The Check 21 Legislation Impact
Check Security Features and Positive Pay are Still
the Strongest Methods for Preventing Check Fraud
Written by Jessica Andrews, AP Technology
With Check 21 legislation set to take effect in October, concerns have been raised that an image-based environment will open new avenues for un-prosecutable check fraud. Banks and industry groups are on a quest for an image-survivable check security feature that can be used to detect fraud on scanned check images. But as the realities of Check 21 unfold, the best defense to protect banks and their customers from check fraud remain those methods that allow for detection of fraud at the time checks are presented for payment, such as check stock with security features and positive pay systems.
Check Clearing for the 21st Century Act, also called Check 21, was signed into law by President Bush on October 28, 2003 and will take effect October 28, 2004. It is anticipated that the result could be a proliferation in un-prosecutable check fraud, depending on the degree to which banks adopt converting paper checks to electronic checks and open themselves to the accompanying vulnerabilities. The new legislation does not require banks to transition to paper check conversion. Check 21 is actually rather limited in scope, only requiring that financial institutions be prepared to process image replacement documents, or IRDs, by Oct. 28, 2004. *1 However, it is the possible repercussions of the legislation that is leading to a great deal of industry discussion on the topic of check fraud prevention in an image-based environment.
Converting checks to electronic images and using these images as substitutes for the real thing, may speed the processing of checks. However, conversion also essentially truncates the security information that may exist on a real check from the point in time when the check is scanned in the clearing process. The current state of reader/sorter technology eliminates the possibility of fraud detection from that point onward.
There have been various technologies introduced over the years that have been intended to modify existing read/sorter hardware to detect an added security feature on checks. These new technologies often require printing marks and codes using UV inks or converting phosphors and adding a special reader to recognize the expected patterns. *2 Until now, such technologies have been too costly for financial institutions to implement.
An ongoing goal is to find a check security feature that survives and is detectable following the electronic conversion process - therefore requiring no read/sorter hardware modification. However, this appears unrealistic at this time, given that current read/sorter technology captures images at resolutions ranging 100 to 240 dpi. At this low resolution, it is physically impossible to distinguish between the scanned image and a copy produced at a higher resolution on standard consumer and commercial grade printers. *3 Even if an image-survivable feature is discovered, there is the added issue of the read/sorter recognizing a trigger for whether the feature is even present for detection or not (most checks will not include the feature); and this trigger must also survive conversion and be impossible for criminals to reproduce. *4
The indemnity of Check 21 legislation holds blameless the recipient and any subsequent recipient for losses they incur as the result of receiving a substitute check instead of the original check. For the indemnity to apply, the recipient of the substitute check must have in place security measures that would likely have detected the fraudulent check had the original been provided instead of the substitute. The indemnity aspect will likely be a reason for many banks to avoid electronically converting checks for large dollar amounts. Exactly how liability for check fraud losses will shift as a result of Check 21 remains to be seen.
High-Security Check Stock Remains a Highly Effective Defense Against Check Fraud
Once Check 21 legislation takes affect at the end of October, it is clear that the best solution to protect banks and their customers from check fraud is still the capability to detect fraudulent checks at the point of entry into the banking system. This means that banks will need to continue examining checks to detect fraud at the point of acceptance. Check stock with numerous paper-based security features, such as those contained in AP Technology's TruPrint check stock, allow for authentication through physical examination and will remain one of the most powerful means of preventing check fraud in a Check 21 truncated environment.
Industry groups are presently looking at current and possible next-generation check security features to define their viability and performance in an image-based, fully automated environment. As a leader in secure document solutions, AP Technology currently offers an industry leading set of security features in its TruPrint check stock and will be actively involved in the evolving requirements and standards for check security features in a truncated environment.
Positive Pay Remains the Leading Defense Against Check Fraud
Once Check 21 takes effect, positive pay will also remain a very effective method for early detection of fraudulent checks presented to banks for payment. Positive Pay is the process whereby banks verify the data contained on a check before release of funds. Specifically, the banks compare the account number, check number, the check amount, and often, the payee information, with a check issue data file that has been transmitted to the bank by their corporate customer. If they match exactly, the funds are released. If not, the corporate customer is notified regarding the discrepancy and is asked to verify the check. Positive pay has proven itself as the leading defense in the war against check fraud. Positive Pay will play an ongoing role in preventing check fraud by working hand in hand with image-based technologies in the future. Products such as AP Technology's SecurePay are being used by banking corporate clients to create and transmit positive pay check issue files that will then be compared with data from scanned check images.
More About AP Technology Solutions
TruPrint Check Stock
TruPrint check stock contains an effective array of high technology features that are continuously being developed to defend documents against chemical alteration, erasure, toner removal, photocopying and counterfeiting. TruPrint check stock showcases the industry's most comprehensive level of features and has been thoroughly tested to insure the highest quality paper/toner bond when used in conjunction with TruPrint MICR toner.
- Toner Grip - A unique surface treatment applied during the manufacturing process, yields greater adhesion of TruPrint MICR Toner on surface of document. By fusing toner to paper fibers, any alteration attempts (usually by cellophane tape lifting printed image) become clearly detectable.
- Void Pantograph - Background designs or screens that expose a hidden VOID pattern when scanned or copied.
- Fluorescent Fibers - Invisible unless exposed under ultraviolet (black) light where fibers appear as bright glowing yellow threads. Copiers cannot reproduce.
- Microprinting - Miniature print that appears as screened line or border. Verified with magnifying glass. Copied or scanned attempts appear plugged and/or unreadable.
- Warning Borders - A notice or warning designed to advise document handlers and potential fraud artists of specific overt and covert safeguards present. Printed in reverse type on face of document.
- Black and Blue Dye(s) - Dyes react to a wide variety of chemical solvents used to remove information from documents. Black or blue stain clearly visible upon placement of alteration solvents.
- Multi-language Brown Stain Void - Brown colored VOID appears in six languages (English, Spanish, French, German, Japanese and Chinese) signaling contact of a bleach or chlorine-based ink eradicator on document.
- Watermark - Pattern printed in opaque ink on back of document. Visible when viewed at 45-degree angle. Copier and/or scanner resistant.
- Special Endorsement Backer - Lists deluxe security features.
SecurePay Positive Pay Software
AP Technology's SecurePay is the most cost-effective and easiest solution for positive pay implementation available today. Until recently, due to the custom computer programming and data transmission requirements, positive pay had been very expensive and difficult to implement, reserved for only very large corporations. SecurePay is the industry's first stand-alone universal solution for positive pay file creation and transmission that may be implemented by any size business. SecurePay works across all accounting applications and their computer platforms, creating positive pay issue files for any bank's specifications. SecurePay fulfills the needs of corporate bank customers, creating the easiest way to implement a positive pay strategy to stop check fraud.
*References
- 1 Cline, Kenneth. "Paper to Pixels." Banking Strategies. March/April 2004.
URL: http://secure.bai.org/bankingstrategies/2004-mar-apr/paper/ - 2, 3, 4 Thaxton, Dan.. Abagnale, Frank. "Check 21 and Image Security." Standard Register and Abagnale & Associates. Copyright 2003. Rev. 3/04
Other Sources
- Financial Services and Technology Consortium
Website: www.fstc.org; Check Security Project Information: http://fstc.org/projects/ - Mearian, Lucas. "Check 21 becomes law, allows speedier electronic settlements."
Computerworld, November 2003
http://www.computerworld.com/governmenttopics/government/legislation/
story/0%2C10801%2C86807%2C00.html
