Avoiding Fraud And Forgery

Small businesses nationwide are increasingly falling victim to fraud and
forgery and, according to the National Research Council, production of
counterfeit currency has doubled every year since 1989. If this trend
continues, more than $2 billion in bogus currency will be in circulation by
the year 2000. Various banking associations also estimate that about 500
million checks are forged annually, contributing to losses totaling more
than $10 billion. Credit card fraud accounted for an additional $2 billion
in lost revenues in 1993, up 16 percent from the previous year. While the
task of preventing such fraud may seem daunting, most losses are avoidable
if business owners take the necessary precautions.

Counterfeit Currency: Don’t Get Stuck with the Bill

Small businesses are at tremendous risk of receiving counterfeit currency.
Counterfeiters know that employees of small companies tend to receive less
training in detecting bogus currency than those of major corporations. This
lack of training, combined with the increasing sophistication of modern
photographic and printing equipment that can easily produce large
quantities of seemingly authentic currency, mean that small business owners
have genuine cause for alarm.
Accepting counterfeit currency can be costly, because financial
institutions will not reimburse the depositor of a counterfeit bill. Small
operations must therefore focus on not accepting bogus currency in the
first place.
Rule number one is to examine the bills you are receiving, especially
denominations of $20 or more. Many counterfeiters rely less on their own
counterfeiting skill than on the inattention of employees. While this
careful scrutiny takes only one or two more seconds, the extra time spent
will result in catching most counterfeit bills. (More advanced methods of
detecting counterfeit bills are outlined in “Detecting Counterfeit
Currency” on the next page.)
The U.S. government is concerned with the escalation of counterfeit
currency production due to rapid technological advancement, and the
potential impact it may have on the nation’s economy. As a result, the
Treasury Department has announced plans to change the design of U.S.
currency to enhance its security.
New features may include an enlarged off-center portrait on each
denomination; a matching watermark; an enhanced security thread in a
different location on each denomination; expanded use of micro printing;
and interactive, or moirŽ, patterns that turn into wavy, irregular patterns
when copied. A final design is expected to be approved in 1995 and new $100
bills will be produced by 1996.
It is hoped that these new security features will help both merchants
and the public more readily identify genuine notes. Other covert features
will enhance the banking system’s ability to detect counterfeits.

Pay Attention to Those Checks

Consumers currently use personal checks to pay for approximately 60 percent
of their purchases, and this percentage continues to increase. As the use
of checks escalates, so does the likelihood of loss from check fraud.
Affordable computer technology is almost single-handedly responsible
for the rise in check forgery. Color copiers, scanners, desktop publishing
software and laser printers make it easy to alter, forge and duplicate
checks. Experts estimate that computer-assisted check fraud is doubling
each year, adding that these forged documents are almost impossible to
detect by the naked, untrained eye.
The American Bankers Association warns of another fraud affecting
small businesses. Crooks are stealing checks from small companies when
owners negligently leave their checkbooks unsecured and pay little
attention to monthly statements. Entrepreneurs should guard their
checkbooks as securely as cash, thereby limiting the chance that crooks or
even employees will be able to abscond with them.
Already-written checks are also subject to fraud. For example, if you
write a $35 check to Jane Doe and leave a small space between the dollar
sign and the “35,” as well as some space in front of the written amount,
the check can easily be altered. If someone simply adds a “6” in front of
the dollar sign and a “Six” in front of the written amount, you just wrote
a check for $635. Remember to keep names and written amounts hard left, and
write from the end of the name all the way to the right of the check. This
will make altering the check almost impossible.
Small operations should also be careful when accepting starter checks.
Many scams revolve around these checks because no name is printed on them.
It is common for crooks to open an account with $100 and never add money
while continuing to write bogus checks. For this reason, businesses should
develop a comprehensive identity verification policy, such as asking for
two forms of ID, when accepting starter checks.
A different scam involves buying merchandise with a check and
returning the merchandise the next day for a cash refund. When the check
later bounces, the store is left without the cash handed out for the
refund. Stores can avoid such a scenario by instituting a policy that
allows refunds only after checks have cleared.
Another disheartening development affecting entrepreneurs is that
recent revisions of the Uniform Commercial Code have shifted the
responsibility of check protection from banks to the party in the best
position to initially prevent the fraud. This responsibility may now fall
more heavily on the shoulders of the small business owner.

Credit Card Fraud Industry Keeps Growing

Between 50 and 60 percent of fraud occurs with lost or stolen credit cards,
while nearly 20 percent takes place with cards stolen straight from the
mail. In 1993, Visa credit card issuers worldwide lost 0.2 percent of their
total volume due to fraud – which amounted to a substantial $655 million.
And Money magazine reports that the average U.S. cardholder is paying an
extra $55 a year in higher interest rates and fees to cover these
fraud-incurred losses.
Two common examples of credit card fraud are counterfeiting cards and
re-embossing or re-encoding lost, stolen or never-received cards. A pure
credit card begins as a blank piece of white plastic that is silk-screened
to add features such as color and the bank name. The card then receives a
hologram and is embossed and encoded. Embossing is the process of raising
the cardholder’s name, validation dates and account number. Encoding is the
process of giving the magnetic strip on the back of the card an account
number, so it will pass through stores’ electronic checkers.
Re-embossed cards are heated, causing the account number to flatten.
A new number is then embossed, generally with a stolen embossing machine.
Re-encoded cards have the original account information deleted from the
magnetic strip. New information is then re-encoded onto the strip, giving
the card a new “identity.” When the merchant runs the re-encoded card
through the electronic checker, the authorization number displayed is for
the account number re-encoded on the magnetic stripe, not the account
number originally embossed on the card.

Detecting and Preventing Fraud

Falling victim to counterfeiting, check or credit card fraud can devastate
a small business. Since counterfeiting is mushrooming and the policy of
extending credit continues to become more common, entrepreneurs must focus
their resources on prevention. Research has shown that amateurs commit more
than 65 percent of all fraud, demonstrating that a significant amount of
fraud is relatively easy to detect.
The first step in preventing fraud is to educate employees who are
responsible for accepting currency, checks or credit cards. Because “front
line” employees are the decision makers when it comes to accepting
payments, they must be trained to recognize questionable documents. If
provided with appropriate resources and adequate instruction, they can be
a business owner’s most valuable ally in limiting fraud-related losses.
The next step is to use technology to your advantage. Many high-tech
options exist such as electronic check verification systems, although their
price may be too high for the average entrepreneur. However, other options
such as databases that contain names of bad-check writers are relatively
easy and inexpensive to start up, and could pay off even if they catch only
one name. Neighboring retailers should also share their databases of
bad-check writers with each other, thereby ensuring that each list is as
complete as possible.
A final word of advice: the more time and effort small business
owners invest in detecting and preventing fraud, the less time and effort
they will spend dealing with it once it hits.

Credit Card Fraud Hits The Gift Basket Emporium

“Tenacious” is an adjective that comes immediately to mind in describing
Donna Hope, owner of The Gift Basket Emporium, Inc., in Merrick, New York.
After deciding to move her home-based business to a retail shopping strip,
she first suffered a raging fire a week before the store’s scheduled grand
opening that resulted in a tangible loss of $55,000 and thousands more in
missed sales.
Hope subsequently experienced further calamities. In January 1993,
her office and production space were flooded as a result of heavy rain
during some construction at the shopping strip. Then when the blizzard of
1993 clobbered the Northeast, accumulated ice and snow collapsed the store
roof, causing $20,000 worth of damage.
Yet these setbacks pale in Hope’s mind compared to what she
experienced after a new customer paid for
an order over the phone with a stolen credit card. That order, and others
that followed for a total of $950 worth of personalized gift baskets over
a seven-week period, were all authorized by the credit service. “I
followed the correct Bankcard procedure each time,” she recalls.
Despite this, the Bankcard processing company subsequently suspended
The Gift Basket Emporium’s authorization to use their cards on the grounds
of credit card fraud – even though the customer, not Hope, had committed
the crime. “After 4-1/2 years of doing business with these
services, and never once having a chargeback, I was told that my merchant
status had been terminated. I was assumed guilty, and discovered there was
almost no way out.”
As Hope struggled to get her merchant status restored, she accepted
$10,000 worth of credit card orders without processing them – confident
that her efforts would eventually be successful. “I couldn’t pay half my
bills with this lump of uncollected receipts sitting on my desk,” she says.
A phone call to the fraudulent customer’s employer finally resulted in
the money being paid back, and the customer signing an affidavit admitting
her guilt. Soon thereafter, Hope’s merchant status was restored and the
orders on her desk were processed – just before the Christmas season, the
store’s busiest time.
“As a small merchant, you are basically operating at your own risk,”
notes Hope. “For this reason, when arranging a credit card account, I
would advise other entrepreneurs to ask flat out what happens in the kind
of situation I experienced. Unlike the companies with which I was dealing,
some will verify the address of cardholders over the telephone in advance
of a sale, or even their solvency. It pays to shop around for the
arrangement that gives you the most security.”

Detecting Counterfeit Currency

America is flooded with counterfeit currency. Here are some tips on how to
detect it.

* Compare a genuine bill to the bill in question. Look for differences
between the two, rather than similarities.
* Many of the $10, $20, $50 and $100 bills in circulation have a security
thread to the left of the Federal Reserve seal. When held up to the
light, the letters USA and the denomination of the bill are noticeable.
This thread, added to bills printed after 1990, is a quick reference to
verify legitimacy.
* Examine the general look and feel of the bill. Genuine currency is
printed using the intaglio method, giving the bill a three-dimensional
look. Counterfeit bills tend to look flat. Intaglio printing gives bills
an embossed, rigid texture, while counterfeit bills are generally much

Although employees cannot go through this entire list of tips during
each sale, making them aware of the possibility of counterfeiting might be
enough to save your business from becoming a victim.

* Paper stock – Look for red and blue fibers embedded in the paper.
* Look for significant detail in crosshatch latticework.
* Hidden microprinting on a security band in $20, $50 and $100 bills can be
seen when held up to the light.
* Check the clarity of the presidential etching.
* Numbers and letters should be clear and evenly spaced.
* Outer margins of the bill are very standard and clean.
* Saw tooth points of the Federal Reserve and Treasury seals should be
clear, sharp and unbroken.

Preventing Fraud – A Detective Tells All

Detective Kris Hosford, a 25-year veteran of the Los Angeles Police
Department, is an expert on how small businesses can arm themselves with
the necessary tools to detect and prevent fraud. As he explains, “Los
Angeles is the fraud capital of the world. For this reason I try to educate
local small business owners on how to avoid being stung.
“Companies tend to neglect their most important line of defense –
their employees,” says Hosford. “Motivating and training staff to ferret
out fraudulent behavior is crucial. The key is to reward them for doing you
an invaluable service by making you less susceptible to fraud.”
Detective Hosford offers the following 10 suggestions to help “front
line” employees detect fraudulent bills, checks and credit cards.

1. When suspicious of any bill, compare it to a real one. Also look for
differences in the two bills, rather than similarities.
2. When accepting a check, always ask for a driver’s license or similar
identification card. Check physical characteristics of the person with
the ID and, if suspicious, ask the customer’s birth date or even
request a signature on a separate piece of paper. Many crooks have
numerous false IDs and may forget which one they are using. Also ask
for a home or work phone number.
3. Make sure a repetitive design (e.g., Mastercard or Visa) appears on the
background of the signature panel of the credit card. An altered
signature panel may appear discolored, glued or painted.
4. Always verify that the signature on the credit card matches the
signature on the sales draft.
5. Check validation dates. Some credit cards may be stolen from the mail
before they are valid. If the card is used before the validation date
and receives a valid authorization number, it could be a re-encoded
card. Remember that if a business accepts any card outside of its
validation dates, that business will be stuck with the bill.
6. Credit cards are made of white plastic. If the sides are not white, it
is almost sure to be counterfeit.
7. Rub a finger on top of the card to check for smudging. Silk-screened
counterfeit cards usually smudge.
8. Check to see if all the credit card’s embossed characters are the same
size, style and alignment. If a card has been re-embossed, employees
should be able to detect original numbers and letters on the back of
the card.
9. Watch for suspicious behavior. For example, is the customer taking a
credit card from a pocket instead of a wallet? Is the customer
indiscriminately buying an unusual mix of merchandise? Is the customer
exhibiting any signs of nervousness?
10. If you have an electric terminal, make sure the account number
displayed matches the embossed number on the credit card. This will
ensure that your business is not accepting a re-encoded card.

Detective Hosford emphasizes that if your business accepts
out-of-state checks, civil or criminal action is almost impossible to
pursue. It is also important to note that the LAPD and most other major
departments will not prosecute if a check with insufficient funds is
post-dated, because they cannot prove the attempt to defraud.
He adds, “If you suspect someone is attempting to defraud your
business, first try and call the police when the customer is not looking,
or have a co-worker phone. If this is impossible, be a good witness. Keep
any suspected fraudulent documents and get a thorough physical description
of the alleged culprit. When the customer leaves, try to get a license
plate number and description of the car. If you follow these and the
preceding steps, you will certainly reduce your odds of falling victim to

Posted by on August 17, 2000