The financial services community has finally welcomed Check 21, promising a more efficient payments system. Since most credit unions have already been truncating checks for years, they, in particular, are uniquely positioned to implement Check 21. Others however, have a bit more work to do in terms of public relations. Many customers of America’s banking industry are used to finding their original checks in with their periodic statements. I wonder if they will know what a substitute check is when they see it? In the meantime, while everyone adapts to the changes Check 21 will produce, the financial services industry is quick to note the advantages-money will travel faster and efficiencies will be heightened. However, one constituency is not particularly keen on Check 21. Financial crimes investigators, those who work as detectives, fraud investigators and district attorneys, see Check 21 as a prime opportunity for criminals to demonstrate their cunning skills. Check 21-What does it do? In simple language, Check 21 is a new law that authorizes a new negotiable instrument into the check-processing stream called a “substitute check.” The law, that took effect on October 28 of this year, is designed to foster and encourage check truncation without mandating it. (We define truncation as the removal of the original item from the check-processing stream. Information from the check is captured from the MICR line and data is transmitted electronically. In true check truncation, the original items are destroyed and customers do not receive their checks back with their periodic statements.) Check 21 allows image-enabled processors to capitalize on their image equipment-without “punishing” those processors that have only reader-sorters and only run paper. This is how it works: As a check is being processed and moved from entity to entity, it may at some point get truncated and converted to an image. If it reaches an institution that only processes paper, that image can be “reconverted” back to paper in the form of a substitute check. A substitute check is the legal equivalent of the original check and is suitable for automated processing. It is about the size of a business check and has the image of the front and back of the original check on it, along with a legend that reads: “This is a legal copy of your check, you may use it the same way you would use an original check.” The substitute check can be processed and everyone is satisfied -the image-enabled processor can deal efficiently with an image and the other processor can operate happily in a paper-only world The benefits of Check 21 are that as checks begin to move more electronically, the industry will save millions of dollars in couriers, airplanes and paper storage costs. Money also will move faster, meaning everyone in the process will get their money faster, which can be helpful for lending and re-investment purposes. Check 21-The Problem Check 21 was not created as a fraud prevention tool. The problem, as the law enforcement community sees it, is that fraud will increase and criminals will be harder to prosecute. Here’s how. Detectives and prosecutors need hard physical evidence to persecute check fraud-they need that original check. District attorneys require the original check as evidence. Without it, prosecutors don’t have a case. You can’t convict someone of a check crime without the check. Original checks contain security features that are not image-survivable. Perforations, watermarks, thumb and fingerprints, and even the signature at times do not survive conversion to an image. A thumbprint looks like a big black blob on an image and is useless as a security feature to track down a culprit. Further, what happens when these items are reconverted back to paper in the form of a substitute check? A substitute check is meant to be the legal equivalent of the original so it should be acceptable to all parties, including DAs. However, it renders itself useless as evidence without the security features associated with the original item. Finally, as mentioned with check truncation, the original checks are ultimately destroyed. However, there are no national or other standards for retention of the original item. Some processors may retain the original truncated item for 30 days, others for 60, and still others for 90 days and so on. If prosecutors don’t snatch out that original item for evidence before it’s destroyed, they’ve essentially lost their case. Yes, it presents quite a quandary. Check 21-Fraud pros and cons While Check 21 should not be viewed as a fraud prevention tool, it will, nonetheless, deliver another hurdle that a criminal must overcome in his or her devious work. Most high-level industry experts agree that fraud will decrease because of Check 21, simply because everything will move faster. Criminals should have less opportunity to manipulate the system. These characteristics associated with other systems that are designed to mitigate check fraud will pose the ultimate test. Today, electronic databases can be configured to alert financial institutions when a suspect check is being returned, either the same day or the next, much faster than waiting for a return notification from the standard check-clearing process. And, there are also new check security features in the works, such as digital watermarking, that are image survivable. Since credit unions are most familiar with check truncation, I believe they are that much more ahead of the curve in spotting fraud, as it would apply to Check 21. Others may not be so lucky. I guess there will always be people looking to defraud others for personal gain. One might ask if they are out there now looking at substitute checks and contemplating how to manipulate the system. My response-”Yes.”

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