Be Cautious When Accepting Checks

Posted on Monday, August 06, 2018

Check fraud costs individuals, businesses and financial institutions as much as $50 billion annually, according to one estimate.

Forged checks have always been a problem, but with inexpensive laser printers and easily accessible paper, check fraud is more of a problem than ever before. 

When a Check Bounces

If you receive a bad check, most states have a means to collect or a court action to force payment. The preferred course of action is to try to collect on the check first. 

Ordinarily, to force payment, you must do two things:
1. Show the check was dishonored.

2. Show the provider you gave notice of the dishonor to the writer of the check. (All states require that the person who wrote the check first be notified that it was rejected.)

Some states require further action, so look into whether your state has a special collection statute and whether courts have set out criteria for collecting on bad checks.

Other Tips

Place a notice at the receptionist's desk, the cashier's window, on invoices, or any other conspicuous place stating your policy on bad checks.
State that you will charge a fee for all returned checks and that the customer will be responsible for all reasonable costs and expenses of collecting checks. (Reasonable costs vary from state to state.)
Send the customer a notice outlining the penalty to be assessed and the charges to be brought if payment or arrangement for payment is not made within a reasonable time (10 to 21 days is considered a reasonable time). You don't have to send the notice by certified or registered mail, but you should include an affidavit of mailing to prove that the notice was sent to the person's last known address.

Remember: The laws for collecting checks vary from state to state, so check with your professional advisors for guidance.

A significant amount of check fraud is due to counterfeiting through desktop publishing and copying to create or duplicate a document. In some cases chemical alteration is required to remove some or all of the information and changing it for the criminal's purposes.

Victims include financial institutions, businesses who accept and issue checks, and the consumer. In most cases, these crimes begin with the theft of a financial document. The crime can start as simply as stealing a blank check from your business, home or vehicle during a burglary, searching for a canceled or old check in the trash  or removing a check from your mailbox.

When your company accepts checks, a little knowledge of the payment system and a good eye can help you distinguish many of the good drafts from the bad ones.

Look for Alterations

Checks contain a nine-digit routing number in the bottom left-hand corner. The first two digits indicate the Federal Reserve Bank that will handle the check. A favorite trick of forgers is to change the routing number.

By knowing the routing number of your closest Federal Reserve Bank, you can quickly tell if there's a problem with the number on a "local" check.

If the routing number appears to be altered, there's a good chance the check is bad. A quick scan can also tell if there is discoloration, which is an indication of check alteration.

Another sign of a potentially fraudulent check: No perforated edge on one side. The perforation allows users to rip drafts out of their checkbooks. A check made on a home printer doesn't have these edges. Of course, there are people who legitimately print checks themselves, but even those usually have one or more perforations.

Sometimes the checks themselves are legitimate, but the person trying to use them isn't. Payroll and other checks are routinely stolen. That's one reason why the federal government started electronically depositing Social Security checks.

Other forgers pilfer check stock directly from companies that write the drafts. 

Inspect Signatures

Your business should have a policy of looking at the signatures on checks, preferably matching them against the signatures on the check writers' driver's licenses or other forms of identification.

Staff members should be instructed not to pay attention to the appearance of the check presenters. They should be concerned about the appearance of the checks.

Consider "Checks and Balances"

Companies issuing checks are at risk, as well. Company executives should examine check stock and account balances regularly to look for discrepancies. A system of checks and balances can also help deter internal fraud. For example, make sure the same person doesn't' write checks and reconcile bank accounts. Limiting the number of people authorized to write corporate checks reduces the chances of fraud.

Get professional help: An accounting firm with experience in this area can perform an internal control study and recommend ways to minimize employee fraud and theft.Your financial institution probably offers fraud deterrent programs that include check stock with water marks and other security features. Payroll cards, on which the company loads electronic payments, are also gaining in popularity.

Remember that the best defense against the danger of check fraud is a proactive approach that prevents — rather than detects — the crime.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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