Scott Wilshire
Management Services Committee Member
United Industrial Group

In today’s world, small businesses are particularly vulnerable to check fraud and are prime targets for fraudsters because they lack the resources and financial controls compared to larger businesses. Check fraud can be particularly debilitating to a business in terms of the emotional and financial impact as well as reputational damage. Recovering from fraud can be a months-long effort that is all-consuming and keeps you from focusing on daily responsibilities. 

There are various ways that fraudsters can target a business including creating counterfeit checks, forging signatures and altering checks. Our company was targeted twice within a year with counterfeit checks. Fortunately, in both cases the funds were recovered quickly; but in the first case, we had to close all of our bank accounts, notify all customers who had received checks from us, and deal with the mess of trying to clean everything up in our payables and our banking systems. Police were involved in the resolution of this, and they cautioned that this type of fraud is on the rise. Businesses, the police cautioned, need to be vigilant about their checks in terms of internal controls (keeping checks secured, separation of duties for those printing and signing) and in terms of external controls. The police said that fraudsters will frequently take mail out of mailboxes, copy a check and return the mail to the mailbox, so there is no indication that anything is amiss. Fraudsters will then use the copied check to create counterfeit checks and signatures. One simple suggestion is to drop mail in a US Post Office mailbox rather than leaving checks in an unattended mailbox. 

As part of UIG’s root cause assessment of this, our bank recommended that we implement Positive Pay, a cash management service offered by most banks to detect fraudulent checks and prevent them from being paid. 

With Positive Pay, the company sends its bank an issued check file or check run detailing the check numbers, amounts, payees and check dates daily. When a check is presented to the bank for payment, it is compared against the information that the company provided for verification. If there is a difference, the bank flags the check and notifies the business via an exception report. The exception report provides the opportunity to accept a legitimate check or reject a fraudulent check prior to its clearing. If a response is not provided within a predetermined timeframe, the check is returned to the issuer. A similar system exists for Automated Clearing House (ACH) debits and credits which allows the business to approve or reject any ACH transactions. 

Positive Pay provides several benefits to help a business safeguard its financial resources. In today’s environment, it is incumbent on businesses to be vigilant and take the necessary preventive measures to combat fraud. We compare the cost (less than $1,000 annually) to another insurance policy. No business can operate without using checks, and we viewed this as a reasonable cost compared to the impact of recovering from fraud. We also learned that our service providers whether IT, insurance, or in this case, bankers, can be a tremendous resource and provide sound recommendations for combating fraud since they have the knowledge and experience that our business doesn’t have. Just like tools in a mechanic’s toolbox, awareness of the reality of fraud and taking steps to combat fraud is a tool that is worth adding to the toolbox.