Note: Sample below may appear distorted but all corresponding word document files contain proper formattingExcerpt from Term Paper:
The payee's endorsement is then forged and a criminal represents himself as the payee (Check fraud (http://www.ipsboston.com/pdcfpps_typesofcheckfraud.htm)."
In addition to the above methods of fraud, criminals often write checks on a close account and it takes time for the corporation receiving the check to find out that the account has been closed.
Criminals also open bank accounts using either fraudulent identification or by assuming the identity of others and commit fraud by depositing bogus checks. Criminals exploit the lag between the availability of funds provided by the depositary bank and the notification by the paying bank of the returned bogus check (Check fraud (http://www.ipsboston.com/pdcfpps_typesofcheckfraud.htm)."
WHY POSITIVE PAY IS a VALID OPTION
With the advances current technology offers the ability for outsiders to commit check fraud continues to increase.
Along with the technological advances, decreasing costs and wide spread availability of these products have made even sophisticated tools affordable to obtain. Now almost anyone with a basic knowledge of computers and software can attempt check fraud. Criminals have easy access to all of the tools necessary to commit check fraud and with the aid of these tools no specialized knowledge or skills are needed (Increasing problem (http://www.ipsboston.com/pdcfpps_whyitsgrowing.htm)."
Because there are more than 65 billion checks processed through the nation's banks each year, there is no way for each bank to visually inspect each check anymore, which opens the door for check fraud to continue to increase as technology provides methods to full computer systems.
At times even visual inspection can't determine if a check is counterfeit. Using a positive pay service would identify counterfeit checks upon presentment. However, without positive pay any counterfeit checks may not be detected until a company receives and reviews their bank statement, which is too late to avoid losses (Increasing problem (http://www.ipsboston.com/pdcfpps_whyitsgrowing.htm)."
Using a positive system helps a company reduce or eliminate the cases of check fraud it might otherwise face.
The basic premise of positive pay is that the bank matches the check serial number and the dollar amounts against a provided list of written checks that the company provides to the bank. If the information matches, the checks are paid. If they don't match, the checks are not paid.
The easiest way to describe positive pay is that is an automated system, designed to detect fraud in checks. It is offered through the Cash Management Department of many of the world larger banking systems including most of the banks that are found in the United States (Overview of Positive Pay (http://www.positivepay.net/).
In its simplest form, it is a service that matches the account number, check number and dollar amount of each check presented for payment against a list of checks previously authorized and issued by the company. All three components of the check must match exactly or it will not pay (Overview of Positive Pay (http://www.positivepay.net/)."
These are sometimes referred to as trigger points.
The way it works provides a set of checks and balances that must be followed for the checks to be paid.
The bank receives a transmitted file of checks that the company issued that day. When the checks are presented to the bank for payment the checks are individually checked against that list of transmitted checks. This is all done electronically so it does not involve additional manpower, and it removes the possibility of human error or the desire to cheat the system by an inside criminal.
The check-issue file sent to the bank contains the check number, account number, issue date, and dollar amount. Sometimes the payee name is included, but is not part of the matching service (Overview of Positive Pay (http://www.positivepay.net/)."
If a check is presented that does not have a match within the transmitted file it is automatically red flagged as an "item of exception." This then prompts the bank to send a fax and an image of the check to the client company to view and either verify as written or flagged as a fraudulent document.
Once the client has reviewed the check in question the client instructs the bank to pay the check or return it unpaid.
There is generally a fee charged by the bank for Positive Pay, although some banks now offer the service for free. The fee might well be considered an "insurance premium" to help avoid check fraud losses and liability (Overview of Positive Pay (http://www.positivepay.net/)."
The purpose of positive pay arrangements is to detect and prevent check fraud. The arrangements, however, cannot typically detect all types of check fraud. Before entering into a positive pay agreement, therefore, it is important to understand the various types of check fraud schemes that exist, the way in which the U.C.C. apportions liability for losses resulting from check fraud, and the degree to which positive pay will detect these frauds and alter the U.C.C. liability scheme (Fraud, 1999)."
Positive pay is useful for detecting counterfeit checks and unauthorized checks when the drawing of the check has not been authorized or the amount of the check has been altered (Fraud, 1999). By using positive pay, a counterfeit check or forged drawer's signature may be detected before the payer bank finally settles for the check. In the example above, if' a wrongdoer deposited a counterfeit check, the suspicious nature of the check would first be detected by the payer bank, which would notice that the check does not appear on the list of checks issued by the customer (Fraud, 1999). The bank would then notify the customer of this anomaly, and the customer, after reviewing its own records, would instruct the bank that the item is not to be paid (Fraud, 1999). In this way positive pay helps to shield both the bank and the customer from losses due to check fraud (Fraud, 1999). "
This is an important aspect of the system as there are several checkpoints along the way that can prevent the release of funds that should not have been released.
When dealing with a billion dollar corporation it is vital to have a system in place for the purpose of detecting fraud and not paying those checks. In addition, as word begins to travel that the company has a positive pay plan in place, those who have been considering defrauding the company will decide not to attempt it. In addition a positive pay system puts insurance stop gaps in place so that if a check gets by and the bank pays it, then the bank is responsible for the funds that are lost.
Overview of Positive Pay (accessed 2-1-07)
Check fraud (accessed 2-1-07)
Increasing problem (accessed 2-1-07)
Statistics (accessed 2-1-07)
Protection from Check Fraud and Losses (accessed 2-1-07)
____(1999) Deterring check fraud: the Model Positive Pay Services Agreement and Commentary. Business Lawyer[continue]
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