Guide To Fraud Prevention - Part 1- External Fraud

Secrets for preventing external fraud.

The Same Twenty Dollar Bill viewed from two different angles shows the covert security feature of recent upgrades to US currency.

If you are like most furniture store executives, you spend a good percentage of your time trying to get the best merchandise into your store, but next to no time at all preparing your people to recognize fraud. My guess is that managing a furniture store is challenging enough without suffering losses due to fraud. More than 1.4 million checks are forged every day causing $27.3 million in daily losses to American businesses. According to the National Check Fraud Center, check fraud and counterfeiting are among the fastest-growing problems affecting the nation’s financial system, producing estimated annual losses of $10 billion and continuing to rise at an alarming rate. This, along with the additional losses due to credit card fraud and other scams should get our collective attention.

In this three-part series we will discuss external fraud prevention, internal fraud prevention, and finally, general fraud prevention practices. The basic building blocks of fraud are Forgery, Counterfeiting, Alterations and Substitutions. These "smoke and mirror" fraud techniques are used by scam artists to rob you by deception. Fraud attacks from two sides, externally and internally. The external frauds come in the form of bad checks, bogus credit cards and counterfeited cash, negotiable instruments and counterfeit identifications that accompany identity theft scams. The internal frauds by employees are embezzlements, cash pilfering, time card schemes and theft of proprietary information.

Credit Card Fraud
Lest you think that you are bulletproof, just last week a La-Z-Boy Furniture Gallery was taken by a common scam. A customer presented a credit card to buy an expensive sofa. However, the card would not read, so the manager simply took an imprint of the card instead. The customer left with the sofa and all seemed well until later when this manager discovered that the tendered card was bogus. Since this was a cash and carry off of the show room floor, this store will probably not be able to recover the loss. To prevent this type of loss, adopt a store policy that prohibits imprinting credit cards for cash and carry transactions. Of course, with special orders there will naturally be sufficient time to establish that the credit account is legitimate.

Scam artists know a good opportunity when they see it. With $40 million being spent on credit sales each day, this field is too fertile to ignore. Visa has reported that the losses due to credit card fraud in 1999 amounted to $336 million! There are two primary forms of credit card fraud, stolen credit cards and counterfeit credit cards.

A counterfeit credit card is a white or gray plastic card called "white plastic." Once a magnetic strip is added on the back, the card is ready to use. The white plastics may be silk screened with various bank logos, including the Visa and MasterCard logos. The account number and desired name are embossed on the face of the card using a "Farrington" machine. Stolen information from unsuspecting account holders is encoded on the magnetic strip on the backs of these bogus cards.

Counterfeiters do not need to use true account holder’s names on their counterfeit cards because they can simply emboss any name to match their bogus identification. With a stolen credit card, the thief has a short time frame in which to operate before the cardholder misses the card. However, the counterfeit card has a longer service life. Since the account number is the only thing stolen and the credit card itself is returned to the legitimate customer, the fraud is not detected until the customer reads over the next billing statement. In some cases a fraudulent user has even mailed stolen or counterfeited checks to the bank for payment, thus extending the credit life of the card.

Account numbers for these counterfeit cards are stolen from the mail and the trash. Thieves trick customers out of their numbers by phone and email schemes. They are also obtained by employees of various types of businesses, such as car rental agencies, hotels, gas stations and restaurants.

Counterfeiters pay these employees for each account number and expiration date they obtain. Many employees use "skimmers" to collect good account numbers from customers.

A skimmer is a hand-held device that can fit in a scam artist’s pocket. It is used to quickly and easily electronically copy the information from a credit card or ATM card. later, this stolen information is sold and used on the black market.

When accepting credit cards

• Confirm that the name of the presenter matches the name on the credit card.
  
• Confirm that the gender of the presenter matches the gender of the name on the card.
  
• Is the card signed on the back? If not, ask for a driver’s license to compare with the tendered credit card.
  
• The numbers and letters on the card should be clear and evenly spaced.
  
• Holograms should be crisp and not appear contrived.
  
• Check the tamper-resistant signature panel on the back side. Many of these have an under-print of the word "Void" so that if a thief tries to erase the true signature from the white signature panel, the white overlay will also be removed, revealing the word "Void" underneath.
  
• Check that the number imprint on the reverse side of the card (which will appear backwards, of course) corresponds to the numbers on the face of the card.
  
• Check with the organization that provides your merchant services to obtain any specific advice and safeguards for accepting credit cards.

Cashier’s Checks, Money Orders, and Traveler’s Checks
Two furniture stores recently accepted counterfeited cashier’s checks and suffered a combined loss of over $75,000 dollars. That’s a harsh blow to any size store! Of course these stores accepted these checks because they appeared authentic. That is the goal of the counterfeiter, to create a negotiable instrument that appears authentic enough that you will accept it.

What contributes to your vulnerability is that negotiable items are tendered less frequently than personal checks. Consequently, you and your staff probably have less experience in negotiating them. But before we take a look at some of the peculiarities of each of these negotiable items, let’s say a word about security features.

These negotiable instruments are made with "safety papers" that contain both overt and covert security features. An "overt" feature is an obvious security feature readily visible on the document, whereas the term "covert" indicates a hidden security feature that becomes visible if you do something to the document. For example, if you tilt a new style twenty dollar bill back and forth while looking at the "20" you will observe the shift in color from brown to green. Or if you hold a Postal Money Order up to a light you will see a ghost image (water mark) of Ben Franklin.

See photographs of the same twenty dollar bill. The left hand image was photographed with the right side of the note bent down whereas the image at right was photographed with the right side of the note tilted upward. This covert security feature of color shifting inks is new to the recent upgrades of US Currency.

Cashier’s Checks
Individual banks issue cashier’s checks. Banks can either issue them from cash received, or they can deduct the amount of the check, plus a fee, from the customer’s account. Cashier’s checks are often written for higher dollar amounts than personal checks, sometimes even in the tens of thousands of dollars. If the check looks official enough, your front counter may give away thousands of dollars worth of furniture to a thief. I call this "grand theft with blind cooperation." Just because a cashier’s check was imprinted by a check writer machine (the mechanical printing on the legal amount line) and has other features that make it look valid, does not ensure that the check is authentic. Don’t let the official-looking portions of the check fool you into accepting it.

Here is a test. Pictured in the printed version of this article were enlarged images of a portion of a Bank of America Cashier’s Check. One is authentic and the other one is counterfeit. The counterfeit was obviously printed on an ink jet printer. See the discussion of ink-jet counterfeiting coming up under American Express Travelers Checks. The same rules will apply to all versions of Cashier’s Checks. That is, Cashier’s Checks are never printed using the low end ink-jet technology but are printed by offset lithography. Keep reading to learn the differences.

Authenticating Cashier’s Checks

• Make sure the cashier’s check was not color copied. If it was, then it is bogus.
  
• The use of white-out is a sign of a bogus Cashier’s Check.
  
• Be sure that none of the numbers on the check appear to have been altered.
  
• Call your local bank officer to verify the validity of the instrument with the issuing bank. Set up a special arrangement with your bank to provide this service to you, and keep your local bank officer’s phone number handy for this purpose.
  

NEXT MONTH
In the October/November issue, this series will continue with information on how to avoid losses due to accepting bad money orders and travelers checks. Also covered will be bogus IDs and a list of fraud prevention “do’s and don’ts. In the December/January issue of FURNITURE WORLD, the series will start to look at scams perpetrated by trusted employees or by honest employees who are tricked by scams.