Keeping Check Fraud in Check: Recent Report Looks at the Marketplace of Fraud Prevention

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While lacking the profile of identity theft or credit card fraud, check fraud remains an active presence, having tallied to $708 billion in 2002, according to Celent Communications, Boston.

How to put that in perspective? Despite a steady rise from 1997 to 2001, check fraud hasn't spiked unreasonably and could be worse. The industry has managed to thwart almost six times as much fraud as the value lost, according to the ABA's 2002 Demand Deposit Account Fraud Survey.

Yet risks of tarnished reputation associated with the crime have always been high and in recent years criminals have become more serious, organized (as in crime syndicates and terrorist groups) and inventive, according to the FBI and other sources.

For any who imagined that the practice of altering checks or falsifying signatures had departed with Frank Abagnale's conversion to "good guy," take note: Forged signatures are still a big problem.

It is one of the toughest types of fraud to catch at the point of presentment without relying on technology," says Celent's Alenka Grealish, who is manager of the research company's banking group.

Typically, a doctored item gets flagged weeks later and rarely gets traced back to the guilty party. This is why signature and payee verification solutions (which work by either recognizing handwriting or text) strike Grealish as being especially valuable to bankers. Positive pay, in which a company provides banks with a list of checks drawn on its accounts, is another, older solution that can help.

Grealish contributed to a research note, Technical Solutions for Today's Check Fraud Environment, written by analyst Ariana-Michele Moore, which was published in April.

Here, we'll review a few key findings from the 40-page document, which surveys traditional prevention methods as well as newer image-oriented and risk solutions, and alternative technologies such as digital watermarks or biometrics.

No single solution Grealish likes technology that focuses on the signature, but she also emphasizes that fraud-changing at the speed of calculated criminal intent-takes on too many forms to be handled with any single application or approach.

Moore says that Celent looked at the marketplace for fraud tools at a time when semi-stable patterns of fraud may get disrupted.

"Check fraud has been around forever, but the pace of changing schemes has been slow enough for bankers to react with very good procedures-many of them manual," she explains.

"Because Check 21 will introduce image, and because many historical procedures are about to become invalid, we believe the rate of fraud may change," says Moore. "We wanted to get a better sense of the marketplace to see how the industry might handle fraud in a mixed environment."

Traditional schemes such as "paper hanging"--in which fraudsters write checks purposely on bad accounts-or non-sufficient funds, stolen checks, and counterfeiting have been joined by attacks on newer forms of payment such as pre-authorized drafts. (These are printed on demand by a third party and have the check writer's account information. Basically, checks created this way get deposited directly into a recipient's account with signatures on file. Unauthorized persons getting access to the systems housing check files can look quite legitimate unless a pattern of payments that don't match to services rendered can be detected. Or, fraudsters create phony preauthorized draft accounts and draw on bank accounts.)

If there is somewhat positive news in all this, it is that technologists keep inventing new forms of protection to let banks gain equilibrium. Traditional measures such as check stock security features or two-dimensional bar codes are joined by databases (for keeping tabs on the bad guys), fraud features in check imaging software for spying out irregularity, and screening software.

All of these occupy an increasingly crowded marketplace of solutions upon which banks can rely, Moore explains. …

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