Check Fraud - New Standards of Care Required

Check fraud is an increasing economic crime these days and no business is immune to this threat.  Yet many companies have not taken the probability of check fraud seriously, especially because banks were often held responsible for check fraud losses. However, the changes made in the Uniform Commercial Code have redefined liability for corporate check fraud to include a standard of "ordinary care" that emphasizes greater responsibility and reasonable check issuing standards by the business community. Thus, companies may be held responsible for check fraud losses if they do not have procedures in place that demonstrate ordinary care.

Preventing check fraud is no easy task, but there are a number of precautions managers can take in order to protect their business. First, a company should always  order checks from a respectable source to ensure checks will process easily through the bank’s clearing system. These checks must include security features that will help combat counterfeiting and alteration.  All reserve supplies of checks and banking documents must be secure in a locked facility, especially blank checks. The personnel allowed to have access to these documents must be limited. Never leave checks or bank documents unattended.

Companies should consider assigning more than one person to accounts payable functions with each responsible for different payment areas. This division of responsibility makes it more difficult for employees to tamper with checks and payments. Check writing and account reconciliation functions should be divided and the number of official check signers should be limited.    There are also fraud prevention services available at your bank, such as: 

• Use maximum dollar amounts on accounts to limit large denomination losses
• Set up a separate account of large dollar payments to keep losses at low denomination levels if fraud does occur
• Request detail reports for large dollar items before withdrawal is authorized
• Use payment system records containing information about each check such as the amount, the check number, bank  information and date, verified by the bank before the check can be paid.

Companies should reconcile accounts promptly and regularly; quick fraud detection increases the possibility of recovery.  Failure to balance accounts monthly in order to find the discrepancies in due time, will likely demonstrate a lack of ordinary care and result in a business having to bear any fraud losses incurred.  And if any change occurs to an account, the bank must be immediately notified.    Although many businesses will continue to go forward business as usual and not see the risk of check fraud loss as significant enough to require any immediate changes to their policies and procedures, a single incidence of check fraud will likely wake them up to the fact taking a few basic fraud prevention measures would have saved them a lot of money.