The banking industry's war on fraud may be causing new headaches for community institutions.

Community bankers who attended last week's American Bankers Association National Security and Fraud Prevention Conference here were warned that as the largest banks deploy increasingly sophisticated security measures, criminals look for easier targets.

Often they settle on community banks, which have fewer resources to dedicate to fraud prevention.

"Con artists recognize when they can no longer penetrate a bank and will migrate to other banks," said Kit Needham, senior director at the Banking Industry Technology Secretariat, a division of the Bankers Roundtable in Washington, D.C.

Ed McDonough, vice president of consulting and risk assessment for Pittsburgh-based Allied Security Inc., agreed. He said check fraud in particular is becoming a larger problem for smaller institutions.

Numbers from the ABA's most recent check fraud survey show that large banks absorb the vast majority of check fraud. The survey also shows the percentage of community banks reporting check fraud to the Federal Reserve dropped from 55% in 1995 to 49% in 1997.

However, no figures on absolute dollar losses are available, and ABA spokesman John Hall said trends suggest increases in fraud at community banks.

"At one point check fraud was an East Coast-West Coast phenomenon," Mr. Hall said, "but lately it's moved into the heartland where there are large concentrations of community banks."

In the past, community banks used their knowledge of customers and employees as a check against fraud. If a longtime customer initiated a transaction that looked strange, for instance, a bank might be inclined to give the customer the benefit of the doubt and complete it.

But criminals are starting to take advantage of such practices. Mr. Hall said a large proportion of check fraud used to come from newly opened accounts. But in recent years, criminals have been leaving accounts open for longer periods, in an attempt to lull banks into a more trusting mode.

Advances in printing techniques also have contributed to increases in check fraud.

"People can go into an office supply store like Staples and buy a box of checks for as little as $19.95 with instructions on how to make up new checks," said Kathy Kuzmicki, loss prevention and assistant security officer at Oak Brook Bank in Illinois. "I see three to five bad checks each day come through the bank," she said, but considerations of practicality prevent the bank from giving extra scrutiny to any but the highest-dollar items.

Though check fraud commanded much attention, those at the conference also discussed the importance of forming working relationships with local police departments. This is a particularly sensitive issue for community banks because their fraud losses are not always large enough to get attention from the police.

Elizabeth Hundley, assistant vice president and retail banking officer at Industrial Bank in Washington, said she meets monthly with city law enforcement officials. "In a big city, it is good to know a representative in the police department," she said.

As crime becomes a bigger problem for community banks, many are beginning to take more aggressive preventive action. Measures range from installing new video equipment to hiring a security officer.

Some banks report that the effort is worthwhile. Michael J. Brennan, vice president of special services at Staten Island Savings Bank in New York, said a focus on fraud prevention reduced the number of cases by 25% in 1998.

Thomas G. Holland, vice president and manager at BankAmerica's corporate investigative and security services, said no one system will stop a counterfeiter. But combinations of measures can reduce fraud to an acceptable level.

He suggested that banks large and small develop and maintain rigorous hiring practices and maintain specific check-cashing limits and customer identification rules.

Fraud prevention, "will work if we work together," said Raymond Kelly, U.S. Customs Service commissioner, who was named "bank security partner of the year" at the conference. "We need to reach out to the public for support and cooperation," he said, "to renew our pledge to help and protect financial institutions from fraud."

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