Navigating the Check Fraud Landscape

Even with check usage declining, credit unions struggle with finding effective ways to protect their members from losses from returned items, counterfeits and forgeries.Fraudsters continue to target checks and their widely known vulnerabilities. In fact, 87 percent of organizations surveyed for the 2013 AFP Payments Fraud and Control Survey reported check fraud attempts.

Losses to credit unions and their members are most commonly caused by return deposit items, forgeries and counterfeits, with each accounting for approximately 30 percent of all check fraud losses. The proliferation of remote deposit capture has also created a new threat for credit unions with the risk of multiple presentment of a single item to multiple institutions. Credit unions must find the balance between the correct operational changes and effective technology solutions to combat these threats and protect themselves and their members. Hopefully the following questions and answers will help in this.

1) With check volumes decreasing, why is check-related fraud still such an issue for credit unions?

Checks have become the low-hanging fruit for fraudsters. Paper is an easily manipulated medium – inexpensive, ubiquitious, quickly reproducible. High quality scanners, printers and software are all easy to use and acquire. All this opens the door for criminals. It becomes an issue for credit unions because members frequently absorb the losses from counterfeits, forgeries and returned items. Preventing these losses is both a service to credit union members, and a way to reduce charge-offs and collection expenses at the credit union.

2) Does check fraud affect any one type or size of credit union more than others?

Losses caused by check fraud affect every type and size of credit union; no credit union and no member is immune. Anyone can fall victim to fraud. However, smaller credit unions can be more vulnerable to the losses caused by fraud, as large losses can more severely impact them. A larger credit union might be better able to absorb these losses.

3) How does check fraud fit in among other areas of loss for credit unions?

Separating check-related fraud and losses from other channels in your credit union doesn’t always make sense. Check fraud is closely related to identity theft because fake identities can be used to generate checks for defrauding consumers. Last year identity theft was the single largest type of financial fraud in the country. It can also give rise to wire fraud. For instance, if a member deposits a fraudulent check, gets instant availability of funds – which is common at many credit unions – and then initiates a wire transfer, the fraud spans multiple channels and can result in losses at multiple points.

4) How can credit unions accurately identify the total cost to the institution, including counterfeit and returned items?

All areas must be considered, and it goes beyond the numbers. The financial toll should combine charge-offs that the credit union takes on losses; losses incurred by members from returned checks they have deposited; and the operational costs of tracking down and processing returned items, including collections. But it is also important to consider the damage done to the member relationship if they are held responsible for losses. The cost to the member is typically much more impactful than the financial losses the credit union might incur and potentially much more difficult to quantify.

5) Why are Reg CC holds not sufficient protection for credit unions against losses from returned checks?

Reg CC governs the availability of funds deposited in checking accounts and the collection and return of checks. These holds actually are one of the best ways credit unions can prevent losses from returned checks, but they need to be applied intelligently. Basing a hold/no-hold decision on the history of your member at the credit union is a good start, but it’s not enough. If possible, using data from the account associated with the check is a much more reliable way to determine the collectability of a particular check, and this information should then be used on making funds availability decisions. Does the check writer have a history of overdrafts or of carrying a negative balance on the account? Is the account even open? These are some of the data-points to consider when making hold decisions that you wouldn’t be able to get just from the relationship you have with your member.

6) What type of operational changes can a credit union make to curb losses from check fraud?

Reg CC governs the availability of funds and collection of checks. It provides guidelines that a financial institution can use when determining when to provide funds availability on a deposit. According to the regulation, there are specific instances – specifically, if a financial institution has a valid reason to doubt the collectability of funds on a deposited check – that allow a financial institution to lengthen the amount of time to make funds available to the depositor.

Creating processes for applying extended holds as allowed by Reg CC is a key way credit unions can curb losses. Extended holds allow a credit union to use their judgement to determine the risk around a check and extend the amount of time required to pass before a member can withdraw funds. Putting workflows in place that require holds to be placed or items to be rejected under certain circumstances will guarantee that all tellers are following the same procedures and that loss mitigation strategies are being followed uniformly across the organization. For example, one institution had a different set of hold policies for deposits into savings accounts than for those put in checking accounts. The fraudsters figured out the discrepancy – problably in collusion with a disgruntled employee – and deposited bad checks into savings accounts. They then transferred those funds immediately into checking accounts via a phone call, and were able to withdraw the funds as cash from the checking accounts. Because no hold was placed on the deposits into the savings account, it created a vulnerability the fraudsters exploited. These procedures should be automated and tellers trained repeatedly.

7) Where does technology fit into the equation?

Screening checks in real time against known incidences of counterfeits and accounts with a high history of non-sufficient funds, overdrafts, closed accounts and other high-risk factors is the single best way a credit union can protect itself and its members from check losses. The key here is doing it in real time – right when the check is presented for deposit. The further downstream holds are applied or that exceptions are identified, the more likely a loss could be incurred.

Andrew Tilbury is chief marketing officer for CUES Supplier member Bluepoint Solutions, Vista, Calif.