Catch It If You Can: Examining the Impact of Fraud on the Checks Market

Video killed the radio star and Venmo killed the personal check. With the tap of a button, we can now send our child’s room coordinator money for class party supplies. We can transfer the $5 that we hope our coworker turns into $500 million when he purchases the team’s Powerball ticket. We can use it to order “Fueled by Caffeine and Chaos” T-shirts that we really don’t need from our friend’s Etsy shop.

Digital payments are convenient, easy and nothing new. Think back to the early 1990s when electronic benefit cards, similar to debit cards tied to benefit accounts, replaced paper food stamps. Today, it’s common to receive tax refunds or economic stimulus via direct deposit or EBT cards. It’s not a misconception that total check usage is dropping, and John LaBrant credits two motivators: convenience and cost.

“At the height of check writing, 68 billion checks were issued annually, but since the early 2000s, check usage has been declining at an annual rate of about 10%,” LaBrant, owner and founder of the Greater Chicago area-based Secure Print Technologies LLC and authorized sales consultant for SICPA Value Document Inks, said. “... In 2018, for the first time ever, we saw ACH debit transfers (16.6 billion) exceed the number of written paper checks (14.5 billion), further confirming the shift away from traditional check writing.”

Those numbers are hard to ignore, so shouldn’t check fraud be a thing of the past? No, because despite their near extinction in consumer payments, checks are the payment of choice among corporations. Tommy Gillis, managing partner of CFC Print & Mail, Grand Prairie, Texas, collaborates with many customers nationally to support vertical markets that he says use “A LOT” of checks. These include construction, oil and gas, education (fund accounting) and, most recently, class action lawsuit settlements.

“The class action lawsuit settlement vertical dropped out of the sky on us,” Gillis remarked.

Businesses prefer the feel of physical checks and the savings they bring when faced with rising electronic payment bank fees. Not to mention it takes exhaustive resources for systems to process payments electronically, and it’s hard to convince other partners in business to make the transition.

What these businesses are not doing, however, is increasing the security that’s on their actual printed checks, which is where distributors come in.

Keep Up With the Fraudsters

According to the 2020 AFP Payments Fraud and Control Survey, 74% of finance professionals reported that their organizations’ check payments were subject to fraud attempts or attacks—up 4% from the previous year. LaBrant isn’t surprised.

“With 42% of companies’ business-to-business payments being made by check, it’s not [shocking] that check fraud makes up the most prevalent form of payment fraud,” he commented. “Digitally reproduced checks—creating fraudulent checks with stolen or diverted MICR account numbers—make it easy for bad actors to cash in while these checks go through processing protocols, as many banks allow a portion of mobile deposit money (up to $200 per deposit) to be accessed immediately.”

Counterfeiters are constantly shifting their tactics, but Gillis said check washing remains the No. 1 tampering method. In layman’s terms, check washing is the process of erasing the ink or toner on a fully negotiable check with chemicals found in common household cleaning products, like acetone.

“This presents a basic check with no signature or payor listed,” Gillis explained. “Only MICR and gothic numbering prevail. The washed document, once dried, is then run back through a laser printer adding the scanned original signature, a new amount and, finally, a new payor.”

To keep up with old and new fraud attacks alike, suppliers are designing more ways to outsmart crooks. For example, SICPA recently launched a new hot stamp form factor of one of its flagship products, SICPASTAR color-shifting ink. LaBrant described it as a secure alternative to holograms.

“The SICPASTAR Hot Stamp incorporates multiple levels of security, and enables offset check printers, who did not previously have the technical capability, to use color-shifting ink,” he said of its selling points. “This expanded ink offering provides an instant color-shift, as well as unique refractory qualities that can be authenticated with the naked eye.”

When paired with covert features (those visible using tools such as lights or magnifying lenses) like micro taggants, SICPASTAR Hot Stamp provides an extra layer of robust security for higher-value checks. “This is a way to outsmart counterfeiters who don’t know what to look for, while giving genuine stakeholders the ability to authenticate using simple tools, like a 400x microscope, with minimal training,” LaBrant added.

For Gillis, it was important to offer patented digital security features and improved color consistency during print runs, and to be able to add a CMYK or four-color process printing of a customer’s logo or name. The company’s aging offset equipment made that difficult. So, in 2017, CFC Print & Mail invested $2.5 million in digital high-speed production inkjet equipment. Among the many benefits the Canon Colorstream 3900 Twin Z afforded the supplier, Gillis said he was most excited to bring to market V-Dot technology, digital void pantograph (DVP) technology and digital verification grid (DVG) technology.

As Gillis noted, certain documents need more than just copy-evident protection. V-Dot technology can be a cost-effective way to provide an anti-copy feature as part of a layered security plan for documents containing color. Its anti-copy function can range from totally blacking out the page or streaking white bars through the image. DVP, on the other hand, causes invisible embedded words and graphics to pop out when the original document is photocopied.

Accessorize With Layers

There is no blanket approach to fraud protection. Clients differ, and so do their security needs, which is why LaBrant recommended completing a risk-based analysis. This allows distributors to look at their customers’ processes, find holes in their security and offer appropriate solutions.

LaBrant said distributors should be asking the following questions:

• What are your end-users’ vulnerable areas of attack? (i.e., money box, transaction line, memo line, signature line, etc.)
• Do you currently employ security features/elements? At what level(s)? Are they effective?
• Are your current solutions coming from a secure supply chain? Can they be easily counterfeited or altered?
• Do you provide end-users with the information they need to verify the authenticity of this product/product line?

A common mistake he has seen over the years is only including anti-duplication features at the design level. VOID pantograph, penetrating numbers, artificial watermarks and microprint all serve a purpose, but they don’t address alteration.

“There is an ease associated with duplicating a check or document these days, so it is no wonder that issuers are loading up on anti-duplication features,” LaBrant said. “The problem is that this approach leaves the check susceptible to alteration.

“While alteration is a little more challenging, counterfeiters appreciate checks that are loaded up with overt anti-duplication features,” he continued. “When presented with an opportunity like this, bad actors will jump at the bit. The lack of protection against alteration enables counterfeiters to create an altered, perfectly secure check, with all the anti-duplication security features intact.”

The key is to rely on the layered strategy that Gillis mentioned earlier. Combine overt, covert, anti-duplication and anti-alteration features to deter duplication and manipulation. Overt features can be good for the general public to verify visually with minimal education, though fraudsters are skilled here. Covert features are not publicized, with generally only the clients, their agents and law enforcement able to verify as genuine.

Gillis suggested an absolute minimum of seven security features on a negotiable document:

• Chemical reactive paper
• Invisible fluorescent fibers viewable under a black light
• UV Dull (84 bright)
• Security pantograph
• Warning border
• Microprint signature line(s) or microprint border
• CFC chemical wash backer

He also advocated for the use of what he believes to be the only proven anti-fraud method: positive pay, a banking service that notifies the company when the check number, amount and issue date on a given check don’t match information on a list of checks previously authorized and issued by the company. “We have positive pay on our CFC accounts,” Gillis said. “It has saved us more than once through the years!”

Of course, budget plays a huge role, but consider how much saving a few pennies per check could cost your client. According to a different AFP Payments Fraud and Control Survey, one incident of check fraud can cost a company more than $20,000—yet another reason to perform a risk-based analysis.

“Evaluating the tangible loss factor will help you establish a realistic budget to combat the threat of fraudulent or altered product(s),” LaBrant instructed. “If you determine there is no tangible loss factor, it’s likely that banks will not dole out the upcharges that would exist on checks with extra security features. Generally speaking, the larger the loss factor, the more willing a bank will be to pay to minimize that loss. Banks want to protect checks because there are higher fees associated with their handling and processing compared to other payment vehicles.”

Perhaps Gillis summed it up best: “Do you want a Cadillac for security, or a Lamborghini?”