Controlled Paper Stock

Recently, SafeChecks received a call from a large company in Los Angeles. The company had just learned that two of its checks had been intercepted in the mail, the payee's name removed, and a fictitious name inserted. Each check was in excess of $500,000, and both paid. One of the altered checks was deposited locally; the other was sent overseas and paid through international in-clearings. This company was staring at a loss of over $1,000,000, and they wanted advice!

In cases of altered payees, the Uniform Commercial Code allows, under most circumstances, for checks to be charged back to the bank of first deposit for up to one year. This is true provided that the paying bank acts within 30 days of when they discover the alteration. In the case cited, the company's bank, Bank of America, credited the company's account for the domestically deposited check. But at last report, the bank had not reimbursed the company for the foreign item. Frankly, we don't think the bank will reimburse the company, as the UCC does not apply to other sovereign nations, and the bank has no recourse for recovery.

Check fraud has become big business, with forgery rings that are both clever and resourceful. They understand the banking system perfectly, including Positive Pay, which they circumvent by altering the payee or replacing the entire document. As companies and banks implement new methods and technologies to thwart the forgers, the forgers develop new methods to circumvent the systems. To prevent fraud losses, banks, software vendors and check printers must respond immediately to new threats. With our knowledge and experience, SafeChecks is among the very best in the country at adapting. In fact, we have already released our fourth-generation check, with the next generation due out by June 1999. At SafeChecks, stopping check fraud is not just a wish; it is an experience-driven goal.

While check fraud will never be eliminated, there are three principal steps that, when used concurrently, will virtually eliminate the risk of fraud losses. These three steps are: Positive Pay, using a high security check built on controlled paper, and understanding sight-review procedures at your bank.

Why Positive Pay?
Positive Pay, an automated check-matching service offered by most banks, will catch any check not issued by the company. It matches the account number, check number and dollar amount of all in-clearing checks. It does not match payee names. With check fraud losses 12 times greater than credit card fraud, every company should use Positive Pay.

Why highly secure checks on controlled paper?
High security checks, which are checks with many safety features, deter most forgery attempts by complicating the forger's task. The minimum number of safety features required in a secure check is seven. SafeChecks' laser checks have 11 features.

Sophisticated forgers use computers, scanners, high-end color copiers and chemicals to overcome most check security features. For example, microprinting can be scanned and replicated; artificial watermarks can be replicated with a three-percent print screen; and copy void pantographs can be eliminated on high-end color copiers. Forgers wash laser checks in chemicals for 15 minutes and follow with a bleach bath to eat off the toner and clean the check. The first chemicals prevent the bleach from destroying the check.

One security feature, however, cannot be defeated-the paper stock itself. However, if forgers can obtain original check paper, they can perfectly replicate the check. Virtually all of the most popular check papers are available in mail order catalogs. If a check is sold entirely blank by a mail order firm or a software company, the paper is not controlled. Using a controlled paper stock with multi-chemical sensitivity is critical to preventing replications.

Many check printers claim they use controlled paper, but these claims are often misleading. True controlled paper is restricted in both its distribution and its use by the paper manufacturer. The manufacturer requires the printer to store the paper rolls in a locked facility, shred pre- and post-check run waste, and in at least one case, regulates the type of companies that can use the paper. A handful of very large printers manufacture their own custom paper. Then they undo their good work by printing millions of laser checks, complete with artificial watermarks, laid lines and void pantographs, and sell them entirely blank to thousands of companies. Everyone has access to each other's identical check stock!

There are perhaps only three or four controlled papers in America. The best paper stocks contain a true watermark that is pressed into the wet paper at the mill. Dual-tone true watermarks are vastly superior to single-tone watermarks, which forgers replicate with a grease pencil. Dual-tone true watermarks cannot be replicated. When this paper is used with a warning band that describes the watermark, forgers are stymied. They cannot replicate the check because they cannot get the paper.

Boise Cascade has just released a new, high security, controlled paper called Pentagon. Pentagon is extraordinarily strong, is reactive to 21 chemicals, and contains a dual-tone true watermark.

When developing Pentagon, Boise Cascade definitely did their homework. This paper is not available to mail order companies or others that resell entirely blank generic-designed checks. Boise Cascade also took the unusual step of requiring Pentagon users to print on the back of the non-check portion of the sheet special wording, such as "This is not a check-Do not negotiate," to render the rest of the sheet unusable for color copying. SafeChecks knows of no other domestic paper company that has gone to these extraordinary lengths to protect its customers.

Before Boise Cascade released Pentagon, SafeChecks exclusively used Boise's SecurityGate paper because of its controlled distribution, its strength and excellent security features. However, SafeChecks is moving all of its customers to Pentagon because, quite simply, it is a better and more secure product. Pentagon is stronger, which helps eliminate paper jams. It is also smoother, which better bonds the toner to the paper, thus helping prevent altered payees.

Sight Review/Signature Verification
It is well known that banks do not look at every check. However, every bank does look at selected large-dollar checks in a process called sight review or signature verification. Most banks sort and group the large items by account number and review all the checks together. Checks that look different are usually fraudulent. This process illustrates the importance of controlled paper.

Every major company has been burned by fraudulent checks that do not look at all like the original. The forger buys laser checks at an office supply store, puts an account and routing number on the bottom, and deposits them through an ATM machine. You might ask, why use security features and controlled paper if the bank does not look at the checks? In a word, liability. The primary purpose of a secure check is deterrence. An attempt deterred is a loss not taken. The second purpose is liability. Who will take the hit, you or your bank?

In a 1997 court case, Kaiser Aluminum sued Mellon Bank after two checks totaling $262,000 paid against their account. Both checks had been sight-reviewed by the bank because of the large dollar amount. The checks that paid looked similar, but not exactly like the rest of Kaiser's checks. In court, Mellon tried to establish negligence on Kaiser's part to shift some of the bank's liability. However, Kaiser demonstrated that they had tight internal controls, reconciled all accounts in a timely manner, and used highly secure checks. Kaiser won. Mellon lost the case and the customer. Kaiser is now on Positive Pay, because while they won the case, their attorney's fees were horrendous. This case is detailed in Frank Abagnale's Check Fraud Bulletin. For a free copy, call SafeChecks at (800) 755-2265.