Table of Contents
INTRODUCTION ....................................................................................................... 1
SOME TYPES OF FINANCIAL FRAUD................................................................. 2
EMBEZZLEMENT ......................................................................................................... 2
Example................................................................................................................. 2
Ways to prevent embezzlement............................................................................... 3
ALTERATIONS ............................................................................................................. 4
Ways to Prevent Losses from Check Alteration ..................................................... 4
FORGED ENDORSEMENTS ........................................................................................... 5
COUNTERFEIT CHECKS ............................................................................................... 5
HOW TO PROTECT YOUR ACCOUNT................................................................. 7
CONCLUSION............................................................................................................ 8
|i
Introduction
Every year, increasingly sophisticated technology and techniques are developed to perpetrate financial fraud. Annual losses resulting from fraudulent activities are staggering. Embezzlement, check forgery, altered checks, the
manufacture of false identities, and counterfeit credit cards are on the rise.
Companies may appear to be more vulnerable to fraud because they may not
have the resources or the time to implement fraud prevention programs, and
may be less aware of the scope of the problem. Additionally, companies may
not perform regular audits, causing many offenses to go undetected until significant losses occur.
Combating financial fraud is a continual battle; one that requires attention and
the implementation of stringent security and control procedures.
JPMorgan can help protect your funds from financial fraud. Our Positive Pay
service matches your check issuance information with the checks presented for
payment. Checks that do not match are rejected and you receive a list of exception items to make a ‘pay’ or ‘return’ decision. By providing you with resources designed to mitigate check fraud, we can help you reduce your exposure to fraud losses.
While Positive Pay does not prevent all types of fraudulent activity, it does
protect against certain types of alterations and counterfeit activity.
This document presents some information on trends we have seen in various
types of financial fraud, and details specific measures that you can take to help
protect your money and minimize risk.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|1
Some Types Of Financial Fraud
Financial fraud usually encompasses four types of activities: embezzlement,
alterations, forged endorsements, and counterfeit checks. Each type requires
use of different approaches in order to prevent, detect or recover losses. Each
of these types of fraudulent activity is discussed below.
Embezzlement
Embezzlement is the willful taking or converting to one’s own use, another’s
money or property, of which the wrongdoer acquired possession of lawfully,
by reason of some office of employment or position of trust. The most common way we see this done is when the wrongdoer intercepts checks being sent
to the company and deposits them into an account for the wrongdoer’s personal benefit. Often the wrongdoer works for the company in accounts payable
or accounts receivable, and thereby has a greater ability to conceal the true
financial status of the company for a period of time.
Example
The following is an example of how embezzlement can occur:
·
Airline ABC purchases XYZ Air.
·
An employee opens several accounts with a similar name
·
The employee of XYZ Air manipulates the books for nine months to conceal the fact that the funds have not been applied to XYZ Air’s account.
·
The employee transfers funds to banks in Switzerland and the Cayman
Islands, then leaves for vacation and never returns.
·
Once an audit is completed, it is discovered that more than $500,000 was
embezzled over a nine-month period.
There are several factors typically given for why this type of crime is able to
be perpetrated in such a seamless manner including:
·
The employee was a long time employee.
·
There was no segregation of duties for balancing the company’s books.
·
No background check was conducted on the employee.
·
The employee experimented at first with low-value transfers, was successful, and was given a lot of autonomy at his job.
·
Several accounts were used to disburse the funds.
·
The employee’s desk was not audited regularly.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|2
Ways to prevent embezzlement
Preventing and detecting embezzlement activity is an ongoing challenge;
however prevention begins with the knowledge that embezzlement does occur.
In addition, clients should implement a multifaceted program that may include
the following initiatives:
·
Set a good example of honesty and integrity. Employees tend to emulate
the behavior displayed by upper management.
·
Create a positive working-environment and be aware of discontent among
your work force. Employees sometimes commit fraud and abuse as a way
of getting back for perceived working injustices.
·
Check employee references. Employees who seek out sensitive positions
with the intent to perpetrate fraud may have a history of prior convictions.
·
Examine bank statements upon receipt. Investigating the first hint of any
irregularity is a key step toward preventing significant fraud.
·
Institute a hot line for reporting suspected abuse. Employees are often in a
position to observe improper conduct but frequently have no way to report
it and might fear retribution—especially if the perpetrator is their superior.
·
Segregate duties. Employees who can manipulate the books and conceal
their activities may be tempted to perpetrate fraud. Eliminate the temptation by disallowing employees who post entries to a general ledger account from reconciling the account. Also, have more than one person review invoices.
·
Audit employee’s functions occasionally and ensure that they take time
off. Dishonest employees do not like leaving their desks, fearing that
someone could review their activities.
·
Obtain a credit check for employees in sensitive financial positions. Employees suffering from extreme financial pressure might have a greater
temptation to steal.
·
Monitor vendor relationships. When employees rely excessively on a particular outside provider, there is the possibility of kickbacks.
·
Monitor the activity between a purchasing manager in a position to pay
invoices and an employee in a position of submitting them for payment.
One company spent $2.8 million paying for goods that were never delivered. In another instance, a criminal submitted invoices of $1,000 per
month to a company for 48 consecutive months. The money was paid
without questioning the invoices.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|3
Alterations
There are three primary types of alterations made to the face of a check: (1)
the name of the payee is altered, (2) the amount is altered or (3) both the payee
and the amount are altered.
Several methods are typically used to alter checks, including dipping them into
chemicals, using liquid correction fluid, typing over with darker and larger
fonts, bleaching, microwaving, and using magnetic tape.
A claim of alteration tendered to your bank that paid the altered item may be
subject to many defenses, most of which center around your company’s negligence. Also, the recovery process may be very lengthy, costing the company
time and money and may involve litigation.
If the company attempting to hold the bank liable for paying or accepting an
altered check has failed to exercise ordinary care in the handling of the item,
the company may be found to be completely or partially responsible for the
loss.
Ways to Prevent Losses from Check Alteration
A wide range of measures can help protect against the rising tide of losses
from altered checks.
·
Determine a high-end limit for checks and investigate any items that are
presented for more than that amount.
·
Develop an account payable system that tracks checks not cashed within
10 days. There appears to be a gap of at least 10 days before criminals present a check, possibly due to the time it takes to develop a plan by which
they can negotiate a particular item. You can capitalize on this timeframe
by inquiring quickly into the status of the check.
·
Develop an accounts receivable system that will serve the same purpose of
tracking old invoices. You could set the same parameter of 10 days.
·
Monitor the flow of incoming mail. Limit access to only those necessary.
Access to unauthorized individuals is sometimes overlooked.
·
Convert to ACH services when feasible; i.e. Direct Deposit of Payroll.
·
Use overnight delivery services for large and sensitive items. The fees associated with these services can be viewed as insurance to preserve your
business relationships and to protect your revenue.
·
Consider sending payroll checks to the employees’ supervisor rather than
to the address of the payee to avoid the risk of having the check stolen
from the mail.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|4
Forged Endorsements
Corporate forged endorsements tend to be for large amounts of money and
perpetrated by employees capitalizing on careless storage of checks. In many
situations forged endorsements can be concealed by perpetrators who are in a
position where they can easily steal the checks as well as manipulate the
books.
Too often companies do not adequately address the possibility of forged endorsements that result from failure to adequately protect access to check stock.
Instead, they submit forgery affidavits seeking reimbursement from the bank
that paid the checks after the loss has occurred.
If a company fails to promptly report any unauthorized signatures on their accounts, they could be prevented from recovering funds. Also, if the wrongdoer
is an employee who is entrusted with responsibility with respect to the checks,
the loss may fall on the employer who is in a better position to avoid the loss
by care in choosing employees, in supervising them, and in adopting other
measures to prevent forgeries.
Counterfeit Checks
Counterfeit checks are sometimes viewed the same as checks bearing a forged
signature, and several law enforcement agencies and other banks treat them
equally. They differ from forged signatures, however, in the sense that the actual check is replicated, not stolen. Only the account information is real.
The volume of counterfeit checks is rising rapidly, both in number of checks
and the overall exposure. It is not uncommon for accounts to experience
counterfeit activity more than once. After the activity temporarily ceases, the
counterfeiters might strike again with another style of checks and a different
pattern of fraud.
Counterfeiters are not selective about the type of accounts they chose to create
counterfeit checks on. They counterfeit any type of check on any account information that they can steal.
The information needed to create a counterfeit check may be bought from
genuine payees (whether vendors or employees), or it may be stolen from the
bank, post office, company mailroom or from accounts payable and accounts
receivable departments. The only information needed to counterfeit a check is
the account number and the approximate check range being used.
This is a worldwide problem. In recent years, we have received fraudulent
counterfeit check claims from over 25 countries around the world.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|5
There are a number of ways to create high-quality counterfeit checks. A personal computer with desktop publishing capabilities can be used or a PC with
a scanner. To a much lesser extent, some counterfeiters have also used color
copiers. Another tactic is to simply buy checks through the mail using stolen
account information.
Some counterfeiters use contradictory information on the check or an invalid
account number. For example, the name of the bank does not correspond with
the routing number, and the abbreviation on the top of the check is also different. This may create a delay for banks processing the items and buy the counterfeiter more time to take the money and run.
The counterfeiter might use a corporate style of checks or use the account of a
corporation and style them like a personal check. They often hire young people to act on their behalf, again making it difficult to catch the actual counterfeiter.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|6
How To Protect Your Account
JPMorgan’s Positive Pay Service provides one of the most efficient and comprehensive ways of protecting accounts from fraud. The Positive Pay Service
compares all items presented for payment against your original issuance file to
determine whether a check is to be paid. Any discrepancies are flagged as exception items and routed to you for a decision to pay or return the item.
As counterfeit activity becomes more sophisticated and widespread, Positive
Pay is an increasingly critical service. Companies that do not convert to Positive Pay continue to leave open a window of opportunity for financial criminals.
Increasingly, banks are taking the position that companies are negligent and
assume the risk for forgeries or altered checks that could have been prevented
had they subscribed to the Positive Pay Service or any other cost effective
service reasonably designed to help prevent fraud.
In litigation involving check fraud, the loss may be allocated to the party that
was in the best position to prevent the fraud. When a company is offered Positive Pay Services and the company fails to utilize those services, the loss may
be allocated totally to the company.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|7
Conclusion
It appears that financial fraud is here to stay. Organized crime rings, the proliferation of new technology, and a high degree of tenacity lead to greater and
more sophisticated methods of financial fraud. Fighting the various forms of
financial fraud needs to be a focus when doing business in the 21st century.
Education and awareness are critical first steps toward deterring and detecting
check fraud within and against your company. You need to monitor the morale
of your organization, maintain checks and balances, track and review all disbursement activity, and recognize that highly deceptive practices can happen
where and when least expected.
Check fraud is a growing problem that requires greater attention regarding
secure storage of check stock, as well as specific check features on the check
itself. Converting to electronic payment processes, such as ACH, may help
prevent the primary sources of check fraud.
Today, one of the most comprehensive and effective tools for reducing exposure to forgeries and counterfeiting is the Positive Pay Service. By electronically identifying any discrepancies between checks presented for payment and
your original issuance file, Positive Pay provides that, under most circumstances, altered and counterfeit checks will be identified before they are ever
paid.
Although, combating financial fraud may appear to be costly and timeconsuming, a sharpened focus on security leads to a wide range of benefits
that include: better control over check issuance procedures, improved management of accounts, and enhanced attention to operations. The losses your
company avoids through the use of Positive Pay may more than pay for the
service.
This document contains information that is confidential and the property of J.P. Morgan Chase & Co. It may not be copied, published or used, in whole or in part, for any purpose other than expressly authorized by J.P. Morgan Chase & Co.
© J.P. Morgan Chase & Co. 2002. All Rights Reserved.
|8