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The Liability of Fraudulent Checks

Checks remain the most vulnerable payment mechanism targeted by fraudsters. This type of fraud is on the rise even though check volume is declining. The reality is that without preventative measures in place to deter criminals from defrauding your company, your firm is extremely susceptible to check fraud. The Association of Certified Fraud Examiners estimates that organizations in the US lose about 7 percent of their revenue due to fraud.

Why should you care? Historically, you did not have to. Financial institutions were on the hook when criminals took advantage of an unsuspecting business. That is not the case anymore. Changes in the Uniform Commercial Code (UCC) have placed the burden on the party who is most negligent in the process. This could be you.

Three of the most prevalent ways criminals are able to obtain and use checks fraudulently are:

  • Lost, stolen, or counterfeit employee paychecks
  • Counterfeit checks showing company’s MICR line with another company's name
  • Payee name is altered on the issued checks

The American Bankers Association and FBI have estimated between 5.5 and 13 billion dollars are lost yearly due to check fraud. Defrauding checks is relatively simple. Prevention, thankfully, is equally effortless.

Implementing preventative measures will significantly reduce your firm’s liability related to these crimes. Here are some safeguards you can put in place to limit your exposure:

  • Eliminate preprinted check stock. Having several different checks with preprinted information makes it hard to monitor which makes it easy for criminals to take checks without notice. Instead, you can purchase blank check stock and use software applications to print checks from your computer for each transaction individually. You also can use this software to print checks from several different bank accounts on behalf of multiple clients, so you only need a single type of check stock.
  • Add security features to your checks. Added security features empower the payee to verify that their check has not been tampered. Here are some of the most effective measures:
    • Heat sensitive ink that when you rub between two fingers, a symbol fades then reappears.
    • A microprint border that when photocopied will appear as an obvious broken line.
    • Chemical reactive paper that will appear to be stained if a chemical alteration is attempted.
    • Watermarks that cannot be photocopied.
  • Close the payment loop. Standard Positive Pay and the new Payee Positive Pay is a closed loop process that sends electronic information to your bank informing them of the information that should be on the check that they are cashing. If anyone attempts to change the dollar amount, payee name, date, check number, or routing code, the bank cashing the check will deny him or her.
  • Implement the proper internal controls. You should set up the appropriate approval structure in your organization to ensure that the correct people in the firm have approved payments made.

Implementing these measures seems like a daunting task at first, but a bit of work at the beginning could save you a lot down the line. Luckily there are solutions that can help you.

Piracle has created a software package that seamlessly integrates into your current ProLaw accounting platform. Create-A-Check has been around for many years, but is constantly working to stay one step ahead of fraudsters. Their software and security enhanced blank check stock tackles all of these issues and more. You can learn more about this industry leading technology at:

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