Check Security Online Special
Frank Abagnale, a consultant in document security and expert in methods of fraud and forgery, was kind enough to speak with BFL&S to help us inform our readers about check fraud and how it will be affected by Check 21. Abagnale is most known as the author and subject of Catch Me if You Can, which was made into a popular Steven Spielberg film. He is also the author of several books about fraud and identity theft. His renown in the security field comes from his ability to circumvent it. As a minor, Abagnale became one of the most notable, successful and notorious forgers ever. Those days are far behind him, but he continues to use his talent to help law enforcement agencies and those in the private sector prevent the kinds of crimes that he himself once committed.
Below are examples of check fraud, explanations of how they were committed, prevention methods and liability issues:
A business writes a $2,500 check to a contractor who then alters the check to $25,000. When the contractor deposits the check it will be scanned and likely truncated (destroyed) leaving a digital image of the check as the only document. If the check clears the business’s bank and is paid then, when the fraud is detected, maybe weeks later, the evidence of the fraud will be very limited. A scanned check loses most of its security features.
How It Happened
Original checks can be altered in several ways. Forgers may use chemicals to remove the ink in several places and then re-write the information for the increased amount. This is known as “washing” a check.
If the check was printed on a laser printer, little more than a piece of clear cellophane tape is needed to perfectly remove the toner. Then any amount can be entered.
Some criminals actually reprint information in a larger font over the existing information.
Finally, it is possible to cut information from one part of the check and reinsert it onto another. This may be done digitally so as not to harm the check.
Chemically-sensitive papers will change color, show the word “void” or simply be destroyed when certain known ink washing formulas are applied. Additionally, some pens use inks that penetrate the check paper and are nearly impossible to remove. Abagnale recommends the uni-ball 207, which was designed to his specifications.
To prevent toner removal, some paper manufacturers altered their stocks to be heat sensitive and bond the toner to the paper. This is often called “toner lock” or “toner anchorage.”
Using a large font when printing checks helps prevent a criminal from printing over the original wording. Certain “secure fonts” can also be used. These fonts print the text in the negative space of a black box, making it impossible to overprint.
Detailed backgrounds make cut and paste operations very difficult, even on a computer. Prismatic backgrounds are especially complicated. They have numerous small and curving patterns and fade colors gently. Some checks incorporate pinstripes of varying widths and spacing. These also help prevent cut and paste fraud.
Liability and Prosecution
Since the original document was likely destroyed there is little evidence. Without evidence, prosecuting the criminal is nearly impossible and even proving that the original check was indeed for only $2,500 may be difficult. This may result in legal battles with the bank or even the contractor. In the end, it is possible that the defrauded company may be responsible for the loss.
A criminal receives, legally or steals from the outgoing mail, a business’s check. Using the information on the check, he or she then makes counterfeit checks and cashes them, taking thousands of dollars from the company.
How It Happened
The criminal may have scanned the original check and then carefully removed the “Pay to” information using image editing software. It would then be a simple matter to print many copies of this check and write them to himself, cashing them at various banks in a short time.
The criminal may also have been able to identify the check stock and then simply buy that stock and print all of the MICR line information at the bottom, essentially recreating the business’s checks. (The MICR, Magnetic Ink Character Recognition, line contains the bank account and routing information. It is located at the very bottom of the check.)
Firstly, to limit a criminal’s ability to steal a check, make sure to place it into a locked postal box. Never leave it on a desk, in the outgoing mail folder or a box anyone can access.
There are a number of features to prevent checks from being scanned. Printed features like high-resolution borders, micro printing, void pantographs and complicated, colored or prismatic backgrounds are good. But any printed feature may be copied with high-quality optical devices. A high-resolution scanner and top-of-the-line printer may be able to passably reproduce these features, though not without difficulty. Non-printed features like UV inks (inks that glow under blacklights), UV fibers, holograms, watermarks (both true and artificial) and thermochromatic inks are highly effective. Scanners and copiers cannot reproduce these features at all. A forger would need expertise, time and equipment to adequately reproduce such features. As Abagnale explained, most criminals are not interested in investing time and effort to forge a complicated document; they will likely move on to an easier target. True watermarks are unforgeable as they are physically embedded in the paper. The same goes for UV fibers. The combination of watermarks and thermochomatic inks is an especially good security combination. Both are easy-to-verify, hard-to-reproduce, features that cannot be optically copied.
To prevent a criminal from replicating a check, there is only one solution: Choose a secure, or hard-to-locate check stock. Some stocks are tightly controlled and will only be sold pre-printed.
Liability and Prosecution
Article 3406 defines certain liability issues occuring as of 1996. This law is uniform throughout all 50 states and dictates, as Abagnale paraphrased, “Whoever was in the best position to prevent the forgery is who assumes the liability.” In the case of a check stolen from unsecured outgoing mail, that would be the fault of the person who left the check there (i.e., the company assumes liability).
If a bank or check cashing store cashes a counterfeit check that has obvious faulty security, then the bank is at fault, but if the original check had easily replicated security features and the check is a convincing fake then liability is unclear. Now “holder in due course” comes into play. Abagnale explained that the original purpose of holder in due course was to prevent the check holder from unfair liability, but it has been used to extort payments from honest businesses. Abagnale said he often must inform companies facing “holder in due course” litigation they may actually be forced to pay the fraudulent check. “That’s a horrible law and people cannot believe—they just sit there dumbfounded—that they have to pay for this,” he said. If a plaintiff can convince a judge there was no way to detect the fraudulent check and it should be considered as a negotiable document, then the defrauded company will have to pay. The judge may side with the business, but who would want to leave such a decision in the hands of the courts when it could be avoided?
The same “holder in due course” legislation may apply in cases of check replication because a company used a common check stock. This is best avoided.
Perhaps the biggest problem for companies dealing with fraudulent checks and “holder in due course” occurs when collection agencies get involved. Some agencies make a living buying disputed checks and then sueing the company for payment. These companies or individuals have the time and resources to do this because that is their primary business.
A business mails many checks in a given week. One of these checks becomes lost in the mail. The designated recipient complains the check never arrived, so the company puts a “Stop Payment” on the original check and reissues it. The reissued check is cashed without problem. A few days later the original check appears at a check cashing location. The business’s bank refuses to pay. Everything seems fine. Then, a few months later, the check cashing store threatens to sue if it does not receive payment. Under “holder in due course” the store sells the check to a collection agency and the legal battle begins.
How It Happened
“The scary part about that ... in most of those cases, there is tremendous collusion between check cashers and the criminal,” Abagnale said. He claimed that criminals will often make deals with the check cashers, admitting the check to be fraudulent but agreeing to give the check casher a percentage if it clears. “It’s hard to prove,” Abagnale said.
Very large checks should be sent by certified mail or an established delivery service (e.g., UPS, Fed-Ex).
Further, Abagnale recommended the following statement be printed on every check (preferably above the signature line) to avoid trouble with “holder in due course” claims: “This check expires and is void XX days after the issue date.” He suggested 30.
He also said it is important to remember that “Stop Payment” orders are only good for six months. Once the “Stop Payment” has been issued, it should be renewed at least three times.
Finally, Abagnale is a huge proponent of “Positive Pay.” This system coordinates each check with the the bank and prevents payments of any un-matching claims. A list of all payments is sent to the subscribing business every day so that accounting may be verified. Abagnale recommended companies of any size to be on Positive Pay at their bank. Using Positive Pay the lost check can be removed from the issue file. If someone attempts to cash the lost check there is no match. The bank will mark this as a suspicious item and call the account holder.
Liability and Prosecution
It is difficult to prosecute most of these problems, especially if the forger has used a false ID and/or left the area. Abagnale said many of those who are caught are eventually released because they do not pose a large threat to society (i.e., they are not violent). “[Banks] know they can’t prosecute any of these checks, but the problem is, if you’re not doing anything about crime, you’re encouraging crime,” he said.
Small companies especially need to protect themselves from these kinds of fraud because a single check fraud instance that courts claim must be paid could lead to bankruptcy. For this reason, Abagnale reiterated, “You have to use a little common sense and protect youself.”