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<p>Technology has driven check-fraud losses to record highs. Simply put, technological advances made over the years have made check fraud a very easy crime to commit. High-tech criminals are using personal computers, laser printers, scanners, desktop publishing, and even color copiers to create convincing counterfeit checks, especially those imitating payroll, business, and teller checks. Sprinkle in some organized crime, and check fraud can spread like an out-of-control forest fire. Nationwide, check-fraud losses are estimated at $12 billion to $16 billion annually. That means there are $1.3 million in fraudulent checks that are returned every day of the year. In examining check-fraud losses, a good starting point is to analyze trends. The analysis may disclose that most of the check-fraud losses are occurring on newer accounts. This may suggest a need to improve new account screening procedures and to focus check-hold efforts on newer accounts. Or, a credit union may determine most of its check-fraud losses are occurring at one branch office. This may suggest a need to increase training at this branch office. Analyzing check-fraud losses should be an ongoing process for credit unions. Policies and procedures must be continually reviewed and changed to keep pace with the changing check-fraud environment. In the past, well-trained tellers could easily identify fraudulent checks. However, computer-generated counterfeit checks are not easily identifiable, even by the most experienced tellers. Nevertheless, there may be some telltale signs of counterfeit checks: Checks that do not contain a MICR line (e.g., specimen checks often included in promotional mailings by companies). Lack of perforations. All legitimate checks are perforated on at least one edge. The exception is checks issued by the federal government. An unusual amount of toner pile-up on the check is indicative of a counterfeit check generated by a color copier. Misspelled preprinted words on the check. Many criminals are bad spellers, with the misspellings often found in the accountholder’s or financial institution’s address. MICR lines that look like they are slightly raised from the paper or bumpy to the touch are indicative of counterfeit checks generated by a color copier. Lack of the fractional routing and transit number in the upper left-hand corner of the check. The denominator of the fractional routing and transit number should match the first four digits in the routing and transit number at the bottom of the check. Incorrect Federal Reserve District number in the routing number. A favorite trick of counterfeiters is to change or scramble the Federal Reserve District number in the routing number. This causes the checks to be misrouted during the clearing process. The Federal Reserve District number in the routing number should match the location of the institution on which the check is drawn. An unreasonable relationship between the accountholder’s address and the address of the institution on which the check is drawn. Although there is no magic bullet to solve the problem, credit unions can take several precautions to reduce their exposure to check-fraud losses. In light of the finding that check fraud often occurs on newer accounts, usually less than 6 to 12 months old, credit unions should improve their new-account screening procedures, including the following: Verifying the eligibility of new-member applicants. This can be difficult for community chartered credit unions. However, one recommendation is to verify the address by checking the white pages of the phone book or requesting a utility bill to prove residence. For employer-based fields of membership, verification of employment is important. Family membership eligibility should be confirmed directly with the primary member. Screening all new members through ChexSystems, which is offered by E-Funds, to determine if a membership applicant has had accounts closed by other financial institutions due to abuse. More than 80% of the nation’s financial institutions report to ChexSystems, which also draws from a major retail-oriented database called Shared Check Authorization Network (SCAN) to identify individuals who have written bad checks to the nation’s largest retailers. Derogatory information returned by ChexSystems on membership applicants should result in reduced services offered to the new members (e.g., offer savings account only). Some credit unions deny membership if derogatory information is returned by ChexSystems. Using a fraud service has become a necessity for credit unions as many scam artists who join credit unions use bogus identities. They generally verify names, addresses, telephone numbers and Social Security numbers. They also identify prior fraud addresses, commercial addresses (e.g., private mailbox locations) and institutional addresses (e.g., prisons, hospitals, or motels). The technology that fueled the check-fraud problem has also aided criminals in obtaining fraudulent identification. Many scam artists use fraudulent identification when they open their account at credit unions. Surfing the web can lead criminals to several sites that sell the templates and software necessary to manufacture fake driver’s licenses and state identification cards for all 50 states. They can even purchase kits to make birth certificates and Social Security cards. Because of the ease in manufacturing fraudulent identification cards, it is recommended that credit unions require two pieces of identification when the account is opened, a driver’s license plus a second piece of identification. The identification card (i.e., driver’s license or state identification card) should be carefully examined by the new-account representative. In many cases of new-account fraud, the identification presented by the scam artist upon account opening was issued days before they joined the credit union. In addition, new-account representatives should examine the back of the identification card to determine if it says “for promotional purposes only,” “not issued by the state,” or similar type language. The presence of such language indicates the identification card was prepared using a fake ID kit. Of utmost importance is for credit unions to limit check cashing and use check holds on deposits made to newer accounts. Credit unions should develop an understanding of Reg CC and how they can use it to help protect themselves from fraudulent deposit losses. For newer checking accounts, credit unions should use holds up to the statutory limits allowed by Reg CC. This includes taking advantage of the new account exception to place extended holds on deposits made to new checking accounts (defined as less than 30 days old). After the new-account period expires, continued use of check holds up to the statutory limits of the regulation is equally important. Credit unions should focus their check-hold efforts on newer accounts for the first 6 to 12 months, or until the account becomes established, whichever occurs first. Many credit unions have a mistaken belief that Reg CC applies to savings accounts as well as checking accounts. Reg CC is intended to apply to transaction accounts only. Therefore, credit unions can use longer holds on deposits made to savings accounts. However, there are currently four states with laws governing funds availability on savings accounts (California, Connecticut, Massachusetts, and New York). Credit unions in these states should check the laws to determine the maximum hold periods on deposits to savings accounts. Finally, new technology such as electronic check presentment can reduce check-fraud losses by transmitting MICR line and transaction amount to the paying institution. This allows for timely notification of returned items.</p>

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