Check Fraud & Check Image Randy Malchar Director of Product Marketing and Management Panini North America
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.
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)
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).
Check Fraud Incurred in losses Did not Incur in losses • 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 75%
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.
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:
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.
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.
Embezzlement Most check kiters intend to cover the fund Embezzler's, or paper hangers, just want to “take the money and run."
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.
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.
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).
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
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.
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
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.
Check Fraud Enough is Enough is Enough!
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
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).
Impact of Image The GOOD The Bad And The Ugly
The UGLY Most of the perceived fraud detection advantages of paper are not image survivable.
The BAD The paper check still exists. Image archive is outside of banks control. Opens the door for re-presentment, digital altering, etc…
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.
New Capabilities • Signature Verification • Digital Signatures • Digital Metrics • Digital Watermarks • Infrared / Ultraviolet light • Steganography • 2D encrypted bar codes • Biometrics • National Fraud Databases
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
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.