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NEEDHAM, Mass. – Check 21, when it becomes reality, is expected to kick off a surge in check imaging that will give credit unions and banks new ways to save money. That’s the good news. The bad news is that it also may pave the way for new kinds of fraud. “Creating a fraudulent check image is far easier in many ways than creating a credible fake paper check, especially with the powerful image manipulation software freely available today,” says Peter James, a senior analyst in wholesale banking for TowerGroup. The banking industry spends about $280 million a year on check fraud prevention measures and still will lose about $853 million to such activity this year, a figure which would have jumped to more than $5.3 billion without the prevention efforts, according to TowerGroup estimates. Prevention is the key, and well-established practices at the teller window and in the back shop for dealing with paper checks will have to be joined by new measures designed to help thwart those who would steal by exploiting fraudulent check images, James says. Credit unions and banks will receive two items in the image-based environment, James says: the digital image of the check and the Electronic Check Presentment (ECP) information that captures the MICR line data. “How these two pieces of information are handled is critical to the fraud-prevention process,” the TowerGroup analyst says. “On the basis of the ECP data alone, the bank can tell if the account is open, whether it has sufficient funds and whether the check number is a valid and reasonable one for that account. “Availability of the images (thus) will enable some automated controls that are not possible or practical today. However, the bank no longer has the paper check to inspect, and there are certain types of alterations that may not be as visible on a digital image as they are to a human being holding the actual piece of paper.” James also notes that such things as infrared marks and watermarks can no longer be used to detect fraud, either. To counter that, he sees the development of centralized detection processes made possible by the collection of data images at one site, further empowered by applications that can be written to scan check images for possible problems, including the ability to compare signatures to master files in far greater numbers than can now be done manually. Encoding identifying information in checks in such a way that it can’t be duplicated by thieves but is readable by machines also will become necessary, and such technology already has made its way onto the market by such operations as Fiserv’s ImageSoft subsidiary, James observes. However, new vulnerabilities will occur once the check exists as an image, James adds, and that could grow with the growth of check imaging in general. “Many capable software packages exist to create and manipulate digital files and images, and it is unfortunately almost a certainty that someone, somewhere, will find in the next few years a way to create, present and profit from a virtual counterfeit check,” the TowerGroup analyst predicts. He said this “new opportunity for fraud calls for new countermeasures,” including developing methods for digitally signing a check image so the credit union or bank would know it hasn’t been altered. “The low-level irritation of amateurish check alterations and the high-level danger of sophisticated and credible fake checks through digital printing technology in the future will be joined by the new threat of fraudulent images,” James concludes. “In the rush to image-enable their check operations, financial institutions should not lose sight of the fact that the counterfeiters are also preparing their next move, and they, too, have access to the latest technology.” – [email protected]

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