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A Fortress Against Fraud
Build a complete system for securing customers' documents.
BY KATIE SWEENEY
FORM, April, 1997
David Sims recalls examining the checks front, back and sideways. "I would have thought I'd printed them myself," says Sims, president and CEO of Sims Business Systems Inc., a distributorship in Springfield, Mo. But he hadn't. Someone else had created the two perfect copies of his customer's accounts payable checks, made them out to a bogus overseas company, and cashed them. The total loss: $400,000.
Although the bank picked up most of the tab, Sims and his customer were anxious to prevent another forgery. In retrospect, Sims can see that the checks were an easy target. They were printed in black ink on safety paper. A watermark was the only security feature. Sims previously hadn't sold many security features, but that quickly changed.
Now the customer's checks are printed on Boise Cascade's CheckProtect paper, which includes such features as an artificial watermark and fluorescent fibers that can be detected under a black light. The checks also include a warning band and padlock icon alerting recipients to the check's security features, as well as microprinting, a line of small type that can only be detected with a magnifier. "They've got every bell and whistle imaginable," says Sims of the redesigned checks.
But adding bells and whistles is only the first step in protecting customers from fraud. Sims analyzed his customer's entire check handling system and looked for potential weak links. "We went in there and looked at how they printed their checks, stored their checks and kept track of internal numbering," he says. During the analysis, Sims discovered that his customer wasn't tracking check numbers accurately because of a computer glitch. He also recommended that the company use a positive pay system for all its checks. With positive pay, a company provides its bank with a daily list of the checks it issues. If the bank receives a check that's not on the list, it won't cash it.
The improved security paid off. A month after the first fraud incident, the same forgers tried to cash another fake check. This time, because of the positive pay system and the security features, the bank refused to cash it, Sims says.
Sims took the lessons he learned from that customer and applied them to other accounts. Today, a year after the forgery, security features are a major focus for his distributorship. "[That incident] put the spark in us as a company to warn the rest of our accounts," he says. "I wish I'd been more proactive before."
Securing the System
Although banks often are held liable for check fraud losses, experts in the financial and printing industries have interpreted UCC Articles 3 and 4 to mean that customers must share some of the liability for forgeries or show "due diligence" in trying to prevent fraud. Due diligence can mean adding security features on checks, but it also includes how a customer handles and stores checks, says Bill Borklund, CFC, a partner of CheckSource, a distributorship in Conyers, Ga.Another reason it's important to help end users develop a holistic system of check security is that not all check fraud is the same. Although in Sims' case the forgers duplicated the company's checks exactly, a check doesn't have to be identical to the original for it to be cashed. "I've seen checks printed on wallpaper that passed," says Borklund. Sherri Flossi, sales rep for Multi Business Systems, a Bakersfield, Calif., distributorship, says one of her customers had $30,000 in payroll checks forged during one weekend. The forgers used white-out to erase the name and amount on the check, then photocopied it and wrote in new information. "They looked phony," says Flossi. But they were cashed.
On the other end of the spectrum, many professional counterfeiters don't just use copiers to duplicate checks, Borklund says. Instead, he says, they obtain account numbers and print fake checks on high-quality presses. Those checks don't look anything like the originals, he says, but they look real. And sometimes, security features just fail. For example, Donald Foster, owner of Accelerated Systems, a Columbus, Ohio, distributorship, says one of his customers used a void pantograph on its checks, but a forger somehow photocopied a check without the "void" feature appearing.
So how can you help your customers protect themselves? In some cases, you can't, says Borklund. No security system and no security features on a check are 100 percent fraud-proof. "It's not a simple problem or solution," he says. But there are ways, in addition to watermarks and warning bands, that you can help customers minimize their risk. Experienced distributors suggest that you:
- Tell your customer to talk to its bank. Or, talk to the bank yourself. All the security features in the world won't do any good if bank tellers don't know what they're looking for. Flossi gives each check customer a suggested letter format to be sent to its bank. The letter describes security features on the checks and how a teller can verify them.
- Consider a positive pay system for larger customers. Borklund says one of the biggest increases in check fraud has occurred at large, big-name companies, such as public utilities or restaurant chains. Forgers often print mass amounts of fake payroll checks in these companies' names and distribute them. "Positive pay is being used by more and more banks," he says.
- Encourage customers to examine their checks carefully. Borklund says all businesses need to be diligent about immediately reconciling their bank statements and looking at the checks they get back. "They need to make sure the checks are theirs and the amounts have not been altered," he says. "Many companies never examine their checks closely." Altering an amount or name on a check is a fraud commonly seen by smaller businesses, he says.
- Analyze the customer's check storage system. Sims says he found most of his clients already kept their checks locked up, but it's good to ask and make sure only select employees have access to them.
- Beware of dumpster thieves. "One of the biggest problems is that checks are stolen out of dumpsters," says Flossi. Even if checks are ripped, some people just tape them back together, she says. When one of her customers changes banks or account numbers, she offers to pick up the old checks and have them shredded.
- Ask about your vendors' security policy for checks. George Robertson, owner of Geo- Graphics and Forms, a distributorship in Tigard, Ore., says a maintenance employee at one of his vendors once stole some of his customer's checks and cashed them. The checks had been sitting unattended on the plant floor. However, the employee used his own name and ID when cashing the checks and was arrested.
- Work with local police. Multi Business Systems is a member of the Modesto (Calif.) Crime Task Force, which meets monthly to discuss the latest local fraud problems and how to prevent them. The group is made up mostly of bank officials and retailers, says Flossi. When police find a counterfeit check, they fax a copy to each member of the task force so they know which forgery methods are being used. "It helps keep us up to date," she says. In addition, Flossi has found new clients through the group. Many bank officials on the task force now recommend her to businesses that open new accounts with them.
Finding the Right Features
After customers are the victims of fraud, they often want to add every security feature possible to their checks. But some companies who have never experienced fraud don't want to spend any money for features. Sims says he knows several companies in his area still only use safety paper for their checks. "Document security is like an insurance policy," says Sims. "You're not going to spend the money until the tornado hits your house." The key to success is helping your customers strike a balance, with the right amount of features for each particular situation. The following are some questions to ask that may help you sort through the confusion:
- How does the customer's bank verify security features? Do tellers use black lights? Do they use a magnifying glass to check for microprinting in a signature line? "If they're just eyeballing it, I try to use features that are readily noticeable, like bleed-through numbering or artificial watermarks," says Sims. Borklund says he doesn't think many people check for microprinting, so it might be a waste of money. However, it is an inexpensive feature.
- Is your customer a regional or national company? "Maybe I'm wrong, but I feel people are more vulnerable when they mail checks all across the nation than if they just mail locally in a 50- mile radius," says Sims. For local companies, he recommends CheckProtect paper, a standard watermark, warning band, void pantograph and microprinting (if the bank checks for it). Also, the check should be printed in one or two colors, he says. Those colors should not be standard red or black, but PMS colors that are integrated in the company logo and screened. Checks with those features generally cost about 10 percent more than checks without features, he says.
- Sims advises companies that mail checks nationally to use bleed-through numbering, more colors and a step-and-repeat pantograph. Adding those features may bring the cost to 20 to 30 percent more than normal, says Sims. "People that just mail locally are not willing to spend 20 to 30 percent more," he says.
- How are the checks distributed? Although some checks are stolen out of the mail, checks mailed from a business to a vendor are less at risk for fraud than checks at other locations, says Borklund. For example, a payroll check for a public utility that might be cashed at a convenience store is more at risk for fraud and would need more security features than an accounts payable check for a small business, he says.
In addition, there are several security features that are simple and inexpensive for economically- minded customers who don't want a lot of bells and whistles. For example, Borklund suggests screening the bank's logo on the front and back of the check. "That's very difficult to duplicate," he says. Borklund also suggests placing an endorsement backer on the check in a light gray screen with reverse lettering. "That's very economical," he says. "You have to print endorsement lines anyway."
For customers who need extra security and don't mind spending the money, consider holograms and foil stamping. Robertson says one of his customers recently had nine payroll checks counterfeited and cashed. Previously, the checks had no security features. Robertson suggested putting a foil stamp on the check where the company logo is. (A foil stamp appears black when photocopied or scanned.) Borklund says he knows of one bank that uses a hologram on its cashier's checks and showed every teller how to verify it.
For the most part, security features are an easy sell, says Robertson. "The proliferation of fraud is so high," he says. "There are articles about it all the time. And from a distributor standpoint, it shows you care about [your customer's] well-being. It puts you ahead of the next guy." And if you don't tell a customer about security features, it could come back to haunt you, says Flossi. "I would not want to have something happen and the client say, 'Why didn't you offer these to me before?'" she says. "You have to protect your client."
Katie Sweeney is assistant editor of FORM Magazine.
Thanks to the following for assistance: A D 2000 Inc., New Haven, Conn.; Adams Business Forms Inc., Topeka, Kan.; The Artcraft Company, Attleboro Falls, Mass.; Hano Document Printers, Springfield, Mass.; Kansas Bank Note Company, Fredonia, Kan.; and Pro Forms Inc., Paso Robles, Calif.
Locking Up New Markets
If you're only selling security features on checks, you could be missing a good portion of the document security market. Gift certificates, prescription pads, birth certificates, titles of ownership, ID badges and tickets are among the many documents that can benefit from security features.
David Sims, president and CEO of Sims Business Systems Inc., a distributorship in Springfield, Mo., says he's found that security features are sometimes easier to sell on these kinds of documents than they are on checks. For example, a local college ordered transcripts from Sims and immediately insisted on security features. "Automatically, their first goal was to make it so it couldn't be duplicated," he says. Sims printed the college's name in a step-and-repeat pattern as a background for the document. He also used bleed-through numbering, a void pantograph and multiple ink colors.
However, when Sims looked at the same college's payroll checks, he discovered they were printed in black ink on white bond, with nary a security feature in sight. "I was just aghast," he says. "I told them, 'Any one of your students could duplicate this easily.'" The college promptly ordered new checks with security features. "It's funny. With checks, [security] is not the first thing that pops into their minds," Sims says. "They feel like checks are automatically harder to duplicate because of the MICR numbering. We're trying to educate them."
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