Technology is the best bet in check fraud battle

Northwestern Financial Review, Jan 15-Jan 31, 2004 by Barta, Dan

Q: What are the most common ways check fraud is committed?

Counterfeit and alterations. Counterfeiters produce the document from scratch whereas an alteration is a change made to an authentic check, like the payee amount. How do they make them? There are many ways. One common way people commit fraud is by purchasing a check - a paycheck from somebody, a worker of some sort, and the buyer will scan the check and get what they need in terms of fonts and graphics. People also steal canceled checks out of the mail, or checks left out for the mail.

How do these fraudulent documents make it past the teller stage?

If it's a good counterfeit or alteration, chances are slim that it's going to get caught at the teller line with the naked eye. Tellers should be trained to look at things like bank logos, the spelling of the bank name, and the micro-font at the bottom. Is the check number the same as the one in the micro-line? With poorly done counterfeits, spotting these sorts of things is not difficult. The physical feel of the paper is a good identifier of fraud. There are a lot of things tellers should be aware of. They should be taught how fraud is committed and where to look for it.

Do most banks do enough training in this regard?

Unfortunately no. What I see is tellers getting initial training, some sort of module that occurs with no ongoing element. There is not enough reoccurring awareness. Tellers also have to be focused on serving customers, balancing accounts and so on. Their role is important in fighting fraudulent checks, but they by no means should be a bank's only line of defense. If you're relying on your tellers alone, you're hurting yourself.

Fraud fighting technology evolves right along with technology used to commit fraud. What new technology do you think poses the greatest fraud risk?

I don't think changes will result necessarily from new technology, but new fraudulent processes will continue to present issues for banks. We've all heard how duplication of checks is the result of lower cost digital equipment. Technology is only going to get cheaper and easier to get a hold of. Where you're going to start seeing more problems, and I think it will be related to checks, will be situations with merchants. Right now some merchants will allow a bank account and routing number to be scanned and used to draw funds to complete the transaction. The check essentially performs like a credit or debit card. The teller dials in the due amount and hands the blank check back to the customer, who signs a receipt. The information used in that transaction can be stolen and used by anyone, but now there isn't even a paper trail. These sorts of new ways to manipulate data will continue to pop up.

How can banks and merchants stay ahead of these developments?

What we're migrating to is technology that will be able to pull everything together. I think this is the best defense you have because it allows you to catch fraudulent activity quickly. If you have a check fraud system and a deposit fraud system and an ACH system and whatever, there is technology that can pool all of this information and present a clear picture of all the activity on one account.

Does Check 21 legislation present any new difficulties'?

To some extent it's a double-edged sword. The positives outweigh the negatives, but the negative is you'll be eliminating the check as something you can scrutinize and analyze. An image will not give you the detail you need to make determinations about things like fonts and logo counterfeiting.

What are the positives?

With Check 21 and image exchange, the entire process will be expedited. A criminal has had three or four days between cashing a check in New York and it being drawn on a bank in Los Angeles. With check imaging, that time frame has been cut to a day. The person passing checks has less time to wait on the process. These systems, along with the software and systems that can pull different kinds of information together, decrease the time between when an act of fraud is committed and when it is identified as an act of fraud. Decreasing that time is very important.

Dan Barta is senior principal in the fraud and risk management group for Dallas-based Carreker. Justin Dullum recently interviewed him by telephone.