Consumer Compliance Outlook: Second Quarter 2008

Responding to Counterfeit Check Fraud

In the second quarter of 2007, Compliance Corner, the predecessor publication of Consumer Compliance Outlook, published an article entitled "How Banks Can Respond to Counterfeit Cashier's Checks and Money Orders," which discussed measures banks could adopt to respond to the problem of counterfeit cashier's checks.1 The combination of inexpensive desktop publishing tools, which make it fairly easy to produce high-quality counterfeits, and federal banking law, which requires next-day availability for deposits of certain types of checks,2 has resulted in a large increase in counterfeit cashier's checks, U.S. Treasury checks, and money orders. In the first three months of 2008, Bankers Online reported 81 new incidents of counterfeit checks and money orders, according to information obtained from bank regulators.3 For 2007, Bankers Online reported a total of 354 such incidents.4

Because of the continued increase in the number of incidents of check fraud, we are publishing this follow-up article to discuss additional measures banks can adopt to address this problem. In addition to educating their customers and staff, banks can verify whether Treasury checks, U.S. postal money orders, Wal-Mart money orders, and American Express Traveler's Cheques were actually issued. Bank personnel should also become familiar with the security features of Treasury checks and postal money orders.

Educating Customers and Bank Staff

One reason that counterfeit check incidents continue to increase is that some consumers are still unaware of this problem. As discussed in the earlier article, educating bank customers is the single most important response banks can initiate to thwart counterfeit check fraud. Banks should therefore be proactive in educating their customers. One method of educating customers is to display educational brochures and posters in bank branches near the area where deposit slips are made available. For example, the FBI publishes an "FBI Fraud Alert"5 poster that could be used to help alert consumers. More information is available at the FBI's Internet Crime Complaint Center.6 In addition, the Federal Trade Commission publishes two helpful brochures: "Check Overpayment Scams: Seller Beware,"7 and "Giving the Bounce to Counterfeit Check Scams."8

Banks can also train their tellers and customer service representatives to inform customers who deposit checks subject to next-day availability that federal law requires banks to make funds available for certain types of checks on the next business day on a provisional basis, but that the availability of the deposit does not necessarily mean that the check has cleared and will not be returned as counterfeit. When consumers are educated about the risks of counterfeit checks and common scams, they can protect themselves.

Verifying Suspected Counterfeit Checks

Another tool banks can use to combat counterfeit check fraud is the database records of validly issued Treasury checks, postal money orders, Wal-Mart money orders, and American Express Traveler's Cheques (a separate database is maintained for each type of check). Staff can use the databases to authenticate suspected counterfeit checks.

Treasury Checks

All federal agencies that issue U.S. Treasury checks enter information about the checks into a database, including the date the check was issued, its amount, the check number, and the payee. Banks can call the Treasury Services Department of the Federal Reserve Bank of Richmond to verify if a Treasury check was issued. The number is 804-697-2605 and the hours are 8:30 a.m. to 6:30 p.m. EST, Monday through Friday. Note, however, that the telephone line is subject to the following restrictions:

To help banks determine if a Treasury check is counterfeit, the Treasury Department publishes a brochure titled "U.S. Treasury Check Security Features" with a guide to the six security features of Treasury checks: watermark, symbol and serial check digit numbers, signature block, ultraviolet overprinting, bleeding ink, and microprinted endorsement line. These features are discussed below.

Banks should train employees who handle Treasury checks about these security features so they can flag suspicious Treasury checks. When employees detect a suspicious check, they can contact the Treasury check verification number to determine if the check was issued by the Treasury. Banks should also be aware that the Treasury Department holds check fraud seminars at banking conferences to educate banks about how they can identify a counterfeit Treasury check. The Treasury Department can be reached at 202-874-7640 to arrange a seminar.

The verification line and training are especially timely because starting in May 2008, the Treasury Department will begin issuing approximately 130 million tax rebate checks as a result of the Economic Stimulus Act of 2008 that President Bush recently signed into law. Given the large volume of Treasury rebate checks, fraudsters may attempt to exploit this opportunity by creating counterfeit Treasury checks.

U.S. Postal Money Orders

The United States Postal Service offers a service similar to the Treasury's for verifying postal money orders. The phone number is 866-459-7822. In contrast to the Treasury phone line, the postal number is automated. The caller is prompted to provide certain information about the suspected counterfeit postal money order, and the automated system verifies if the money order was issued on the date and for the amount listed. To assist people in identifying a counterfeit money order, the postal service publishes a brochure ("Look Before You Cash!") that identifies the following security features of a postal money order:

The maximum amount is $1,000 for domestic and $700 for international money orders, so any amount in excess of these limits is a red flag for a counterfeit.

Other Checks

Wal-Mart money orders can be verified by calling Traveler's Express at 800-542-3590. American Express Traveler's Cheques, which are not subject to next-day availability, can also be verified at 800-525-7641.

Conclusion

Counterfeit checks continue to be a problem for banks because of the low cost of desktop publishing tools and creative scams to exploit the requirement of federal banking law that banks make check deposits available the next banking day for certain types of checks. To combat this problem, banks can verify whether certain types of checks were actually issued, educate their staff about the security features of Treasury checks and postal money orders, and educate their customers about the risks of counterfeit check scams. In the long run, as the banking system adopts Check 21 and its electronic processing of checks, the problem of counterfeit checks may be significantly reduced.

Specific issues and questions about this article should be raised with the consumer compliance contact at your supervising Reserve Bank or with your primary regulator.