Paul K. Graser, CFE
Senior Investigative Specialist
Edward Jones
Merchants (sellers) have a decision to make when they set up their business regarding accepted forms of payment. All methods come with risks, but the goal is to mitigate that risk so it is easy to conduct business with customers (buyers).
Credit cards are convenient, but the merchant pays a fee to accept them (typically between 1.5 and 4.0 percent per transaction). Checks can also be convenient for the buyer, but the merchant runs the risk of the bank returning the check due to forgery or insufficient funds.
The merchant assumes the risk and can pay a heavy price for offering the convenient payment options. Many small businesses play the role of both customer (buyer) and merchant (seller).
Some of your fellow EASA members shared cautionary tales regarding experiences with various payment methods and their respective risks.
Fraudulent Checks
One EASA member was balancing their books and noticed they had several charges that they were unable to reconcile. They discovered somebody had created a set of checks printed with the EASA company’s routing and account numbers. The fraudster started using them for small purchases and escalated to larger purchases. The damage amounted to six checks totaling almost $10,000 in loss. The company had this same checking account for several years without issue. An investigation showed the checks were all written to people around Atlanta, Georgia, which was a location where this company did not typically conduct business. This discovery helped their case as they worked with their bank.
The company had to change their checking account number after 15 years, which was no easy task on the administrative end. Ultimately, they were credited for the fraudulent charges.
Intercepted Checks
Another EASA member wrote nearly $32,000 in checks to pay multiple invoices to a vendor.
After a few weeks, the vendor called to say it had only received six of the nine payments. The member reviewed the records and showed the checks were indeed issued. After further investigation, they discovered three of the checks were intercepted in the mail, washed and made payable to a different entity.
This EASA member decided to switch to electronic payments with their regular suppliers instead of checks. They implemented a rule for sending and receiving ACH payments. If a change in account number was detected or requested, they would contact the individual who initially set up the ACH account to confirm the change. They also changed their checks to include additional security features, which made them more challenging to wash.
Quick Cancelation
An EASA member made an “off-the-shelf” sale to a walk-in individual representing a new business. The member ran the credit card transaction and obtained approval.
As soon as the individual left the store, he canceled the credit card transaction with his bank but kept the item he had purchased. It took several calls and the threat of legal action from the EASA member before they could obtain payment.
Chargeback rights often favor the cardholder (issuing bank) rather than the merchant (acquiring bank) despite the actual circumstances. Banks must respond to the dispute within 30 days and have up to 90 days to resolve it. Win or lose, the dispute costs the merchant due to additional fees charged by the bank, not including their time and other resources involved.
Businesses can take every precaution and still fall victim to fraudulent activity. It is essential to keep a close eye on the money flows (both in and out). Consider adopting the best practice of employing a second set of eyes on activities to ensure accuracy and help detect disparities.
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