In today’s high-tech world of e-commerce, check fraud remains a significant threat, costing individuals, businesses, and financial institutions billions annually. Despite advancements in digital payments, many companies still accept checks, leaving them vulnerable to fraud.
The Persistent Threat of Check Fraud
Check fraud often involves counterfeiting through computer-aided methods or chemical alterations to remove and change security-related information. Victims include financial institutions, businesses, and consumers. These crimes typically start with the theft of a financial document, which can occur in various ways, such as stealing a blank check during a burglary, dumpster diving for old checks, or removing checks from mailboxes.
Identifying Fraudulent Checks
Businesses accepting checks should be vigilant to avoid falling victim to fraud. Here are some key strategies:
- Look for Alterations: Checks contain a nine-digit routing number in the bottom left-hand corner, with the first two digits indicating the Federal Reserve Bank that will handle the check. A favorite trick of forgers is to alter the routing number. By knowing the routing number of your closest Federal Reserve Bank, you can quickly identify if there’s an issue with a “local” check. If the routing number appears altered, there’s a good chance the check is fraudulent. Additionally, check for discoloration, which is an indication of alteration.
- Check Perforations: Authentic checks usually have a perforated edge, allowing users to tear drafts from their checkbooks. Be wary of checks without perforations, as these may be forged. While some legitimate checks may be printed without perforations, they typically have other security features.
- Inspect Signatures: Your business should have a policy of verifying the signatures on checks, preferably matching them against the signatures on the check writer’s driver’s license or other identification. Train staff to focus on the check’s appearance rather than the customer’s appearance to avoid potential lawsuits.
Implementing Internal Controls
Companies issuing checks are also at risk of fraud. Implementing strong internal controls can help deter fraudulent activities:
- Regular Inspections: Business owners or trusted executives should regularly check stock and account balances to identify discrepancies. Establishing a system of checks and balances can deter internal fraud. For example, don’t allow the same person to write and reconcile company checks. Rotate these responsibilities to minimize risks.
- Separation of Duties: Limiting the number of people authorized to write corporate checks reduces the chances of fraud. Ensure that different individuals handle writing checks and reconciling bank statements to prevent misuse of company funds.
- Professional Assistance: An accounting firm with experience in fraud prevention can perform an internal control study and recommend ways to minimize employee fraud and theft. Your financial institution may also offer fraud deterrent programs that include check stock with watermarks and other security features. Payroll cards, where the company loads electronic payments, are also gaining popularity for businesses that don’t use direct deposit.
Dealing with Bounced Checks
If you receive a bad check, most states provide mechanisms to collect payment or take court action to force payment. The preferred course of action is to collect the check first. Typically, you must do two things to force payment:
- Show the check was dishonored.
- Notify the check writer of the dishonor. (All states require that the person who wrote the check be notified that it was rejected.)
Some states require further action, so it’s essential to understand the specific collection statutes and court criteria for collecting bad checks in your state.
Additional Tips
To further protect your business, consider these additional tips:
- Place a notice about your policy on bad checks in visible areas such as the receptionist’s desk, cashier’s window, or on invoices. State that you’ll charge a fee for returned checks and that customers will be responsible for all reasonable costs and expenses.
- Send the customer a notice outlining the penalty to be assessed and the charges to be brought if payment isn’t made within a reasonable timeframe (generally 10 to 21 days). While you don’t have to send the notice by certified or registered mail, include an affidavit of mailing to prove the notice was sent to the person’s last known address.
- Remember that the laws for collecting checks vary from state to state, so consult your attorney or CPA for guidance.
The best defense against check fraud is a proactive approach. Implementing robust internal controls and staying vigilant can significantly reduce your risk. For personalized advice and support, contact Patten and Company LLC. Our experienced team can help you develop strategies to protect your business from fraud and ensure your financial security.
Contact Patten and Company today to discuss how we can assist you in safeguarding your business against check fraud.
