Tool 7: Understanding Risk

Fraud Detection Techniques

Here are some fraud detection techniques that were developed for paper checks but will have equal, if not better, results in electronic check clearing.

Rules-Based Systems

These systems help paying and deposit-taking banks detect unusual check activity, which could indicate that items deposited or presented for payment are fraudulent. With these programs, examination of the paper check is less relevant for detecting fraud. These systems are highly effective in identifying fraudulent deposits and check-kiting schemes. Effectiveness is dependent on updating databases, analyzing data, identifying trends, and adjusting the parameters accordingly. Effectiveness and efficiency improve as the bank learns from experience and as they move to teller-based systems.

Positive Pay

Positive pay systems, often developed internally, are cooperative links between corporate customers and banks. They limit fraud because companies provide banks with check-issue files and checks presented against those accounts are verified against the files. Positive pay systems are useful in a substitute check and image environment because a physical examination of the check isn’t necessary.

Automated Signature Verification

A number of signature verification products exist today which will have added value in a Check 21 environment. One captures signatures from signature cards and stores them in a database, to be compared against checks using neural-network technology. The process uses check images, not the actual physical documents, and significantly increases the number of check signatures that can be examined without human intervention.

Examination of Suspect Items

Paying banks reviewing transactions can compare a substitute check or image against checks previously paid on that account. Banks can use several recent checks or a single “companion check ” (e.g., a low-dollar check which is more likely to be valid). Here’s what the bank examines:

·  Signatures
·  Fonts
·  Serial number sequences
·  Missing serial number / ·  Location of check information
·  Address
·  Check stock

Banks may also be able to detect alterations by observing discoloration in the payee or amount line.

In all cases, banks need to consider whether a particular transaction makes sense for the account. For example, would a large pharmaceutical company be writing a check to a local hardware store?

AMERICAN BANKERS ASSOCIATION 3