Check Fraud

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Check Fraud Check Image

• Randy Malchar
• Director of Product Marketing and Management
• Panini North America

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Presentation Goals

• Check Utilization.
• Types of check fraud.
• Check fraud in the US market.
• The perceived advantage of paper.
• How does image impact check fraud.
• What to look for in distributed check image
  capture hardware.

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We still love checks
In 2006 the FED estimated it processed 30.6
billion checks
While the number of checks are declining
The average amount of the check is rising
950 to 1,366 (a 43.8 increase)
2003 2006 (a 17.96 decrease)
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Check Usage

• Checks are still very popular in many developed
  and emerging economies, especially B2B.
• Check usage and processing standards are
  different from country to country.
• Problematic to define and adopt universal
  security standards.
• Not the same with cards and bank transfers (e.g.
  SEPA in Europe, which does not cover checks).

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Check Fraud

• A 2007 research by Accenture shows check fraud is
  the most common type of payment fraud among
  retailers.

Type of fraud reported in 2007 (base 400
corporate who reported fraud)

• 94 of the retailers interviewed had check fraud
• 25 incurred check fraud losses
• Altered payee names, counterfeits, lost or stolen
  paychecks, fraudulent e-check conversion

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Check Fraud

• Unlawful use of checks in order to illegally
  acquire funds that do not exist within the
  account balance or account-holder's legal
  ownership.
• The most notorious "bad check artist" of the 20th
  century, Frank Abagnale, devised a scheme to put
  incorrect MICR numbers at the bottom of the check
  he wrote, so that they would be routed to the
  incorrect Federal Reserve Bank for clearing.

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Common Types of Check Fraud

• Illegal borrowing
• Circular kiting
• Retail-based kiting
• Embezzlement
• Bad check writing
• Abandonment
• Forgery
• Disappearing Ink
• Check Washing
• Re-presentment
• Identity Theft

Some Examples
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Illegal borrowing

• Robbing Peter to pay Paul or using a second
  bank or a third party to cover funds in a
  checking account on the day the check is due to
  clear .
• Impoverished or temporarily unemployed
  individuals.
• Small businesses seeking emergency loans.
• Start-up businesses or other struggling
  businesses seeking interest-free financing.
• The parties normally intend to make good on their
  balances.

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Kiting

• Can involve one or more parties.
• Each party may have an account at a different
  bank.
• Groups of individuals writing checks in a
  circular fashion makes detection more difficult.
• Kiting rings may involve offenders posing as
  large businesses.
• Masks their activity as normal business
  transactions.
• Banks are inclined to waive the limit of funds
  made available.

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Embezzlement
Embezzler's, or paper hangers, just want to
take the money and run."

• Most check kiters intend to cover the fund

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Bad check writing

• Write a check to a merchant.
• The embezzler will then take possession of the
  cash, goods, or services.
• They hope the merchant will not take action or
  they will not be successful.

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Abandonment

• Deposits a bad or fictitious check.
• Bank normally makes the funds available on the
  next business day.
• Before the bank realizes the check is bad the
  funds are withdrawn.
• The check writer intends to abandon the account
  and take the cash.

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On-Us Check Fraud

• Use of legitimate checks that are stolen and then
  cashed.
• Altering a legitimate check to change the payee
  or inflate the amount.
• Use completely fake checks (Frank Abagnale).

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Disappearing Ink

• Ink that will disappear in several hours or days.
• Writes a check to yourself or a partner for -
  2500.00
• Deposit it in Bank A write it on Bank B
• The 2 is written with the disappearing ink.
• The 500.00 the remainder of the amount in
  regular ink.
• The check will be deposited to Bank A for
  2500.00.
• When the check reaches Bank B it will reflect
  500.00.
• You could just write it to a retail
  establishment.
• It will be blank later!

500.00
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Check Washing

• Theft of a check in transit, typically stolen
  mail.
• Use chemicals to remove the ink on the check
  except for the signature.
• Fill in the blanks.
• A good check washer will steal the check,
  digitally wash the check, and put the check back.
• The recipient never knows it was missing.

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Re-presentment

• Duplicate copies of checks.
• Check presented at more that one place.
• With Remote Deposit Capture the risk is increased
• Copy of check and copy of image of check

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Identity theft Account takeover

• The availability of online repositories of check
  processing images and data open the door to a new
  wave of fraud
• Spoof emailing (phishing) or use of
  malware/trojans.
• Credentials used to obtain check images and
  monthly statements.
• High-quality counterfeit checks with
  appropriate amount and scanned signature.
• Can be done without online repositories.

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Check Fraud

• Enough is Enough is Enough!

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Perceived Advantages of Paper

• MICR code lines
• Difficult to alter
• Positive Pay database, based on MICR
• Paying bank can match issued and received items.
• Items not in the issued list are presumed to be
  fraudulent.
• Effective for organizations who issue/print
  checks through computer systems protects the
  issuer
• Barcodes

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Perceived Advantages of Paper

• Security features to
• Authenticate the original document.
• Deter criminal activity.
• Watermarks true (visible by light) or artificial
  (visible by angle)
• Thermochromatic ink (changes color or disappears
  when heated).
• Paper and/or ink (print/coating) reactive to
  chemicals.
• Toner anchorage (for laser checks).

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Impact of Image

• The GOOD
• The Bad
• And The Ugly

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The UGLY

• Most of the perceived fraud detection advantages
  of paper are not image survivable.

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The BAD

• The paper check still exists.
• Image archive is outside of banks control.
• Opens the door for re-presentment, digital
  altering, etc

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The Good

• Checks clear faster Detect fraud quicker.
• No transport Fewer stolen or lost checks.
• Eliminates or reduces transportation cost.
• Several new fraud fighting capabilities.
• Check image requires more sophistication to
  commit several types of fraud.

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New Capabilities

• Signature Verification
• Digital Signatures
• Digital Metrics
• Digital Watermarks
• Infrared / Ultraviolet light
• Steganography
• 2D encrypted bar codes
• Biometrics
• National Fraud Databases

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Out-of-spectrum light

• IR light to read through an IR-transparent ink
  barrier
• Eye will see black barrier Scanner will see data
  beyond it via IR
• IR/UV-reactive ink for invisible printing
• Eye cannot see the data
• IR-light equipped scanner can see the data
• Opportunity invisible patch on which alterations
  are evident

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Summary

• Fraud will always be around.
• While eliminating paper nullifies some fraud
  detection capabilities, using image creates new
  fraud fighting abilities.
• Image lays the groundwork for a national fraud
  database.
• Plan on using both account behavior analysis and
  image based analysis.
• Make sure your RDC equipment has very good MICR
  read, Infrared and Ultraviolet capabilities, and
  very high DPI cameras.

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Q A