Skimming revenue, part two

Laundering stolen checks


By Joseph Dervaes, CFE, ACFE Fellow, CIA

Fraud's Finer Points

In the January/February 2005 issue, we began a discussion about the primary method I've seen where the highest-risk employee - the employee who's the last person to prepare the bank deposit before it goes to the bank - skims revenue from the organization using a check-for-cash substitution scheme. Skimming frauds are perpetrated by employees who remove funds from the organization prior to recording accountability for the transaction in the accounting system. This column continues the discussion on employees stealing checks from the organization.  

Stealing checks
Many managers don't understand the fraud risk associated with checks. They believe they're safer than currency and no one else can endorse them after the customer enters the organization's name on the payee line of the check. This is faulty logic. I see more employees stealing checks now than ever before.

Trusted employees can negotiate stolen checks in several different ways but regardless of the methods, the endorsements on the checks are irregular and certainly aren't what managers would expect.

Why don't banks notice irregular endorsements during processing? I've found that most fraudulent endorsements on stolen checks generally are sufficient for them to be processed through the banking system.

By necessity, the cost of internal controls over check irregularities has caused banks to default to requiring check issuers to notify them of any irregularities they detect. Banks will accept their responsibility and suffer the losses if fraud is present. Sometimes, they do this to maintain good customer relations. According to the 2005 Safe Checks Web site (www.safechecks.com): "Check fraud is a problem reaching epidemic proportions. With annual losses over $20 billion, check fraud far exceeds all other forms of financial theft, except embezzlement. No company is immune."

In this environment, banks are seeking ways to transfer the liability for bogus checks to their customers. In 1990, the U.S. Uniform Commercial Code was revised; the cost of check fraud is now shared by the bank and its customers. In each case, the party in the best position to prevent the fraud takes the greater share of the loss.

Most financial institutions and consultants recommend organizations implement a number of practices to combat the risk of check fraud and reduce the likelihood of incurring a loss from bogus checks. Here are some of those practices:

  • Separate financial duties within the organization.
  • Reconcile bank accounts immediately upon receipt of the bank statement.
  • Implement positive pay or reverse positive pay systems. These systems reconcile checks issued with checks clearing the bank on a daily basis to prevent bogus checks from being paid.
  • Ensure that checks being issued incorporate an appropriate number of security features. (Contact your banker for additional information about these standards.) 

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