Positive Pay - Positively Pays

Check Fraud - The Rules Have Changed and You Are Exposed, Part II

By Kurt Pahl, President of PAHL CONSULTING, P.C.

Last month's article covered the growing problem of check fraud and a title company's need to be aware of the shifting responsibilities to prevent check fraud from banks to their corporate customers. This month we continue with a discussion of the best way to avoid becoming a victim of check fraud - the use of a bank service called positive pay.

Positive pay involves the verification of checks presented each day to your bank for payment. If a check has not been authorized it will be rejected and ot paid. Time frames are tight and your staff must diligently follow prescribed procedures for positive pay to be effective.

To use positive pay you must be able to prepare and transmit a computer file of all checks written or issued every day. Your bank then matches the check number and amount of the checks you have issued with the checks presented for payment. Exceptions are reported to you every day for a pay/no pay decision. You generally have only a few hours to review the exception reports and to communicate your decisions to your bank.

A variation on positive pay is for your bank to transmit information on all checks presented to your company for approval. This is called reverse positive pay. While you have to go through more detail with this service, you are not required to transmit a file if you don't have that capability. Presented checks can be compared with a paper check register in your offices. Reviewing only checks presented above a certain amount will reduce comparison time but with some risk. You must tell your bank of any unauthorized checks that are not to be paid, again within a short time period.

In addition to the check number and amount read from the magnetic strip at the bottom of the check, some banks can also make available an image of the front and back of the check presented. You can then verify that the payee name has not been altered and that the endorsement appears proper. Visually verifying large dollar checks, such as loan payoffs, before they are paid provides the best security available against large-scale check fraud.

Banks have been pushing their customers to use positive pay so that check fraud can be stopped and to get a corresponding reduction in check fraud losses that banks have been absorbing. Since your bank also benefits when you ust this service, it should be provided at a nominal cost.

Be sure to carefully examine your bank checking account agreements before signing. Many banks' agreements have gone beyond the recent changes in relevant laws in an attempt to shift even more liability to their corporate customers. Get good legal advice and don't hesitate to negotiate the terms of your agreements. Positive pay usually requires a special agreement. Make certain that you don't waive any of your rights to dispute payment of a check based on a physical examination of the check itself fo r alterations not disclosed in the exception report.

Use of positive pay is not yet required. Courts have ruled against banks asserting that companies were responsible for check fraud solely because they failed to use positive pay. But, since it is available why not use it? A little time spent on due diligence every day is a lot better than the time and money that could be wasted in a dispute or litigation with your bank.

Positive pay services can also speed your bank reconciliation process. As long as paper checks are used, this service is a must. Contact your bank for more information.