Despite the heavy use of credit cards and online payments, and the redoubled efforts of the FBI and police anti-fraud units, check fraud continues to increase. CFEs can benefit from reviewing the rudiments of check fraud detection and prevention, and the new twists. 

Naomi, 21, an employee at a check-cashing business in Brooklyn, N.Y., received only the basics of detecting check fraud from her supervisors: look for watermarks, compare encoded check numbers and question customers to see if they can keep their stories straight if a check looks suspicious. (1) 

Earlier in the month, the main office of Naomi's business warned workers to look for a Roberta Kane who had been successfully passing false checks in other branches. When Roberta walked into Naomi's branch, Naomi closely examined her ID and the $200 check. The check's routing numbers were larger than they should be, the check felt softer than others, and there was no watermark. Naomi asked Roberta how she had received the check, and Roberta said it was a paycheck from her employer. Naomi called the number of the company that supposedly wrote the check. When the number appeared to be out of service, Naomi told Roberta that she had presented a false check and that the police would have to get involved. Roberta frantically ran for the door, leaving behind her fake check and ID.

While Naomi was able to keep Roberta from receiving more illegitimate funds, she didn't call the police because she wasn't sure if they'd handle such a miniscule case.

Even with the most basic knowledge of detecting check fraud, the neophyte fraud examiner Naomi was able to deter a thief. It's even more important for CFEs to review the rudiments of check fraud detection and prevention and the new twists plus know who to call in an investigation.

One of the 'Top 10 Scams'
According to the National Fraud Information Center, managed by the nonprofit National Consumers' League, fake check fraud is No. 6 in the Top 10 Internet Scams of 2004. Though it was No. 6, the average loss due to check fraud was the greatest of all of the scams at $5,201 per person.

Four types of check fraud
According to the ACFE's Encyclopedia of Fraud, about two million bad checks are accepted in the United States every day, with check fraud averaging $15 billion in losses annually. Check fraud is usually committed in one of four ways:

• Forgery: Forged checks usually include those written for under $300 to avoid suspicion and then cashed at grocery stores and check-cashing businesses, which have looser security controls than financial institutions. These forgeries occur when a fraudulent employee issues a check without proper authorization, or criminals steal personal checks and use fake identification to endorse them. Another form includes payroll check fraud in which blank checks are stolen and then replicated.
• Counterfeiting and alteration: Counterfeit checks are created either by using desktop publishing equipment (personal computer, scanner, bookkeeping software, printer) or by duplicating a check with photocopiers. Check fraudsters will use bleaching agents to remove inked handwriting from stolen checks. When the checks dry, the fraudsters write a new amount of greater value and cash them.
• Paperhanging: This scam involves writing and reordering checks from closed accounts. Paperhangers pass checks at retail stores where they write the check for more than the purchase amount. Sometimes they'll stop the payment, return the item, and ask for a full refund. Alternately, the fraudsters might make a fake deposit at a bank and ask for cash back.
• Check kiting: This fraud involves opening accounts at two or more banks and using the "float time" it takes for checks to clear at each institution to create fraudulent balances. (Check kiting cases might be reduced by the recent shortening of float time in U.S. banks.)

FBI's 'Operation Continued Action'
In the Nov./Dec. 2004 issue of Fraud Magazine, we learned in an interview with Brian Lamkin, chief of the FBI's Financial Crimes Section, that the agency is fighting check fraud with Operation Continued Action. The unit, which began in August of 2004, investigates financial schemes such as mortgage and loan fraud, insider fraud, identity theft, check fraud and kiting, plus financial institution failures due to fraud.

The FBI director has a group of 10 core priorities that begin with counterterrorism, counterintelligence, cyber, public corruption, civil rights, transnational crimes/criminal enterprises, major white-collar crime, and violent crimes. Economic crimes fall within the seventh-ranked priority of the director's 10 priorities. The FBI handles the larger check fraud cases but who tackles the smaller cases?

Specialized check fraud units in police departments
ACFE's 2004 Associate Member of the Year, Detective John Gipe (who has since earned his CFE) has a diverse background in criminal investigation. A former homicide detective, he now works for the Check and Fraud Unit of the Baltimore City Police Department. The five detectives in his division each handle anywhere from five to 10 cases every month dealing with check fraud, embezzlement, identity theft, and contract fraud.

"We get a lot of people in Maryland writing fake checks for $497 or $498," Gipe said. Writing a fake check for more than $500 is a felony, so most of the fake checks that the Check and Fraud Unit investigates are a few dollars short of that amount.
He said that if an individual comes across a fake check, the local police department should be contacted immediately and a copy of the police report or the case number should be retained. Credit card companies, financial institutions, and insurance companies may ask for a reference of the report to verify the crime.

"Call the police and make a report to get it on file. Contact the bank to put them on notice, so if others try to cash (a similar check) the bank will be aware," Gipe said.

Most check frauds originate from crime rings. Gipe deals with a common check fraud scheme in which the leader of a crime ring buys check stock and a bookkeeping program that prints checks from an office supply store. He'll then obtain a blank check from a target company usually through an accomplice employee who has access to the payroll. The crime ring leader scans the check and prints bogus checks with the bookkeeping program. "He gets a group of people on the fringes of society to go to check-cashing businesses and each cashes a check and keeps a piece of the proceeds," Gipe says. "But the guy printing the checks will get most of the money. Once the check-cashing place wises up to it, (the crime ring) will use a different check and do it all over again," Gipe explained.

Gipe says that the amount of check fraud that occurs each year is definitely increasing. So what can a business or individual do to avoid being duped?

These are red flags for detection: 

• The printing and/or text on the check aren't uniform in color and texture, or slants up or down.
• The check contains misspellings, typos, and grammatical errors, or doesn't have a watermark.
• The routing transit number (RTN) or ABA number on the bottom of the check doesn't accurately include the two sets of numbers on the upper right corner next to the check number. (The RTN or ABA number is the nine-digit code on the bottom of the check. The first three numbers indicate the state and district office of the issuer. These numbers don't coincide on altered checks. (See Figure 1 below)  
• The check number doesn't repeat in the electronically coded serial number on the bottom (See Figure 2 below).  
• When several people ask a customer where he received a check, he can't keep his stories straight.

[Figure 1 is no longer available. — Ed.]

Figure 1. An example of a fake check. The numbers on the upper right corner should repeat within the electronically encoded numbers on the bottom of the check. In this example, the fraudsters correctly added the top numbers to the Routing Number below, but they forgot to add a digit. Routing numbers always have nine digits. 

[Figure 2 is no longer available. — Ed.]

Figure 2. Another example of a fake check. Often, a fraudster is wary of creating a check with a low account number. In his attempt to make a larger account number, he typically doesn't correctly match the check number on top with the encoded number below.  

The original figures above, used with permission from www.gaspumpclassics.com, has been altered for demonstrative purposes. 

Here's a list the ACFE has compiled to prevent check fraud:

• Minimize employee access to checks.
• Reconcile statements when they arrive.
• Be aware of magnetic routing numbers.
• Look for checks with a check number less than 200.
• Notice the date that the account was open.
• Look for perforated edges on the checks.
• Know the components of acceptable identification.
• Recognize forged/altered identification.
• Notice potential culprits who are overly polite, nervous, or aggressive and hurried.

Variations and classics
Even with the FBI's new Operation Continued Action and proliferating specialized fraud units in police departments, Detective Gipe says that the amount of check fraud is still increasing every year. CFEs would do well to keep apprised of new check scam variations as well as review the venerable classics.

1. Names, locations, and some details in this case have been changed. 

Suzanne Mahadeo is a business writer for the ACFE. She is working on her master's at St. Edward's University in Austin, Texas.

"4-1-9" advanced fee fraud hits home

By Suzanne Mahadeo

Ironically, while writing this article on check fraud as an ACFE employee, I was almost the victim of advanced fee fraud.  

Recently, I tried to sell my used couch on Craigslist.org, an auction Web site similar to eBay. I was a bit wary when I received an e-mail from "Victor Martins," complete with an absurd amount of typos and lines that read "God bless you and your family." He said he was interested in buying the couch even though he didn't live in the United States. He told me that he had a "client" in the states who owed him money. His client would send me a money order for $3,000, which I was to cash at a local Western Union office, deduct my funds for the couch, take an additional $100 for myself, and then wire the rest to an international shipper. The supposed international shipper e-mailed me the next day, non-coincidentally from Nigeria, where fraud scams like these have been rampant since the 1980s. Though the shipper's name was "Mrs. Justine Gracie Smith," Victor Martins said that "he" - referring to Justine - would pick up the couch immediately and that I should wire the funds as soon as I received the money order. The shipper also e-mailed me with specific instructions from a Yahoo account, which seemed odd because this was supposed to be a prominent international business.

All the above details seemed to come straight out of a case study on wire fraud from the Fraud Examiner's Manual. I decided to play along with the fraudsters to see if they would actually send me the money order, which they did. I was not only sent one money order, but a total of four separate ones, each totaling $950 (see Figure 3). The fake United States Postal Service money orders came with authentic-looking watermarks; I probably could have easily cashed them and wired Martins' asking price of $2,500 from a Western Union to Nigeria. However, when Western Union would have realized that there was no money behind the worthless pieces of paper, they would have come after me for the entire amount.

These scams are quite popular because fraudsters can create a fake money order fairly easily. This is a classic variation of the advance fee fraud (AFF) scheme, known internationally as "4-1-9" fraud after the section of the Nigerian penal code that addresses fraud schemes. The 419 Nigerian Advance Fee Fraud is now an internationally operated, illegal, and multi-billion dollar industry. According to "Crimes of Persuasion," by Les Henderson, estimates put the losses from various AFF operations at more than $1 million every day in the United States alone. (www.crimes-of persuasion.com/Crimes/Business/nigerian.htm)

[Figure 3 is no longer available. — Ed.]

Figure 3. One of the four fake money orders the author received in the mail from an international scammer.  

If this would have happened before I started working for the ACFE, I may have easily fallen for this scam, thinking that an authentic-looking money order was just as good as cash. Thanks to the ACFE, I knew better.

[Some source links referenced in this article are no longer available. — Ed.]