Avoid Being a Check Fraud Victim

Are your business checks in good hands? Maybe not. According to the 2015 American Bankers Association Deposit Account Fraud Survey Report, fraud against bank deposit accounts cost the industry $1.9 billion in losses in 2014. Debit card fraud accounted for 66 percent of industry loss, followed by check fraud at 32 percent, and online banking and electronic transactions such as wire and ACH at two percent. The most common check fraud categories were counterfeit checks and return deposited items.

Thankfully, there’s a resource available to help put a stop to check fraud against your business. It’s called Positive Pay. Positive Pay is an automated fraud detection tool offered by the Cash Management Department of most banks. In its simplest form, it is a service that matches the account number, check number and dollar amount of each check presented for payment against a list of checks previously authorized and issued by your company. All three components of the check must match exactly or it will not pay.

How Positive Pay Works

Each day checks are written, your business sends (transmits) a file of issued checks to your financial institution. When those issued checks are presented for payment at the bank, they are compared electronically against the list of transmitted checks. The “check-issue file” sent to the bank contains the check number, account number, issue date, and dollar amount.

If there are any discrepancies to the information you submitted, the check is flagged as an exception and will be sent to you for review/authorization. Exception items can include check numbers that don’t exist in the issue file, dollar amounts that don’t match the issue file, duplicates of checks that have already been paid, and checks that were marked as “void” in the issue file. When something doesn’t match up, you will receive a fax or email alert with an image of the check in question and an option to pay or not pay (return the check).

Positive Pay offers two additional services:

• Payee verification
  Altering the payee field has become an increasingly popular method of check fraud (just read the personal story from one of our “KLients” below). Payee verification is an advanced security feature that validates checks not only by account number, check serial number, and dollar amount, but also by payee name. Presented checks are compared to the payee field in the issued check file and exception items are sent to you for a pay/no-pay decision.
• Reverse positive pay
  This is a good solution for businesses that don’t want to go through the effort of creating issue files every time a check is written. In the reverse method, your business receives a file of the checks presented for payment from the bank every day and you then notify the bank of authorization decisions. Although this can be a time saver, the big downside is that it won’t prevent fraudulent checks from being cashed since the teller won’t have access to an issue file.

As we see it, there are many advantages of using Positive Pay. Some of these include:

• Instant check reconciliation (rather than waiting until bank statements are issued)
• Ability to reject unauthorized payments before the loss is incurred
• Checks can be voided on your bank’s website or in the issue file, eliminating the need to go through the “stop payment” process
• Improves audit control
• Improves accuracy of deposit balancing
• Simplifies accounts payable process
• Saves your business time and money

There are a couple of things to be aware of:

• Unless your financial institution has uploaded the check-issue file first, payees will not be able to cash any company-issued checks on the same day as issuance.
• The fees for Positive Pay services are not set in stone and will vary. It could pay to shop around.

“KLient” Story – Checks ending up in the wrong hands

A client of ours wrote out a hefty check for about $200,000 to a vendor they owed. A few weeks after mailing payment, our client received a call from an unknown number. The company on the other line was calling to follow up on a large check they had received from one of their own customers. The troubling thing was, the individual presenting the check was significantly overpaying for the services they owed. The check was written out to the individual and they, in turn, were asking to have the excess amount returned to them in cash.

Thankfully this raised some red flags so the company decided it would be best to contact the issuer of the check (our client) to confirm. After comparing the account number, check serial number, dollar amount, and payee name, they realized something was not adding up. The name written in the “Pay to the Order of” line had been changed. The payee address had also been changed from an address in Canada to Indianapolis, Indiana. Somehow the check had ended up in the wrong hands. This was the wake-up call our client needed to sign up for Positive Pay. Our client has now taken back control of their check issuing processes and has the peace of mind that their money will only go where it’s intended.

Don’t let check fraud happen to you

In 2014, there was an estimated $13 billion in attempted fraudulent transactions. Thieves show no sign of letting up so check fraud could easily happen to any business. To learn more about this invaluable business management tool, contact your financial institution’s Cash Management Department or a Kruggel Lawton Business Accounting Services professional can point you in the right direction.

Written by: Evelyn West - Senior Staff Accountant
Business Accounting Services Group
ewest@klcpas.com
Phone: 574.289.4011, x242