August 1996 Check Fraud: A Sophisticated Criminal Enterprise By Keith Slotter, CPA ________________ Special Agent Slotter works in the Financial Institution Fraud Unit at FBI Headquarters in Washington, DC. ________________ (Criminal organizations are using increasingly sophisticated techniques to perpetrate check fraud.) Like waves on the ocean, variations of fraudulent activity keep pounding the shores of the banking industry. Prior to the 1980s, bank fraud schemes generally involved only a few transactions perpetrated by a single individual or small group. Losses averaged less than $100,000 to the victim institution, and law enforcement investigations were fairly routine in nature. Following deregulation of the savings and loan industry in 1982 and the initiation of more speculative, risky ventures by those in charge of these institutions, a new wave of fraud emerged. During the late 1980s and early 1990s, large-scale frauds perpetrated by institution insiders and those held in trust within the banking industry became prevalent. Law enforcement agencies used massive, task force-oriented investigations to calm the surge of these frauds. As a result, the banking industry as a whole has stabilized and continues to insulate itself from insider abuse. Conversely, a flood of fraud perpetrated by outsiders, especially organized ethnic groups, has risen dramatically since 1987. Outsider fraud now accounts for more than 60 percent of all fraud against financial institutions.1 The most prevalent problem in the industry, by far, centers on check fraud, but also involves other counterfeit negotiable instruments, such as traveler's checks, credit cards, certified bank checks, money orders, and currency. EXTENT OF THE PROBLEM In its 1994 Check Fraud Survey, the American Bankers Association (ABA) indicated that the volume of check fraud against financial institutions increased by 136 percent from 1991 to 1993. During this same period, dollar losses rose 44 percent, from $568 million to $815 million annually. The country's major financial institutions attribute fully one-half of all check fraud to professional and organized group efforts.2 Financial institutions do not suffer alone as victims of fraud. For the past 2 years, the Forensic and Investigative Services Division of KPMG Peat Marwick, one of the big six accounting firms, has compiled an annual fraud survey of the 2,000 largest U.S. corporations. These companies reported check and credit card fraud as their most problematic losses during 1994. The responding companies suffered an average annual check fraud loss of $360,000, an increase of 38 percent from 1993. Alarmingly, over two-thirds of corporate executives believe these losses will continue to mount over the next several years.3 More than 1.2 million worthless checks are accepted for payment every day.4 The technological improvements that have fueled the growth in check fraud schemes have made it difficult for law enforcement to combat the problem. Forbes magazine reported on the trend in 1989, stating "...the desktop computer did not create the crime of forgery. All it did was make the tools user-friendly."5 With the prevalence of laser printers and advanced duplication systems, the production of quality counterfeit checks has become commonplace. In addition, Congress unwittingly aided the business of duplicating and counterfeiting checks. By passing legislation in 1988, known as Regulation CC,6 Congress made detecting fraudulent checks even more difficult for financial institutions. This law requires banks to process checks within a 72-hour period and ostensibly provides customers with increased access to deposited funds. While the regulation may have succeeded in making depositor's funds more accessible, it also made passing fraudulent checks easier by giving banks less time to confirm the legitimacy of these transactions. CHECK FRAUD ORGANIZATIONS Worldwide, 80 billion checks exchange hands annually; 60 billion of those are written in the United States.7 As anyone who has mailed a check to the mortgage company 3 days before payday can attest, Americans have become enamored with writing checks and taking advantage of the "float" period, the time during the check-clearing process. Criminal elements within numerous immigrant groups in the United States have analyzed American banking, noting the system's deficiencies and the fact that it affords opportunities for fraud. Presently, organized ethnic enterprises conduct a sizable portion of annual check fraud activity throughout the country. The Major Groups The principal ethnic enterprises involved in illegal check fraud schemes include Nigerian, Asian (particularly Vietnamese), Russian, Armenian, and Mexican groups. The majority of the Vietnamese, Armenian, and Mexican organizations base their operations in California, especially in the Orange County, San Francisco, and Sacramento areas. However, they have networked their operations throughout the country, with a number of connections in Chicago, Houston, and Washington, DC. The Nigerian and Russian groups, with bases in the northern and eastern areas of the country, exhibit more nomadic tendencies. They roam throughout the United States, stop to pass stolen or counterfeit checks, and then move on to new locations. The Russian groups initially established themselves in New York but have extended their activities to Chicago and the West Coast. Nigerian groups often solicit legitimate identification and account information to further their check fraud schemes. Recently, law enforcement authorities have noted their interaction with Vietnamese organizations in the Chicago and Houston regions. In the north-east, Nigerian rings have opened numerous investment accounts within various brokerage houses and deposited large sums of money using stolen and counterfeit corporate checks. Most West Coast Asian gangs began to organize their bank fraud activities during the 1980s and have continued to expand and develop these sometimes-sophisticated operations. Many such groups originated in Taiwan, Hong Kong, and Vietnam and include the Viet Ching, Big Circle Boys, V-Boyz, Wo Hop To, Wah Ching, and Red Door gangs.8 Within the Asian gangs, known as triads, the group leader usually holds the title of "master" and oversees all organizational operations. Current investigations indicate that some Asian groups have been dealing with Russian counterparts, especially to negotiate (deposit or cash) counterfeit currency through the banking system. Recently, members of the Russian Mafia obtained such currency, which was printed in Montreal, Canada, sold to several West Coast Vietnamese factions, and distributed throughout California. Notably, each of these groups conducts a myriad of white-collar, drug, and violent crimes. The groups perceive check fraud--unlike drug trafficking, extortion, or murder--as a "safe" crime; it carries minimal penalties and a low risk of apprehension. The Players Regardless of ethnic origin, groups involved in check fraud maintain certain universal characteristics. Unlike traditional, tight-knit, organized criminal groups, such as La Cosa Nostra, these groups, which may embody several hundred members, usually are loosely organized. Members often network among several organizations. Despite the lack of a rigid hierarchy, members typically fall into one of several roles--leader, check procurer, counterfeiter, information broker, or check passer. Leaders Leaders of an organization generally have an extensive criminal history and possess above-average intelligence. Often, they have a degree in business and/or law. These individuals provide the overall direction of the group, as well as expertise in understanding American business and the banking system. Check Procurers Check procurers obtain authentic checks, usually by stealing them while employed within a financial institution. Group members then sell or negotiate the stolen checks as is, or they duplicate the checks for future use. Counterfeiters Counterfeiters duplicate corporate and payroll checks, traveler's checks, credit cards, certified bank checks, money orders, currency, and other negotiable instruments, as well as personal identification. They usually are well-versed in the use of personal computers, especially in the field of desktop publishing. Information Brokers Information brokers gather personal and financial information on legitimate individuals. Using this credible information, associates open new bank accounts, pass counterfeit checks, and secure loans, which they fail to repay. Check Passers Check passers actually negotiate stolen and counterfeit checks through the banking system and collect the proceeds to distribute to the group. They often travel throughout the country, opening new accounts and transporting their illicit proceeds. Typically, they negotiate only about 10 percent of a group's illicit checks; the group sells the rest of the checks to other individuals and organizations. Check passers maintain little contact or status within the hierarchy and often are the only members whose ethnic backgrounds differ from the core group. Ethnic organizations tend to distrust anyone not of their own heritage, making it difficult for law enforcement to infiltrate them. Even though police frequently arrest check passers throughout the country, these street-level criminals generally possess little information concerning upper-echelon group members. TYPES OF CHECK FRAUD SCHEMES The variety of check fraud schemes perpetrated throughout the country ranges from depositing single stolen checks to counterfeiting thousands of negotiable instruments and processing them through hundreds of bank accounts. Although it is impossible to summarize all of the check fraud schemes currently operating, three schemes in particular--large-scale counterfeiting, identity assumption, and payroll check fraud--typify frauds being tracked by bank security officials and law enforcement authorities throughout the nation. Large-scale Counterfeiting The most notorious groups engaged in large-scale counterfeiting operations are the Vietnamese triads operating out of Orange County, California. Members routinely get jobs within local financial institutions in order to collect master original bank checks, money orders, and corporate/payroll checks for counterfeiting. The triad masters, who often are counterfeit experts with a host of duplication devices, manage the groups' criminal activities. The groups exchange their counterfeit instruments for cash in a variety of ways. Check passers directly negotiate a portion of the counterfeit documents through financial institutions. They deposit the fraudulent checks, often into new accounts, and withdraw the funds before the bank can complete the check-clearing process and discover the fraud. The transient check passers open accounts in different institutions throughout the country; however, group members within the organizational hierarchy ultimately control their activities from a home base. In order to minimize their ex-posure to law enforcement, the counterfeiters sell the majority of their phony goods to third parties for negotiation or further resale. They create most counterfeit checks in $2,000 to $5,000 increments and sell them to black market customers at 5 to 25 percent of their face value, depending on quality and appearance. Identity Assumption Seen in various metropolitan areas, identity assumption schemes often involve Nigerian and Vietnamese criminal organizations. Group members obtain employment or develop sources in local banks and credit agencies so they can acquire otherwise confidential information on bona fide bank customers. The groups then create counterfeit identification, including driver's licenses, social security cards, and credit cards, to assume the innocent person's identity. Under the assumed identity, the criminals open new bank accounts, which they use to deposit fraudulent checks and subsequently withdraw the funds, as well as to secure personal loans and lines of credit. Once bank accounts have been established, the financial institutions become vulnerable to a variety of frauds. Prior to depositing fraudulent checks and withdrawing the proceeds, the "customer" is likely to obtain a credit card account with a substantial credit line. The perpetrators withdraw funds against the credit line and distribute the money within the criminal organization, along with any bogus loan money they have procured. After withdrawing monies pursuant to the deposit of fraudulent checks, the "customer" leaves town, and the bank sustains a substantial loss. Such schemes hurt more than just the banks, however. The innocent people whose identities were assumed suffer from ruined credit histories, which may inhibit their future financial activity. Payroll Check Fraud A variation of the identity assumption scheme involves placing group members within payroll check-processing companies. These firms compile and distribute payroll checks on behalf of their corporate clients. The miscreant employees print duplicate payroll checks for various client recipients. They then steal the checks from the premises, and the group duplicates them for negotiation. Concurrently, the group obtains full background identifying data on the client's regular employees, which can be used in future schemes. METHODS OF ALTERATION New technologies give check fraud perpetrators a wide variety of schemes and devices for committing their crimes. Chemical techniques and computers provide the primary means by which criminals manipulate and counterfeit checks. Chemical Techniques Legitimate personal checks can be changed easily by chemical means. Similarly, someone well-versed in manipulation techniques can modify corporate checks, traveler's checks, bank checks, and U.S. Government checks with minimal effort. Chemical alteration is commonly referred to as "check washing." Check washers use a variety of acid-based chemical solutions to erase amount and payee information, while maintaining the integrity of the preprinted information. They then dry the check and inscribe a new payee and a significantly higher dollar amount before presenting it to a bank for payment. One acid-based solution even allows criminals to revise a check and subsequently destroy the evidence. In this instance, the check washers must move quickly because the chemical solution causes the paper to disintegrate within 24 hours, leaving no supporting evidence of the transaction. Technology Today's computer technology makes it relatively simple to counterfeit checks. A counterfeiting operation requires only a laser scanner to capture the image of an original check, a personal computer to make changes, and a quality laser printer to produce the bogus check. The necessary equipment can be obtained for less than $5,000. Once an original check has been scanned, its data can be manipulated and reprinted with ease. Still, the counterfeiter faces the tough challenges of matching the paper stock used by the check manufacturer; correlating complex color schemes, such as those used on U.S. Government and traveler's checks; and overcoming some of the counterfeiting safeguards currently used by legitimate check printers. Yet, counterfeiters can overcome even these hurdles without much difficulty. A number of unscrupulous printers throughout the country offer preprinted checks containing whatever information the customer desires, without bank confirmation or concurrence. Further, today's computers can come very close to duplicating even the most complex color schemes and check safeguards. A counterfeiter's success hinges on knowing that most checks will not be scrutinized closely enough to detect the fraud until they have been cashed and cleared through the banking system. FRAUD PREVENTION In order to prevent fraud, check-printing companies offer a variety of counterfeiting safeguards.9 All such features make attempted alteration detectable in one way or another. Yet, these enhancements are not foolproof and often prove cost-prohibitive to the purchaser. In response, financial institutions have begun to implement a type of biometric fingerprint identifier as a more cost-effective approach. In early 1995, Bank of America (BOA) in Las Vegas, Nevada, became the first financial institution to use fingerprinting technology to deter check fraud.10 At BOA, when customers who are not account holders present checks for payment, they must place an inkless fingerprint next to their endorsement. When bank officials identify an attempted fraud, the fingerprinting system provides law enforcement with evidence and background information never before attainable at the onset of an investigation. This pilot project has garnered impressive results. BOA officials report that the biometric identification system nearly has eliminated check fraud schemes perpetrated by outsiders. It also has reduced the bank's overall fraud by 40 percent.11 BOA's success in Nevada has spurred the Arizona Bankers Association to lead a campaign with member financial institutions to implement a similar program. A core group of Arizona-based banks implemented this technology in the fall of 1995. Moreover, BOA officials plan to extend fingerprinting operations to their branches in Texas and New Mexico. A number of financial institutions have expressed a desire to expand the program to new customer accounts, another hotbed for fraudulent checking activities. During this implementation process, the banks involved have become cognizant of the sociological and privacy concerns underlying such an identification system. Some customers fear the improper use of identifying information. Bank officials stress, however, that no central database of fingerprint information will be maintained and that these records will be furnished to law enforcement only pursuant to suspected criminal conduct. LAW ENFORCEMENT SUCCESSES Criminal investigators working negotiable instrument fraud cases, especially involving organized groups, have begun to achieve significant results by using a task-force approach and by promoting effective cooperation with their international law enforcement counterparts. In March 1994, officials from eight federal, state, and local law enforcement agencies in California12 combined forces to raid a contingent within the Wo Hop To triad, arresting nine subjects and seizing more than $500,000 worth of merchandise obtained through counterfeiting activities.13 The Westminster, California, Police Department's Tri-Agency Resource Gang Enforcement Team, as well as various San Francisco Bay area task forces, has conducted successful raids and arrests targeting Asian criminal organizations involved in check fraud and counterfeiting enterprises.14 Similarly, the Los Angeles Division of the FBI successfully investigated a local gang involved in a check alteration scheme in which the culprits deposited $600,000 worth of fraudulent checks into accounts at American Savings Bank and subsequently converted the funds to gold krugerrands. Since its inception in 1992, the Phoenix, Arizona, Financial In-stitution Fraud Task Force has achieved impressive results in the fight against bank fraud, particularly check fraud. As of March 31, 1996, this task force15 had indicted 451 subjects with 342 convictions returned.16 Various FBI field offices throughout the country are studying the success of this particular task force in the hope of establishing similar programs within their jurisdictions. The Interagency Working Group on Nigerian Crime in Washington, DC, is cultivating cooperation among Nigerian law enforcement agencies to help combat the growing fraud problems associated with these groups. In July 1995, Nigerian authorities raided a Lagos-based organization and arrested numerous locals involved in check fraud and counterfeiting operations. The Royal Hong Kong Police have provided great assistance to U.S. law enforcement in tracking suspects and providing intelligence information on fraudulent operators believed to have migrated to America. CONCLUSION Checks can be either stolen, manipulated, or counterfeited. Illicitly obtained checks can be negotiated immediately, altered, or used for future counterfeiting. Generally speaking, only unsophisticated criminals acting alone will immediately negotiate stolen checks by forging the signature. Most organized groups steal checks as a prelude to more enterprising endeavors. Bank security officials and law enforcement agencies concur that the problems associated with check fraud and counterfeit negotiable instruments have reached epidemic proportions. As criminal organizations become more sophisticated in the devices they use, law enforcement also must become more creative and sophisticated in the techniques used in its investigations. To meet this challenge, the battle against check fraud is best fought through cooperation--among agencies, bankers, bank regulators, and the public. Endnotes 1 FBI Financial Institution Fraud Criminal Referral Statistics for Fiscal Year 1995, September 30, 1995. 2 American Bankers Association, "1994 ABA Check Fraud Survey," November 30, 1994. 3 KPMG Forensic and Investigative Services, "1994 Fraud Survey," March 1, 1995. 4 Frank W. Abagnale, "Document Verification and Currency Transactions Manual," Abagnale & Associates, 1994. 5 David Churbuck, "Desktop Forgery," Forbes Magazine, November 27, 1989, 246. 6 Expedited Funds Availability Act, 12 U.S.C. 4001, et seq., passed 8/10/87, enacted 9/1/88. 7 Supra note 4. 8 "Asian Gangs Involved in Credit Card Fraud," Intelligence Operations Bulletin, Office of the Attorney General, California Department of Justice, vol. 47, December 1994. 9 Check-printing companies offer a variety of counterfeiting safeguards, such as embossing, artificial watermarks, laid lines, chemical voiding features, warning bands, high-resolution printing, dual image numbering, and security number fonts. 10 Steven Marjanovic, "Arizona Group Pushes Fingerprinting as a Ploy to Deter Check Fraud," The American Banker, July 6, 1995, 10. 11 Robert Bird, Vice President, Bank of America, San Francisco, California, remarks at meeting of the Bank Fraud Working Group subgroup on Check and Credit Card Fraud, Washington, DC, July 19, 1995. 12 Participating agencies include the Bureau of Investigation of the California Department of Justice; the Antioch, Oakland, and San Francisco police departments; the U.S. Secret Service; the Immigration and Naturalization Service; and the U.S. Customs Service. 13 Supra note 8. 14 "V-Boyz," Intelligence Operations Bulletin, Office of the Attorney General, California Department of Justice, vol. 46, November 1994. 15 The task force comprises law enforcement officials from the FBI; the Phoenix, Tempe, Glendale, Mesa, and Scottsdale police departments; the Maricopa County Attorney's Office; the Arizona Attorney General's Office; and the U.S. Attorney's Office. 16 Kathryn Brewer, Financial Analyst, Financial Institution Fraud Task Force, Phoenix, AZ., telephone interview with author, April 1996. Sidebar 1 Identifying Fraudulent Checks To recognize check fraud, law enforcement officials must know as much about these instruments as the criminals. Perforation Almost all legitimate checks have at least one perforated edge; counterfeit checks are often smooth on all sides. Federal Reserve Routing and Transit Number The routing and transit fraction number in the top right hand corner (below the check number) should correspond to the electronically encoded number, known as the MICR, on the bottom center of the check. Fully 98 percent of all fraudulent checks have an incorrect Federal Reserve transit number. Federal Reserve District and Office The first three digits in the MICR line represent the state and district office to which the bank is assigned. On fraudulent checks, these numbers often do not correspond appropriately. Serial Number Match The encoded check serial number on the bottom left should correspond exactly with the check number in the top right corner. Check Number Low numbered checks also indicate potential fraud; 90 percent of all check frauds involving insufficient funds are numbered 101-200. Source: Frank W. Abagnale, Document Verification and Currency Transactions Manual, Abagnale & Associates, 1994. Sidebar 2 A Typical Scheme In September, 1994, a San Bernardino County, California, undersheriff received a letter at his residence from an alleged Nigerian businessman promoting a typical fraud scheme. The letter advised that the Central Bank of Nigeria was holding $35 million in U.S. currency, which was due to him as a foreign contractor. This "businessman" was seeking assistance in transferring this money to the United States and needed an American bank account in which to deposit the proceeds. In exchange for his account number and temporary use of the account, the undersheriff was promised 30 percent of the deposited funds for his services. Source: "Nigerian Schemes Continue," Intelligence Operations Bulletin, Office of the Attorney General, California Department of Justice, vol. 53, February 1995.
for a long time. He now works for the government to help stop the fraud / counterfeit people. According to Abagnale, the ink has to be a Pigment based ink which bonds to the fibers of the paper that it is written on, if it is a dye based it will wash off with the correct chemicals because it merely stains the surface of the paper. If the inks that are used are Pigment based then I am sure that they too would protect you/ your customers to some degree. It is a point to tell them that but I would look further into this before I make that claim.