As the workhorse of the payments system, checks have always been vulnerable to abuse--and continue to be the target of fraud, a recent ABA survey points out.
Though society's criminals and cheats are the exception, have had their effect on the banking system and its rules. In addition to driving up operating costs, fraud often costs a bank its reputation with the customer and depletes organizational morale. Combating fraud requires training, account screening, signature verification, and information sharing with regulators and local authorities, bankers say.
ABA tracks check fraud through annual industry surveys conducted since 1992. The most current of these suggests that loss due to check fraud--generally defined as the intentional negotiation of a check without the account holder's approval or authorization--has amounted to $512.3 million in 1997, a 5.2% increase over the $487.1 million estimated for 1995 by the Federal Reserve.
Check fraud includes schemes such as check kiting or forging a signature or endorsement.
Losses to all size banks
A national sample of 5,000 banks (clustered in three asset groups--small, medium, and large) showed that one in two institutions, or 48.3% of the survey sample, suffered financial losses from check fraud in 1997.
Losses were reported by 49% of community banks, 90.5% of mid-sized banks, and by all large institutions. The estimated losses did not include check-fraud loss avoidance as a result of banks' prevention systems and procedures. Such potential losses amounted to 113% of actual reported losses during that time.
(Note, for comparison, that total deposits held by commercial banks grew 12.8% between 1995-97.)
The number and dollar amount of check fraud losses show considerable variation by bank size and within size category.
Community banks reported a median of four fraud cases in 1997, with a total median loss of $5,590 per bank. Mid-sized banks reported 40 cases, with a total median loss of $53,265 per bank. Regional banks reported 638 cases with a total median loss of $1.2 million per institution. Superregional/money center banks reported 2,169 cases with a total median loss of $11.1 million per institution. To combat fraud, many banks have allocated resources to their internal systems, operations, and investigation functions.
Methods to the madness
Checks written against consumer accounts were the most common source of …