Combating check fraud: a multifaceted approach.

Check fraud can affect anyone. Almost every business owner, government agency, and financial institution, as well as millions of private citizens have been victimized by people who have written bad checks with the intent of getting something for nothing. In some jurisdictions, the large number of reports of fraudulent checks means that law enforcement officers can address only the cases with the most substantial losses. Since 1987, bank frauds committed by nonemployees have risen dramatically and now account for more than 60 percent of all financial institution fraud.(1) Most of these frauds involve counterfeit or stolen checks.

Various sources have estimated that the total economic impact of check fraud on financial institutions, private businesses, and the public ranges from $815 million(2) to between $5 and $10 billion(3) annually. Unfortunately, because there is no source of reliable statistics, no one knows the total losses incurred. However, based on anecdotal information and the experience of bank executives, check fraud represents the most important crime problem affecting our nation's financial community. By identifying organized check fraud activity and implementing investigative and preventive strategies, law enforcement officers can have a measurable impact on this pervasive crime problem.

CHECK FRAUD INDICATORS

Investigators must remain alert to indicators that signal check fraud activity. They can identify such leading indicators by completing a comprehensive crime survey, which requires evaluating demographic information, analyzing crime reports, and collecting data from financial and business communities, civic groups, and other law enforcement agencies. By analyzing suspicious activity reports, which financial institutions submit to the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, and other check fraud complaints, local law enforcement agencies can identify a variety of factors, such as the types of fraud schemes prevalent in the area and the identities of banks that seem prone to check fraud activity.

Frequent check fraud attacks against a particular bank may result from its location, inadequate internal controls, or marketing strategies that present opportunities to savvy check fraud artists. Some mutual fund companies, for example, regularly allow customers to open accounts by mail. A significant number of check fraud complaints from a particular geographic area may indicate the presence of an active, organized group that warrants law enforcement attention.

Maintaining contact with banks and regulators may help investigators identify weaknesses, develop controls, and prevent future losses. At the same time, analyzing the complaints received from other victims - such as department stores, check cashing establishments, and grocery stores - may help law enforcement determine the modus operandi of the fraud artists and assist in developing investigative strategies.

Other types of criminal activity related to check fraud may serve as leading indicators. Counterfeit identification documents, theft of identification by pickpockets, credit card fraud, and structured cash transactions may point to organized check fraud operations. Confidential informants with knowledge of underworld trafficking in stolen and counterfeit identification documents can help investigators identify check passers and others involved in organized check frauds. An organized group may include a counterfeiter or printer, a distributer, one or more providers of false identification, and several "smurfs," who open false bank accounts or visit check cashing establishments to negotiate fraudulent checks.

Organized pickpocket rings represent excellent sources of false identification. On the streets of New York, a stolen wallet complete with identification and credit cards, referred to as a "spread," has resale value. People buy spreads for a variety of uses, including welfare, check immigration, and tax frauds. Therefore, informants who are familiar with pickpockets in the community can become reliable sources of information about people who buy stolen wallets, helping investigators uncover those involved in check fraud.

INVESTIGATIVE STRATEGIES

Investigators can use a variety of investigative strategies to address check fraud, including traditional techniques, proactive approaches, joint investigations, and task forces. Each of these strategies may prove appropriate, depending on the nature of the crime problem and the manner in which the complaint comes to the attention of law enforcement. Law enforcement officers should not view any single technique as a panacea; rather, they should develop a balanced approach that incorporates several methods to address the identified crime problems.

The overall strategy also should include all agencies that have jurisdiction over the crimes being committed. Above all, regular communication and coordination remain essential when several agencies become actively involved in attacking this crime problem. This proves especially important when undercover operatives serve in proactive investigations of violations that fall within the jurisdiction of multiple agencies. Each agency must take precautions not only to protect its undercover operatives but also to avoid the embarrassment that results when one agency learns that it has arranged to buy counterfeit checks from the undercover agent of another agency.

Traditional Investigative Techniques

At first glance, the typical investigative approach appears relatively straightforward. Following receipt of a complaint, the investigator interviews the victim; obtains the original check, copies of identification documents, and surveillance camera films; and interviews everyone else who came in contact with the check and the person who passed it, in an effort to identify a suspect. The victim and witnesses may view a photo spread or lineup that includes the suspect. After identifying a subject, the investigator may use a confrontational interview to seek a confession. Failing that, the subject's handwriting and fingerprints may be subpoenaed. The forensic laboratory compares latent fingerprints and handwriting on the check with known fingerprints and handwriting exemplars to determine if they can be identified as the subject's. The evidence gets presented to a grand jury, which returns an indictment, thereby initiating the judicial process.

In reality, such cases can prove extremely difficult to solve. In many instances, investigators cannot develop key elements needed to resolve them. The surveillance cameras may not work, or the witnesses cannot give a consistent description of the suspect. The check passer wears gloves or does not leave prints on the checks, or the prints do not match any known prints. The laboratory may be unable to match the handwriting on the check with the writing sample provided by the suspect. Such obstacles may arise after investigators have worked for weeks or months examining documents and interviewing victims and witnesses.

If the investigation proves successful and the suspect goes to trial, another year or more may pass before the trial and sentencing. Check fraud investigations generally take the same amount of time, regardless of the amount of the check. An average of 2 years elapses between the opening of a traditional New York FBI check fraud case and its final disposition. Professional check passers know how long these investigations take. They also are confident that, as long as they do not become too greedy and remain willing to move around so as not to saturate a particular area with bad checks, the chances of getting caught using traditional methods are minimal.

Moreover, under federal sentencing guidelines, individuals with no prior convictions who pass checks for less than $70,000 can expect to receive probation. This serves as an incentive for defendants to plead guilty to a single count but provides no motivation for them to cooperate with law enforcement. Consequently, traditional investigations frequently result solely in the conviction of the check passer. It remains extremely difficult to identify, let alone convict, the passer's associates, such as the thief or counterfeiter and those involved in distributing the checks.

Traditional methods of addressing check fraud may be necessary, based on the timing of the complaint and the circumstances of the offense. These techniques can promote fairly regular case clearance rates and can successfully convict individual check passers. But because of the amount of time required to process these cases, they may not make a significant impact on the crime problem. Proactive approaches may work best to identify the criminal networks that pose the greatest threat to the financial community.

Proactive Approaches

Proactive techniques involve the use of undercover operatives and cooperative witnesses or subjects. Other proactive measures, such as telephone intercepts and other technical and physical surveillance techniques, can successfully identify members of organized groups and develop evidence of their activities.(4)

An undercover operation, properly formulated and supported, can penetrate and break up organized fraud rings. Added benefits of this technique include the continual development of cooperative witnesses, who help to develop additional cases, and the ability to uncover other criminal enterprises, such as money laundering, drug trafficking, stolen goods fencing, illegal arms dealing, and other organized crime endeavors. Because of their intrusive nature, undercover operations must be carefully formulated and evaluated to ensure the safety of undercover officers, minimize civil liability, and guard against entrapping potential subjects.

The typical undercover scenario begins with the arrest of a check passer who agrees to cooperate and introduce investigators to others involved in the fraud. Consensually recorded conversations between the cooperative witness, undercover officer, and subjects, coupled with the purchase of fraudulent checks, identification documents, and other contraband or evidence, capture the illegal activity as it occurs. This scenario, when properly executed, produces extremely strong evidence against the subjects. It also helps the prosecutor to define the true nature of the fraud by demonstrating that multiple transactions and high losses would have occurred without the investigation.

Investigators and prosecutors also can take advantage of stronger penalties to encourage subjects to cooperate, thereby supporting the expansion and continuation of the operation. For example, one FBI undercover operation has been active for over 14 years and has resulted in the arrest and conviction of over 700 individuals, dozens of whom have agreed to cooperate to further the investigation. Violations revealed and prosecuted during this investigation have included bank, wire, and mail fraud; conspiracy; drug trafficking; illegal arms trafficking; and counterfeiting. Subjects have been equally diverse, ranging from illegal immigrants to diplomats, car service operators, grocery store owners, and members of organized crime families.

While proactive efforts are best supported by undercover officers or agents, cooperative witnesses may help investigators gain introductions into organized fraud activities. Close supervision of cooperating individuals and electronic and physical surveillance during their operational activities remains essential to maintain control over the investigation. By involving experienced investigators and exercising close managerial oversight and control, the risks inherent in this approach can be minimized.

Joint Investigations

When enforcement agencies actively work together on a case, they can reduce the time required to bring it to a conclusion while adding depth and flexibility to their investigative and prosecutive strategies. Federal investigative agencies can provide a variety of resources, such as advanced laboratory analysis, specialized expertise, funding, and endurance, that is, the ability to concentrate on one case for a long period of time. Local police departments can share their strengths, such as rapid response, institutional knowledge of local criminal elements, community support, broad information coverage, staffing, and specific knowledge of identified subjects, repeat offenders, in particular. The combination of these assets, coupled with the ability to select a prosecutive venue in either the local or federal courts, results in a formidable array of weapons that can be directed against organized fraud rings. Other agencies, such as banking regulators and offices of inspectors general, also can add expertise and inside information that can provide valuable assistance to more complex investigations.

When agencies work closely together, they must agree on how to handle sensitive or protected material, such as grand jury and informant information. Participants have a responsibility to agree on answers to a host of potential questions. Who will participate in interviews? Who will take notes during interviews? Whose reporting formats will be used? Who will maintain custody of documents and evidence? Who will contact informants and deal with cooperative witnesses? Who will prosecute the case? Close cooperation by first-line management remains essential, both at the beginning and throughout the investigation, to ensure that the participating agencies agree upon protocols to address such questions and other potential areas of concern so that investigators can concentrate on solving the case.

Joint investigations can accomplish great results if managers and investigators can set aside their institutional pride and professional allegiances to work together to solve problems. For example, in one instance, several New York banks reported to the FBI that they were being defrauded by customers who opened checking accounts using counterfeit Russian identification documents and stolen checks. The subjects withdrew most of the funds as soon as the checks cleared and before the thefts were reported. At the same time, U.S. postal inspectors learned that bags of mail were being stolen from large office buildings in Manhattan. Through close communication and cooperation, the FBI and the postal service quickly determined that the deposited checks had been stolen from the same Manhattan office buildings.

This case quickly grew from a postal inspection matter to a joint investigation with the FBI and the U.S. Secret Service in New York and Miami. Violations included theft from the mail, over which the U.S. postal inspector has primary jurisdiction; bank fraud, in which the FBI has primary jurisdiction; and credit card fraud, in which the FBI and Secret Service share jurisdiction. Several of the subjects had ties to a recognized organized crime family, and one of the conspirators allegedly was murdered when he failed to mm over proceeds from stolen checks that he had been entrusted with, facts that further whetted the interest of the FBI.

The indictment charged multiple subjects with violating the Racketeering and Corrupt Organizations (RICO) statute and included allegations of murder and conspiracy in addition to the financial crimes charged. The successful accumulation of all of the evidence in this investigation resulted from the willingness of the investigating agents to work together informally using both traditional and proactive investigative techniques. Although each agency could have pursued its own aspect of the case individually, separate indictments would not have had the impact of the RICO charges that resulted from their joint efforts.

Task Force Operations

Unlike joint investigations, which address specific illegal acts, task forces tend to address more general crime problems. The formation of a task force provides a more formal environment for investigators from different agencies to work together. A task force may encompass a number of separate investigations or be set up to support a specific investigation. For example, task forces have been used to investigate complex terrorist bombing investigations, such as the bombing of the Oklahoma City Federal Building and the Olympic Park bombing in Atlanta. Task forces also may provide an efficient way to address a particular problem. Joint federal and local fugitive and violent crime task forces remain fairly common in larger U.S. cities.

Financial crime task forces, though not as numerous, also are being used in several states with great success. The formality of a task force, which differentiates it from a less formal joint investigation, is embodied in a memorandum of understanding (MOU) that describes the protocols to be followed and is endorsed by the leaders of the participating agencies. The MOU spells out such broad issues as mission, goals, and objectives, as well as such details as the location of office space, transportation, supervision, funding, equipment, evidence storage, and record retention.

Task forces addressed bank failures that occurred in the early 1990s in several cities, including Dallas and Boston. The Arizona Bank Fraud Task Force (BFTF), which focuses on check fraud and other attacks on banks by nonemployees, was formed on March 2, 1992, to address the fraud problem in Maricopa County, Arizona. This task force includes representatives from the Phoenix division of the FBI; the Maricopa County Attorney's Office; the Phoenix, Glendale, Tempe, Mesa, and Scottsdale police departments; the Arizona Attorney General's Office; and the U.S. Attorney's Office for the District of Arizona. Improving cooperation and communication among participating agencies and the financial institutions in the area represents one of the primary functions of the BFTF. To accomplish this, the BFTF serves as a central reporting entity for bank fraud complaints, thereby reducing the confusion that often results when complaints are submitted to multiple agencies with overlapping jurisdiction. This central facility also permits better analysis of complaints and improves the possibility of identifying organized fraud rings that operate in the area.(5) As of February 1998, this task force had investigated 1,898 cases, involving more than $33.5 million in losses, which resulted in 539 indictments, 482 convictions, and more than $10.5 million in court-ordered restitution.(6)

The Arizona BFTF served as the prototype for the Metro Denver Bank Fraud Task Force, formed in Denver, Colorado, in 1996, to promote communication, establish and maintain an information base, investigate multijurisdictional cases, and serve as an educational resource for financial institutions. The Denver BFTF includes participants from 13 federal and local investigative agencies and six federal, state, and local prosecutors' offices. Task force guidelines call for reporting financial institutions to submit standardized suspicious activity reports that allow task force analysts to collate complaints, identify similarities that could indicate organized frauds, and initiate investigations in a timely fashion.(7) Both the Arizona and Denver task forces demonstrate the finest qualities of initiative, creativity, and cooperation in law enforcement as they work to serve their communities.

PREVENTIVE STRATEGIES

Law enforcement agencies can develop preventive strategies to combat check fraud. These include working with potential victims to implement fraud prevention measures and training financial professionals to recognize and prevent fraud. Such strategies can help the financial community develop an understanding of the problem, allocate appropriate resources to address it, and reduce the demand on limited investigative resources while providing a relatively low-cost way to reduce check fraud losses.

Fraud Prevention Measures

Law enforcement agencies may think of fraud prevention measures as the internal responsibility of banks and other potential fraud victims in the financial community. The banking and investment industries stress the concept of "know your customer" and the performance of "due diligence" as keystones of their fraud prevention methodology. Neither of these concepts appears, at least on the surface, to involve law enforcement. However, a role does exist for investigators to help potential victims of fraud guard against loss.

Regular communication of fraud-related information can benefit both the law enforcement and financial communities. Although privacy laws and dissemination rules and regulations may restrict the type of information communicated, all parties can benefit if they establish appropriate protocols for exchanging information. In the Russian check fraud case, based upon information provided from victim banks, investigators disseminated a profile of the fraud scheme to all banks in the area. The profile increased the awareness of banks to the scheme, thereby preventing direct losses. Banks also identified other fraudulent accounts before they incurred further losses. Thus, by sharing fraud profile information, investigators can help financial institutions and industry regulators devise audit techniques and other preventive measures that they can use on a regular basis to prevent fraud.

Law enforcement also can support innovative fraud prevention techniques, such as the inkless fingerprinting campaigns that some financial institutions have launched. Banks in Nevada, Arizona, and Texas experienced remarkable reductions in check fraud losses after they began requiring that noncustomers provide inkless fingerprints when cashing checks at the teller line. Although initial tests of this technique in New York and California more than 10 years earlier met with mixed results, modern innovations in automated fingerprint processing and aggressive marketing by financial institutions resulted in more recent loss reductions of between 43 and 59 percent.(8) According to the American Bankers Association, financial institutions in other states, encouraged by the successes in Arizona and Texas, are considering the use of the inkless fingerprints, as well.(9) While, ultimately, financial institutions and other check cashing establishments must decide if they wish to employ this strategy, law enforcement officials can support the expansion of inkless fingerprinting techniques by reinforcing marketing strategies and speaking to civic groups about the advantages of the process. In addition, by ensuring that they will act upon complaints involving fingerprinted checks in a timely manner, law enforcement officials also can provide incentive for financial institutions to invest in these programs.

Banks also have used fingerprinting in other ways to minimize the risk of fraud. Some banks require that corporate customers submit the fingerprints of employees who have access to company accounts. In one instance, this practice resulted in the apprehension of a fugitive who had been wanted for murder for almost 20 years. In 1995, when Aramark Food Services Corporation, the maker of Tupperware, gave an employee access to its corporate bank account, the bank required him to be fingerprinted. After forwarding his fingerprints to the FBI, the bank discovered that he was wanted for the 1976 drive-by murder of a 52-year-old man in a suburb of Brooklyn, New York.(10) Thus, law enforcement should encourage business owners to establish policies that require all employees who handle checks to be fingerprinted as a reasonable condition of employment, which not only can reduce fraud losses but also can result in unexpected benefits.

Training

Most financial institutions require periodic training of tellers and other employees. Law enforcement agencies can offer to provide check fraud awareness training to financial institutions, retailers, accountants, and civic groups, as well as to others who may come in contact with fraudulent transactions. Training sessions that identify the red flags that signal fraud and reinforce internal controls and fraud reporting procedures can effectively reduce check fraud losses. The attendance of a law enforcement officer at this training can improve student interest and emphasize the importance of the information. Some banks and large retailers can provide professional videotapes that demonstrate red flags and show check passers in action.(11) Using such training aids, along with examples of actual cases, reinforces the subject matter and helps employees remember important points.

Training sessions also promote and improve relationships between law enforcement agencies and the communities they serve. Additional benefits may include better communication between investigators and officers of victim institutions, more timely reporting of fraud attempts, quicker responses to subpoenas, and easier access to employee witnesses.

Enforcement officials also can benefit from fraud awareness training. Patrol officers and those who concentrate on other types of crime - whether violent crime, organized crime, or drug-related offenses - can help financial crimes investigators by remaining alert for check fraud paraphernalia, stolen or counterfeit identification documents, and other indicators of fraud activity during their routine arrest, search, and investigative activities. Police officers and investigators, who may not deal with financial crimes on a regular basis, can receive clear instruction that includes how to spot fraud and process fraud evidence.

CONCLUSION

Check fraud is a significant crime problem that victimizes corporations, government agencies, and private individuals. Law enforcement organizations must work with the communities they serve to identify the leading indicators of fraud and develop investigative and preventive strategies to effectively combat this problem. Investigative strategies should include a balanced approach that incorporates both traditional and proactive investigative methods. Joint investigations and task forces comprised of several agencies have proven highly successful in some jurisdictions.

Preventive strategies can include the use of fraud prevention measures, such as developing fraud profiles and instituting fingerprinting policies, as well as providing training for potential victims. Preventive techniques can reduce the demand on limited investigative resources and provide a relatively low cost way to reduce check fraud losses.

The ability of law enforcement officers to develop protective and mutually beneficial relationships with the communities they serve remains the cornerstone of any crime prevention effort. Together, law enforcement agencies and financial institutions can employ innovative strategies to combat check fraud.

Red Flags that May Signal Check Fraud

FBI investigations identified common techniques used by fraudulent check passers in New York:

* Customer attempts to open an account with a corporate check or other third-party check

* Customer tries to flatter, hurry, or confuse the teller to draw attention away from the transaction

* Customer delays endorsing a check or producing identification during peak hours to frustrate the teller and hurry the transaction

* Customer presents for cash a low-numbered check drawn on a new account

* Customer offers foreign documentation (birth certificate, passport, visa) or nonphoto identification (social security card, credit card) in lieu of photo identification to open an account or cash a check

* Customer offers altered or damaged identification to open an account or cash a check

* Customer attempts to cash or convert several small checks into wire transfer, gold, or other tender

* Customer requests an exception to established rules to force the transaction.

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 Saul Hansell, "New Breed of Check Forgers Exploits Desktop Publishing," The New York Times, August 19, 1994.

4 Because laws vary among jurisdictions, officers should consult their legal advisors or local prosecutors before using any of these techniques.

5 Howard D. Sukenic, J.D., and James G. Blake, J.D., "Combating Bank Fraud in Arizona, FBI Law Enforcement Bulletin, November 1994, 8-12.

6 Rudy N. Ruiz, financial analyst, Arizona Bank Fraud Task Force, FBI, Phoenix, AZ, personal interview, March 26, 1998; see also Howard D. Sukenic and James G. Blake, "Teaming Up Against Financial Fraud," Independent Banker, September 1996, 50-51.

7 "Metro Area Bank Fraud Task Force Operating Guidelines and Procedures," unpublished internal document, September 17, 1996.

8 Genilee Swope Parent, "An Effective Check Fraud Prevention Tool," Bank Security and Fraud Prevention 3, no. 6 (June 1996): 5.

9 Supra note 8, 1-7.

10 Dennis Hevesi, "Fingerprints Reveal Suspect on the Run from '76 Killing," The New York Times, August 19, 1995, 1.

11 The New York Clearinghouse, an association of major New York banks, has produced a training video that emphasizes red flags. In addition, the FBI, in concert with the City of London, England, Police Department, has produced a video with an accompanying training guide, titled "A Meeting of Minds," which examines complex fraud schemes.