Identity manipulation and improved technology are causing an increase in check fraud incidents, despite a decline in the total number of checks written. A Federal Reserve release estimates consumers wrote 42.5 billion checks in 2000 for a total value of $39.3 trillion. This represents a sharp decline from the 49.5 billion checks estimated to have been written in 1995. In addition, consumers are now making more ACH payments rather than writing checks. Yet, check fraud continues to escalate, with estimated nationwide losses at $12 billion to $16 billion annually. This figure includes losses suffered by financial institutions, retailers and other businesses that accept checks for payment. Two elements are fueling the inverse growth of check fraud in relation to total checks written. First, improved technology is allowing consumers to purchase sophisticated desktop publishing systems to make their own checks using a PC and an inkjet or laser printer. The second factor is a steep increase in new-account fraud involving identity manipulation. In this scenario, scam artists open accounts at financial institutions under someone else’s name and Social Security number for the purpose of defrauding the institution with fraudulent checks or by obtaining loans. Verifying the identity of new members can be difficult but not impossible. Credit unions typically verify an identity by checking the new member’s driver’s license or state ID card. However, the use of fake IDs by criminals has increased significantly. The technology that stoked the check-fraud problem has also aided criminals in obtaining fraudulent identification. Surfing the Web can lead criminals to several sites that sell templates and software necessary to manufacture fake driver’s licenses and state ID cards for all 50 states. Kits can even be purchased to make birth certificates and Social Security cards. Passage of the Internet False ID Prevention Act of 2000 makes selling fake IDs and fake ID templates illegal in the U.S., but they can still be purchased from overseas Web sites. Many states now issue driver’s licenses with bar codes or magnetic strips that carry standardized data. Licenses are swiped through a hand-held terminal that reads the information on the code or strip. This allows businesses to verify the information contained on the front of the ID (name, birth date, address, sex, height, weight, etc.). Until all states use bar codes or magnetic strips on licenses and hand held readers are widely available, credit unions should take alternative precautions. Many criminals are obtaining valid ID, but under false pretenses. In many states, birth certificates and death records are a matter of public record and readily available. Criminals obtain birth certificates for individuals whose identity they want to assume and then manufacture fraudulent Social Security cards. With this information, they can obtain a legitimate driver’s license or state ID card. To combat this problem, many credit unions now require two pieces of identification when an account is opened – a primary photo ID and a secondary piece (Social Security card, credit card, or health insurance card). However, even these may not be enough to verify the identity of new members. Credit bureau reports can assist credit unions in verifying the identity of new members before accounts are opened. To spot red flags that can expose potential identity manipulation, new-account representatives must carefully compare the personal information supplied by the new member to the information contained in the credit bureau report. New-account representatives must compare the address supplied by the new member to the address currently on file with the credit bureau agency. When scam artists open an account at a credit union, they often use their own address or a private mailbox they have rented to help conceal their true identity. Therefore, mismatched addresses may be a sign of identity manipulation that must be resolved before the account is opened. Requesting a utility bill as further evidence is one way to resolve a mismatched address. The new-account representative must also compare the surname supplied by the new member with the surname currently on file at the credit bureau agency. Sometimes the scam artist misspells the surname on the membership application, which is a definite sign of identity manipulation. Another red flag is mismatched birth dates (birth month and year). This error may mean the scam artist did not know the identity theft victim, so they used their own birth date or made one up. Credit unions also use credit bureau reports to determine the level of services to offer new members. A member’s past behavior can be a good indicator of the future – which is why many credit unions now obtain credit reports for all new members (you must comply with the Fair Credit Reporting Act before obtaining a credit report). Credit unions are using loan underwriting methodology and applying it to the deposit side of the operations. Empirica scoring models are typically used to measure an individual’s creditworthiness. How individuals handle their loans is a good indicator of how they will handle their deposit accounts. If you allow immediate access to member deposits, you are essentially granting them a loan. Credit unions are evaluating creditworthiness to determine the level of services to offer new members and to identify potential “high-risk” members (members with low Empirica scores or derogatory credit). “High-risk” members should be eligible for a savings account only with no ATM privileges. Credit unions are experiencing a significant decrease in fraudulent deposit losses by focusing their check hold efforts on the “high-risk” group identified. Fraud services are also useful in combating check fraud. They can verify names, addresses, telephone numbers and Social Security numbers, and identify prior fraudulent addresses, commercial addresses (private mailbox locations) and institutional addresses, such as prisons, hospitals, or motels. None of these techniques are effective unless credit union staff, especially tellers and new-account executives, are trained to detect fraud. Tellers should be trained to a 60-second standard – to examine within one minute the person, ID presented, the transaction and the instrument for any red flags that might indicate a problem. Additional back-ups such as credit bureau reports and fraud services can provide additional protection against identity manipulation and check fraud.

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