Banks Upgrade Check Fraud Detection

To the banking industry, check fraud is a problem of image. Not the public-relations kind, but the technology kind. Banks are finding themselves arrayed against a small army of criminals using laser printers to create authentic-looking checks ranging up to millions of dollars. As the tools of the trade have become ubiquitous, check counterfeiting has gone downmarket, with amateurs edging out professionals.

The check fraud-detection systems, which banks have offered for years as part of services they provide to manage a company's cash flow, weren't designed to weed out bogus checks printed by laser printers on genuine-looking check stock. "Fraud permeates the industry," says Tony Gandolfo, head of product management at Bank of New York. "Although the tools used to fight fraud have gotten more sophisticated, so, too, have the tools used to perpetrate fraud."

In conventional fraud detection, called positive pay, the business customer provides a daily list of checks against which the bank matches incoming checks. If a match is found, the check gets paid; if not, the check gets flagged as a suspect item and the customer is notified.

But check forgers have found a way to defeat positive pay: Steal a legitimate check and alter the payee line. If it's well-executed, the forgery will go.

To fight back, banks are mobilizing the digital cameras they've installed to capture images of checks as they're conveyed on sorting machines at the rate of thousands per hour. Banks capture check images for a variety of reasons: as an alternative to transporting paper checks between banks, something the newly passed Check 21 law aims to eliminate; to create new sources of revenue such as statement imaging for consumers and businesses; as a way to speed adjustments and other tasks; and to help comply with the Bank Secrecy Act, USA Patriot Act, and other regulations.

To identify checks where the payee line has been altered, banks use intelligent character recognition to read not only the account number and amount of the check, but the payee line as well.

Bank of New York is implementing this type of positive-payee system called Positive Pay Plus, part of FraudGuard products from Imagesoft Technologies Inc. The bank is testing the system with a customer in November and plans to go into full production next year.

It also plans to implement another FraudGuard product that will allow it to read a computer-generated signature at the bottom of a check and compare it to a dynamic electronic file "rather than a stale signature card," says Gandolfo. In yet another enhancement, the bank will notify the customer about suspicious checks immediately instead of the following morning, giving it more time to determine whether fraud is actually involved.