Check fraud costs businesses, individuals, and financial institutions as much as $50 billion annually, according to one estimate.

Forged checks have always been a problem, but with inexpensive laser printers and easily accessible paper, check fraud is more of a problem than ever before.

When a Check Bounces

If you receive a bad check, most states have the means to collect or a court action to force payment. The preferred course of action is to try to collect on the check first.

Ordinarily, to force payment, you must do two things:

1. Show the check was dishonored.

2. Show the provider you gave notice of the dishonor to the writer of the check. (All states require that the person who wrote the check first be notified that it was rejected.)

Some states require further action, so look into whether your state has a special collection statute and whether courts have set out criteria for collecting on bad checks.

Other Tips

  • Place a note at the cashier’s window, receptionist’s desk, on invoices, or any other place stating your policy on bad checks.
  • State that you’ll charge a fee for any and all returned checks and that the customer will be responsible for all reasonable expenses and costs of collecting checks. (Reasonable costs vary from state to state.)
  • Send the customer a notice outlining the penalty to be assessed and the charges to be brought if payment or arrangement for payment is not made within a reasonable time (10 to 21 days is considered a reasonable time). You do not have to send the notice by registered mail or certified, but you should include an affidavit of mailing to prove that the notice was sent to the person’s last known address.

A significant amount of check fraud is due to counterfeiting through desktop copying and publishing to duplicate or create a document. In some cases, chemical alteration is required to remove the information and change it for the criminal’s purposes.

Victims include financial institutions, businesses that issue and accept checks, and the consumer. In most cases, these crimes begin with the theft of a financial document. The crime can start as simply as stealing a blank check from your home, business, or vehicle during a burglary, searching for an old or canceled check in the trash, or removing a check from your mailbox.

When your company accepts checks, a little knowledge of the payment system and a good eye can help you distinguish many of the good drafts from the bad ones.

Look for Alterations

Checks contain a nine-digit routing number in the bottom left-hand corner. The first two digits indicate the Federal Reserve Bank that will handle the check. A favorite trick of forgers is to change the routing number.

By knowing the routing number of your closest Federal Reserve Bank, you can quickly tell if there is a problem with the number on a “local” check.

If the routing number appears to be altered, there is a good chance the check is bad. A quick scan can also tell if there is discoloration, which is an indication of check alteration.

Another sign of a potentially fraudulent check: No perforated edge on one side. The perforation allows users to rip drafts out of their checkbooks. A check made on a home printer doesn’t have these edges. Of course, there are people who legitimately print checks themselves, but even those usually have one or more perforations.

Sometimes the checks themselves are legitimate, but the person trying to use them is not. Payroll and other checks are routinely stolen. That is one reason why the federal government started electronically depositing Social Security checks.

Other forgers pilfer check stock directly from companies that write the drafts. 

Inspect Signatures

Your business should have a policy of looking at the signatures on checks, preferably matching them against the signatures on the check writers’ driver’s licenses or other forms of identification.

Staff members should be instructed not to pay attention to the appearance of the check presenters. They should be concerned about the appearance of the checks.

Consider “Checks and Balances”

Companies issuing checks are at risk, as well. Company executives should examine check account and stock balances regularly to look for discrepancies. A system of checks and balances can also help deter internal fraud. For example, make sure the same person doesn’t write checks and reconcile bank accounts. Limiting the number of people authorized to write corporate checks reduces the chances of fraud.

Get professional help: We can perform an internal control study and recommend ways to minimize employee fraud and theft. 

Remember that the best defense against the danger of check fraud is a proactive approach that prevents — rather than detects — the crime.

Hoberman & Lesser’s NYC accountants serve a broad cross section of businesses, ranging from publicly held companies, to private sector businesses, to individual entrepreneurs throughout New York, New Jersey, and Connecticut, and across the United States. To schedule a complimentary and confidential consultation with a member of our team, please contact us.