past two years. In 1999, regional banks absorbed 30 percent of industry losses, compared with 25 percent in 1997. In contrast, money center banks accounted for 60 percent of total losses in 1999, down from 62 percent two years ago.

Community banks' share of industry losses remained small, yet in the past two years there has been an 18 percent increase in community banks that report losses.

Regardless of the size of the bank, the most common type of check fraud in 1999 was forgery, with more than one-third of fraud cases and fraud losses attributed to forged signatures and forged endorsements. Insufficient funds or bounced checks that customers never pay ranked second, and counterfeit checks ranked third. While a significant proportion of community banks' losses were from NSF and closed accounts, larger institutions were more likely to have losses due to counterfeit checks.

Survey participants were asked to rank perceived check fraud risks. The responses varied with bank size. Forgeries were ranked first by community banks, but mid-size and large banks were most concerned with organized crime rings and counterfeit checks.

The most common fraud prevention practices at banks of all sizes included employee training, signature verification systems and having a funds availability policy that takes advantage of the hold periods permitted by Reg CC. Other methods mentioned in the report were new account screening, working with law enforcement on fraud-related issues and internal tracking of check-related losses. All participants ranked "positive pay," a computerized check numbering/ matching program between banks and corporate customers as one of the most effective fraud prevention methods.

While one-fourth of money center banks incurred more than $10 million per year for check fraud-related operating expense, such expense varied from $50,000 to $5 million per institution at regional banks to less than $10,000 for community banks.