ABA Launching Check-Fraud Survey

Hopes Results Will Help Win Longer Clearing Time

The American Bankers Association is about to start a study of banks' payment operations in the hope that the results will persuade regulators to allow more time for clearing checks.

The survey, which will be mailed to the top 500 U.S. financial institutions next month, will address the problem of bank losses due to check fraud.

By nailing down some hard statistics on fraud costs, the ABA hopes to prod the Federal Reserve Board and Congress to extend the funds availability deadlines mandated by the Expedited Funds Availability Act.

Under the 1987 act and the related Fed Regulation CC, financial institutions have two days to make funds available on checks deposited locally and five days for nonlocal items.

Few Hard Numbers on Losses

Industry estimates of bank losses from check fraud range from $750 million to $1.5 billion, but few hard numbers on the crime exist, according to industry observers.

"Every single bank experiences losses from check fraud, but none of them are particularly eager to have their writeoffs publicized," said Bruce Brett, a vice president in cash management at Signet Bank Corp., Richmond, Va. "This is an issue that could use some quantification."

ABA representatives said the past 12 months have seen a significant increase in bogus checks cashed by banks. The increase is due, at least in part, to the availability of desktop publishing systems that enable criminals to print near-identical duplicates of legitimate checks.

Just $1,200 will buy the software necessary to print counterfeit checks complete with the magnetic-ink identification line that can be read by banks' high-speed check processing machines.

Vendors Not Criticized

Ironically, such software -- from companies including Bottom Line Technologies Inc., Exeter, N.H., and Image Technologies, Somerset, N.J. -- was created to help combat check fraud. Private businesses that issue a large number of checks use the technology to print checks as needed instead of keeping a large inventory of blank drafts that might be stolen or misused.

Bankers are quick to point out that the abuse of such a technology is neither the fault nor responsibility of vendors. It is simply one example of a wide range of methods criminals may employ to dupe banks.

And, according to the ABA, the abuses demonstrate the need for legislation that would let bankers defend themselves against such crimes. An extension on the amount of time a bank is allotted to clear a check is a good start, bankers said.

"With over 50 billion checks flowing through the banking system each year, it's just impossible to effectively look for fraud under current regulations," said Signet's Mr. Brett. "Banks are just writing these things off, and that's really not the best way to deal with the problem."

Bankers expect that as image technology for check processing develops, security measures will improve -- because signature verification will become easier. But that is years away, and bankers said they need relief now.

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