Cheque washing

Cheque washing

By Stuart Finlayson

Stuart Finlayson examines what action the banking and finance industry is taking to reduce the multi-million dollar hit on profits caused by cheque fraudsters.

Anyone who has read the book or seen the film "Catch Me if you Can", based on the early part of former cheque fraudster Frank Abagnale's life, will be aware that cheque fraud has long been a scourge of the banking community.

Even today, despite the fact that banks have far more sophisticated technology at their disposal than they did back in the 1960s when Abagnale was cashing dud cheques, cheque fraud remains a huge problem, with estimates putting the losses stemming from cheque fraud in 2002 at between US$850 million and $2 billion in the US alone.

Aside from the issue of fraud, the sending of physical cheques by banks for clearing purposes is a very antiquated, costly and time consuming process, but still a legal neccessity that banks would doubtless like to see done away with.

To this end, legislation is being proposed in the US that would allow banks to process and clear cheques electronically.

While such legislation had been discussed in the US for some time, the aftermath of September 11, when air traffic was grounded and millions of cheques could not move, combined with the anthrax mailings, prompted lawmakers to take action. In Australia, the wheels of change are moving rather slower: "The Australian banking industry has been talking about doing this for at least the last 12 years but it requires Federal and State legislation to be developed and introduced to facilitate it," says Stephen Ford, director, security services, Deloitte Touche Tohmatsu.

The thing is, at present, Australian banks already exchange cheque information electronically. They send files to each other that contain all the details of the cheque and they are able to clear and settle on the basis of that information. Ultimately, they still have to forward the physical cheque after that electronic exchange. This is down to the fact that current legislation requires them to do so, otherwise banks would have stopped sending physical cheques long ago.

Washing up and cleaning up

The huge costs associated with transporting cheques for banks is dwarfed by the cost incurred through fraud. While the figures for losses incurred by Australian banks annually due to cheque fraud are not made public, the losses in the US are thought to be between US$800 million and $2 billion, therefore, one can safely assume that the losses in Australia must run into tens of millions of dollars at the very least.

So how do the fraudsters get away with it? Well, a common method of cheque fraud is cheque washing, where the cheque is treated with a range of insolvents, depending on what sort of ink has been used to write the cheque. The idea behind it is to remove the recipients name and the amount the cheque is made out for in place of a vastly increased amount made payable to the fraudster: "Some can be spotted, for instance where a different font is used (to retype the new sum and recipient on the cheque), but not always," says Ford. "I once handled a cheque which I knew had been washed but I couldn't tell - it was just perfect. These cheques are for tens of thousands of dollars. A cheque for $43 suddenly becomes a cheque for $25,000 and so on."

Company dividend cheques are frequently hit because it's very visible when a major company mails out its dividend, with South East Asia among the blackspots, according to Ford: "A lot of the fraud has come from dividend cheques that have been mailed to offshore locations, particularly South East Asia. The perpetrators take advantage of the time factor and the extra difficulty in clearing cheques internationally."

There are two ways to prevent such fraud taking place, but as Ford explains, one method of detection relies heavily on the sharp eyes of the teller, whilst the other is not practised by business at present. "There are two ways to stop washed cheques slipping through the net. The first way is to examine the cheque for evidence of tampering, which would be the job of the teller, but bearing in mind that in some cases a teller may be going through a pile of 30 to 40 cheques in a single transaction, it is unlikely they will spot it.

"The other way is if you are able to check at the time of deposit what the true figures are that are supposed to be on that cheque. In a corporate world, it is at least a conceivable idea that the organisation printing the cheques could forward a file to the banks showing what the true figures were, but with a personal cheque, the bank has no way of knowing until the cheque is actually deposited."

Ideas that are being considered by Australian banks at present to help prevent such cheque fraud include the introduction of cheques made out of a material that is resistant to tampering with solvents, or the inclusion of a security symbol on the cheque that appears when insolvents have been applied to it.

Peter Smith, CEO of the Australian Payments Clearing Association (APCA) - the basic function of which is to establish rules to govern the way in which financial institutions exchange payment instructions, including the exchange of cheques - says the Association is already examining ways of foiling the counterfeiters: "We are actively looking at design features and manufacturing features of cheques that would make them safer and less susceptible to counterfeiting and less susceptible to having the details on the cheque altered. That is very much a core part of our business."

By A cheque free society?

In addition to the more modest suggestion that measures could possibly be put in place to ensure that when a business is registered it is being done for valid purposes, Smith offers a more radical approach to the problem: "The best thing the banking industry could do over the longer term would be to oversee the elimination of cheques as it is a declining instrument."

While that would certainly beat the fraudsters - or at least force their attentions elsewhere - doing away with cheques is not without its difficulties, as Ford explains: "We can view it in isolation and say it's a really good idea to get rid of cheques, as it is one of the most expensive ways to move money around, and there is the fraud situation as well, but in practical terms it would be extremely difficult to do that, as any individual or organisation can write a cheque to another organisation and post it to them but if they want to do it electronically they have to have information about accounts and they would have to supply information to the recipient about where the payment was made and so forth, so it appeals on a superficial level but as a society we are not really ready for it."

"The usage of cheques, both here in Australia and in the US, has diminished dramatically over the last few years because of electronic payments," adds Ford. A hint then that we may indeed be ready for such a sea change in the way we conduct our transactions in the not too distant future.

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