Facing up to an explosion of check fraud that has begun to threaten their bottom lines, financial institutions across the country have begun to employ a variety of high- and low-tech systems designed to frustrate scamsters.
As losses due to stolen and counterfeit checks have mounted significantly in recent years, it has become apparent that bankers are taking a more pro. active stance in thwarting fraud, and are less willing to accept these crimes as a cost of doing business.
And while some banks are turning to high-tech approaches to detecting fraudulent transactions, such as using software that uses artificial intelligence programming techniques, other institutions are turning to less leading-edge technologies, even to the point of manually inspecting items as they are cleared through their payment systems.
Estimates vary widely on how much banks lose to check fraud, but most agree it is in the billions of dollars per year.
And the problem is getting worse, as bankers point to the fact that criminals have access to technology that makes the crimes easier to commit. Low-cost document scanners attached to personal computers can be used to quickly produce nearly identical counterfeit corporate and payroll checks.
Bill Capps, executive vice president and chief administrative officer at Imperial Bank in Los Angeles, when asked if he viewed check fraud as a fast-growing problem in the industry, replied,"I wouldn't characterize it any other way." He added that in meetings with other bankers, "We don't debate how bad it is, we just debate how best to stop this runaway train."
Steve Ebert, an assistant vice president and cash management product manager at Norwest Corp., said his bank has not yet seen big losses from counterfeit-check fraud, but "the frequency has been going up," he noted. "We've been a champion about speaking about check fraud, getting corporate customers aware that it isn't always the banks that end up losing, particularly with counterfeits. It bites you out of nowhere."
Barkley Clark, an attorney with Kansas City-based Shook, Hardy and Bacon who has worked a number of banks concerning payment liability issues, said beefing up fraud control systems can help banks assign financial losses to their corporate customers rather than taking all the hits themselves. "If banks take on a form of technological protection...they can limit their liability under the Uniform Commercial Code if their controls are consistent or exceed what other banks do," Mr. Clark said.
What's interesting though, is. that while criminals are increasingly going high-tech, banks aren't always fighting fire with fire.
For example, in the check arena, many banks now manually review a selected number of items coming from corporate accounts to detect suspicious transactions. Mr. Capps said after Imperial experienced big losses due to check fraud in 1993, the bank this year began reviewing all checks over certain a dollar amount. "Since we're primarily a business bank, we don't have the check volume a retail bank has so it made manually reviewing items easier," he said. "We are able to catch a significant dollar amount of fraudulent items that way," including a bogus check for a whopping $2 million.
Another fairly simple antifraud system more banks are employing is called "positive pay," whereby corporate customers transmit daily information about the checks they have issued, including the sequence numbers and dollar amounts. This data is then used by the bank to compare with the checks clearing through their back office.
Mr. Ebert, a member of an American Bankers Association task force on check fraud, said most cash management banks now offer positive pay as pan of the account reconciliation services. "If the customer and the bank are doing it right, it's pretty much impossible to beat."
The problem with positive pay, he noted, was that it is really only feasible for the large corporations who are willing to make the commitment to install the necessary systems needed to electronically transmit check data on a daily basis. "Banks have had pretty good success rate of getting their large corporate customers onto positive pay, but even then I'd guess its only 5% of commercial accounts."
So in order to help corporations who can not take advantage of positive pay, earlier this year Norwest developed software called Arti that works with the bank's mainframe-based account reconciliation system.
Arti uses statistical algorithms, and incorporates rules developed by Norwest employees that have been proficient in spotting fraudulent checks, in order to flag suspicious items, Mr. Ebert said.
In place only since mid-August, Arti already has caught a handful of fraudulent transactions, he said. "We've taken the needles out of the haystack."
An Atlanta-based software vendor, Antinori Software, is developing a similar system with the help of SunTrust Banks Inc. and Crestar Bank. The detection system is expected to be in production sometime next year, Antinori officials said.
Imperial Bank officials said they now have three weapons to combat check fraud. In addition to examining large-dollar checks by hand, it also offers a positive pay service to its larger corporate clients. But to better protect all its customers, the bank worked with check printer The Standard Register Co. to develop a line of checks with a number of security features, including microprinting and copy-proof watermarks that make the documents difficult to counterfeit.
The new line of check stock, called SafeChecks, is now being marketed to banks nationwide, Imperial Bank officials said. "Standard Register agreed to produce a large run of the check stock, which has lowered the percheck cost to bank customers," said Greg Litster, senior vice president.