Just 10 days after installing a system to detect check fraud, First Alabama Bank got a big surprise. The Birmingham-based bank discovered well over $250,000 in check-kiting schemes in the works. Fortunately, First Alabama found the fraud early enough to avoid any losses.
Still, the amount of the potential fraud was jarring. First Alabama had assumed effective safeguards against check kiting were already in place even before the new system was up and running.
Edward Solomon, senior vice president of operations, recalls there some "doubting Thomases" at the bank who questioned the need for such a system.
But the doubts quickly faded. "The program was successful right out of the box," said Mr. Solomon. "It paid for itself in the first 10 days."
The bank, a subsidiary of Regions Financial Corp., installed Sterling Software Inc.'s VectorKite last year.
VectorKite and a variety of other tools to fight check fraud are increasingly being employed by banks to get a handle on this growing problem.
A 1994 American Bankers Association survey found 1.3 million cases of check fraud - a 136% jump from the organization's 1992 survey results - and estimated bank losses of $815 million. A Federal Reserve survey - released too late to be included in this report - is expected to show an increase in losses, experts said.
The available data, however, don't break down check fraud losses by type, dollar amount, or frequency of incident. But some industry observers say that check kiting is not as big a problem as it once was, largely because increasingly sophisticated fraud detection programs have helped reduce this brand of crime.
First Alabama's decision to install the Sterling software had more to do with the bank's rapid growth than with fear of discovering more fraud. Since 1990, First Alabama's parent grew from $6.3 billion of assets to more than $14 billion.
Mr. Solomon said the bank had outgrown its previous fraud detection system, from Computrol Inc. of St. Louis. With that system, which detects potential bad checks by analyzing the volume and velocity of funds flowing through accounts, it became difficult to keep up with the review of potential fraudulent check.
"We kept narrowing the parameters," said Mr. Solomon. "There was a risk of something falling through the cracks."
Something almost did. In 1994, the bank caught one of its commercial customers in a $755,000 kiting scheme.
Losses were averted, but the bank came away from the incident feeling vulnerable, said Mr. Solomon.
VectorKite was chosen, he said, mainly because it supports and improves upon the Computrol Kiting Detection System. The two systems are linked.
Computrol and Sterling formed an alliance in 1992 to build the interface between the two mainframe-based programs.
The Computrol system first flags account activity that departs from usual customer patterns. Sterling's system then analyzes transaction patterns and compares them with historical and current data from the demand deposit account system, customer information files, and other sources.
Automating this process has greatly reduced the amount of work for the bank, said Mr. Solomon. Now First Alabama is able to use a wider range of parameters to detect fraud, and thus decrease the possibility of something slipping through. Since its installation in February 1995, VectorKite has detected $1 million in kited checks, said Mr. Solomon.
"Before, we didn't look at anything under $1,000, so we had some losses from small-dollar kites," said Mr. Solomon. VectorKite, he added, also enables the bank to review activity beyond checking, such as automated teller machine transactions.
Observers note that while computers have made it easier for crooks to run elaborate kiting schemes - by setting up operations so that banks can't get notification of returned items before funds are released - so too have computers helped banks spot telltale kiting patterns.
"Kiting, because it's been around longer and has definite patterns to identify, is easier to spot than newer schemes, such as counterfeit checks," said William T. Morrison, vice president of Jacksonville, Fla.- based First Union National Bank.
The bank, an affiliate of $132 billion-asset First Union Corp., has been using VectorKite for three years. Previously, it used an in-house system to detect potential kites.
Like First Alabama, First Union uncovered kiting schemes shortly after switching to VectorKite.
Examining the first rounds of test data generated by the system, the bank discovered a fraudulent check for $90,000.
"That one transaction justified the price of the system," Mr. Morrison said.
The "electronification" of checks combined with transactions analysis has made kiting "not as big a problem," said Christopher Dowdell, vice president, Chemical Banking Corp., and co-vice chairman of the Accredited Standards Committee that published a "Check Security Guideline" last year.
Indeed, check kiting was not seen as a first priority at a February meeting of the ABA's check fraud task force, which included such institutions as Chemical, CoreStates Financial Corp., BankAmerica Corp., and NationsBank Corp.
"Kiting was not a big issue," said Sally Shawen, associate director of the ABA's anti-fraud task force.
"The systems banks have in place are effective so that, if kiting does occur, it can be stopped quickly," she said.
With check fraud on the rise, the industry will no doubt continue to use a combination of technology and cooperative efforts between banks and customers to stem the tide.
"Banks have to work toward getting ahead of the fraud process," said First Union's Mr. Morrison. "Today, we're a step or two behind."
Tracey Tucker is a freelance writer based in New Jersey.
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Banks are devising back-office procedures to better detect counterfeit checks.
Enter the New Generation of Check Scams - Desktop Fraud
While check-kiting schemes have long plagued banks, the industry is becoming increasingly concerned with newer types of check fraud driven by advances in personal computers, copiers, and laser printers.
"Banks' biggest concerns now are counterfeit checks, because they're the hardest to track, and often involve the largest dollar amounts," said Sally Shawen, associate director of the American Bankers Association's check fraud task force.
The industry is employing a number of preventive measures to combat the growing fraud.
The Arizona Bankers Association, for example, has sanctioned a statewide campaign to use fingerprints to verify some checks at teller windows.
In back-office environments, a service known as "positive pay" enables banks and corporations to electronically exchange check information before items are presented, thus reducing exposure to check fraud.
Ms. Shawen said that banks want to implement similar services at teller lines, where it's getting more difficult to spot counterfeits. Such systems would allow tellers to pull up on-line information on dollar amounts and other corporate account data, she said.
Atlanta-based Antinori Software Inc. markets this type of system. Called the Check Fraud Detection System, it analyzes daily check transactions in order to spot counterfeits and forgeries. By looking at dollar amounts and serial numbers, the system can flag a number of "out-of-range" behaviors that might be fraudulent.
The system works in the back-office environment, initiating analysis after demand deposit account posting occurs, and at teller stations.
The latter capability, added recently, gives tellers on-line access to transaction analysis during the day.
First introduced in 1994, 16 customers currently use Antinori's system, including Crestar Financial Corp. and SunTrust Service Corp.
First Alabama Bank, a unit of Regions Financial Corp., which spends about $300,000 annually on check fraud prevention and bank security, is looking into a variety of other ways to prevent check fraud. One system would flag serial numbers outside a prescribed "normal" range.
In addition, the bank is completing the installation of an image-based signature verification system from Norcross, Ga.-based Servantis Systems Inc.
