An effective check fraud prevention tool
by Genilee Swope Parente
Banks are fighting the bad guys with the very tool those criminals have used to get ahead: technology. And one of the latest ways to do that begins with a fingerprint.
ABA's Check Fraud Task Force and Security Management Committee and several state bankers associations have come out in support of requiring fingerprints to cash noncustomers' checks at the teller line. ABA now offers the Touch Signature program to its members, which comes with inkless pad, implementation guidelines, decals and statement stuffers, materials, and suggestions for handling the publicity and educating customers.
Yet much of the credit for the birth and growth of fingerprinting systems goes to individuals banks, which have joined forces in their communities or through their state associations to create successful programs.
The idea of fingerprinting to identify bank customers is not new. It was tried over a decade ago by several banks primarily in New York and California with mixed results. It was discontinued for a variety of reasons but with the substantial increase in fraud, both the banks and law enforcement authorities have renewed their interest in reactivating the program.
"Both the law enforcement technology and the eventual use of the print have changed," explained Bob Randolph, vice president, manager of investigative services for the southwest, Bank of America. "Twelve years ago, you merely put a print on paper. If the check came back, you might take it to law enforcement, and if it was a high enough amount, they might use it for proof positive to pursue a case," he said.
But most fraudulent checks are not in huge amounts. Instead, criminals and criminal groups cash many small checks, and law enforcement is not likely to pursue one small case.
Today, many check fingerprinting programs are backed up at the investigation and prosecution end by the Automated Fingerprint Identification System (AFIS), which is used by most local and federal law enforcement officials, motor vehicle bureaus, and some government agencies such as state welfare departments. AFIS digitizes fingerprints, and gives individuals a digital identification based on the print. These digital identifications can be used for rapid searches that can narrow a check down to a specific individual in a very short amount of time despite the fact the individual may have changed names many times.
"States' use of AFIS is growing along with banks use of fingerprints. It's not universal. The point is, however, that we're using technology now the same way the criminal does-to get ahead of the game. We're trying to stop the fraud up front," Randolph explained.
"A fingerprint is a deterrent to those who don't want to be identified. And to those people that it doesn't deter, it gives us a more timely way to identify them using less man-hours," he added.
Bank of America is one of the first banks to launch modern-day fingerprinting, and its success is well publicized. It launched the first test in Las Vegas in January 1994 at seven of its branches, followed by seven more the next month and all Las Vegas branches by March of that year.
From 1994 to 1995, losses from checks cashed across the teller line fell by almost 50 percent, Randolph said. Other banks in the area began to pay attention.
"Other banks noted our success and some commented they saw their own losses going up a bit perhaps because the fraudsters were moving down the street." Many of those banks now have programs of their own, and the fingerprinting program has turned into a statewide effort. Banks there now report they have seen reductions of about 42 percent on losses since they implemented the program.
Meanwhile, Bank of America began to look at using fingerprinting in branches in other states. In Arizona, Randolph worked with Walt Heilner, vice president and manager for loss investigations, southwest region, Wells Fargo (formerly First Interstate Bank), to gain the support of the Arizona Bankers Association.
In July 1995, a statewide initiative was launched with the state's four largest banks participating. Since then participation has grown, though no one knows yet how much. The association is getting ready to send out a survey to find out how wide the growth has spread in that state, and how successful the program has been in cutting fraud. (See sidebar 1)
Meanwhile, credit unions in the state also are using it, as well as merchants, casinos, and other groups, Randolph said.
What cost to banks?
According to both Randolph and Heilner, fingerprinting is a low-cost program with high returns. Randolph said Bank of America's branches can be outfitted for fingerprinting for about $50 to $75 per branch.
Other resources the bank must expend include training to establish procedures and notification to customers and noncustomers.
"A bank must work internally to ensure procedures are established," Randolph said. "Those procedures need to be very simple, really. If you (a bank employee) are presented with a check, and it's a noncustomer's check, you fingerprint the person. You have to train your people to be consistent that it's okay to say to persons who won't leave their fingerprint that the bank cannot cash their checks," Randolph said.
To notify noncustomers, Bank of America and Wells Fargo published notices that as of a certain date, the program would be implemented with no exceptions.
"The way we (Wells Fargo) approached it in Arizona and Nevada was to do a 30-day advance notification," Heilner said. "We put signage up in branches and driveins and handed out brochures to anyone who came in to cash a check," he explained.
Notification to customers took place in the usual way--correspondence and statement stuffers. Randolph said one lesson Bank of America learned in its Nevada venture was the importance of carefully explaining the program to corporate payroll-issuing customers, a lesson the bank used in launching the program in Arizona.
"Some of the payroll-issuing customers with our first program didn't understand how it worked or why we implemented it. There was some concern from companies whose employees had been cashing checks in our banks for years without having an account."
"But once we explained the fingerprint program, our customers supported it wholeheartedly. They realized that the program also could save them a lot of grief when an employee claims they lost a check. The employer would have evidence if the employee cashed it," he said.
Perhaps most important is educating the community, which is why launching the program jointly with other banks in the area is important.
"The banks in Arizona agreed that this had to be a joint effort," Heilner said. "We didn't want it to look like it was something that any one bank was forcing. It was a joint effort, and it had the support of local and federal law enforcement."
Randolph added that "the best fingerprinting efforts seem to be those where all banks in an area decide to implement the program on a set date. This needs to be preceded by a very good public awareness program."
In Arizona, the job was made easier by the fact that the media had been running articles on check fraud. "Our timing couldn't have been better," Heilner said. "The media was very supportive, and we received a lot of favorable publicity."
And while there have been a few stray objections from individuals, the public was so well educated that by the time the Arizona initiative was launched, it was almost a nonevent, both Heilner and Randolph pointed out.
"Some civil rights groups and other types of groups came to us to express privacy concerns," Heilner said. "But once we explained that this program was totally nondiscriminatory, that it applied across the board with no exceptions, they backed off," he added.
A few individuals with visions of big brother expressed concern that banks were working with the government to collect fingerprints, but the objections were based on misunderstanding the process. "Obviously they didn't understand how many millions and millions of checks get processed every day and how difficult it would be to pull out those checks that have prints on them," Heilner said. The prints are used only when a problem arises.
Mostly, though, banks did not get nearly the amount of complaints they anticipated. In fact, Bank of America said that the refusal rate (the number of people who leave without cashing their checks) has been about one percent in both Nevada and Arizona.
Why it works
The fingerprinting system is seen both as a deterrent and a method of simplifying banks' responsibilities when it comes to prosecution.
"The program is definitely deterring those people who are opportunists," Randolph said. "Those individuals who walk into the work environment, for example, and take a check someone has left on his or her desk. They may be contemplating forging it. But when they come in and try to cash it, they're asked for a print."
"It also has deterred some people who have historically been smurfs-who have been approached by more organized individuals who offer identification and part of the proceeds to pass checks. These smurfs, knowing they're going to be printed, realize they can't rely on the forged I.D.," Randolph said. When a person decides to go ahead and leave a print, but cash a fraudulent check, the bank's follow-up is much simpler.
"One real advantage on the bank's side is that if someone is arrested and has to go to court, the prints on the check provide the evidence needed to identify," Heilner said. "You don't have to have a teller go to court or be involved in lineups. That's a real plus. It's traumatic enough being a teller these days," he added.
Randolph added that: "One of the things that needs to be touched upon when we talk about desktop publishing and counterfeiting is the inherent unreliability of identification. It can be counterfeited as easily as a check. The advantage of this new system is that as a bank, we might lose $1,500 or $2,000 on a fraudulent check with one name on it. That name will change. Other checks will be passed at other banks by the same person with different names."
"Law enforcement is inundated with cases, and they may not be able to give priority to lower dollar cases. But with fingerprinting, we can link the cases together by digital identification. So now you have identified a person who may have created a total loss of $0,000," Randolph explained.
Where it's going
Much of the action in implementing fingerprinting has occurred on the West Coast, where banking is very competitive and criminals have taken advantage of looser check-cashing requirements. Initiatives have been launched or are planned for Utah, California, Washington, Oregon, and Idaho.
And they are occurring elsewhere in the United States. The Texas Bankers Association and the Clearing House Association of the Southwest implemented a statewide initiative Dec. 1. Those groups already have figures on how successful the program has been (see sidebar 1). The Florida Bankers Association in May announced a pilot program with several of its major banks.
And both Heilner and Randolph said they also have had a number of inquiries seeking information on the program from banks and associations in states that have not yet launched initiatives. Randolph said he has had inquiries about fingerprinting from financial institutions as far east as the Washington, D.C./Baltimore area.
Meanwhile, banks that have experienced significant drops in check fraud since fingerprinting are looking at the possibility of expanding the program to other areas. USBancorp, which has branches in Northern California, Nevada, Oregon, Idaho, Washington, and Utah, and is looking to expand elsewhere, has implemented a fingerprinting program in one location for new accounts (see sidebar 2).
Other banks also are looking at the possibility of expanding their fingerprinting programs, and not just to new accounts. Wells Fargo has no immediate plans to implement fingerprinting in other areas. However, as Heilner explained, the system has possibilities in areas such as credit card cash advances, purchasing of traveler's checks, even loan documentation-"anything we do for a noncustomer," he said. "The responsibility of our bank is to protect itself and the customer who has issued legitimate instruments," Heilner said.
"Anyone who has ever had their identity taken knows that you're in a position of proving you're innocent, rather than guilty. Having prints on these documents serves that purpose," he said. Randolph agreed. "We have major fraud groups that are highly mobile moving throughout this country. This program is a proactive, joint effort that has the four relationships: to know who we are dealing with-to have positive proof that we are dealing with the right person."
Texas thumbprint program a documented success
The Clearing House Association of the Southwest has gathered statistical data that illustrates the potential for reducing check fraud losses fingerprint signatures may hold.
The Clearing House worked with the Texas Bankers Association to implement the Thumbprint Signature Program in that state late last year. The first banks announced the program in November 1995 and began using thumbprints on noncustomers' checks in December. Since then the program has grown significantly, and now over 140 banks are participating.
But even more astounding than the number of banks participating are the reductions in losses that seven banks chosen as a monitoring group have experienced.
In January, February, and March, losses from checks cashed over the teller line fell an average of 43 percent, 47 percent, and 59 percent, respectively, (see chart on page 7) when compared to a base-line monthly average for a four-month period.
"Can we conclude from looking at this data that this is empirical evidence that the thumbprint signature program is working? No, not absolutely. But the preponderance of evidence would certainly lead us to that conclusion, and the people reporting the numbers can find no other reason for the reduction in losses," commented Joe Fenninger, director of loss avoidance and risk management for the Clearing House.
Fenninger added that "because the data reported includes all losses from checks cashed at teller windows, it includes fraudulent checks cashed by customers as well as noncustomers. But the thumbprint signature program is designed to deter losses from noncustomers only."
"What we don't know is the ratio of losses between noncustomers and customers. If we assume a 70/30 proportion, and in March we realized a 59 percent reduction of total losses, then the program in reality achieved an 84 percent reduction of losses!"
Fenninger also emphasized the cost effectiveness of the program.
"If the first quarter numbers for these seven banks hold steady for the balance of the year, they will, as a group, realize a savings from loss reductions of about $2.4 million. That's a pretty substantial return on an investment of ink pads and decals."
USBancorp's new account fingerprint program
Because of the success of its program to fingerprint noncustomers' checks, USBancorp has expanded fingerprinting to new accounts in one of its metropolitan locations.
The bank began fingerprinting checks cashed over the teller line in Nevada at the time the program took off there-about two and a half years ago. (Its Utah subsidiary also has started fingerprinting checks and plans are in the works for Oregon and Washington).
About six months after check fingerprinting began in Nevada, the bank took a look at its operating expenses in the area, and discovered new account opening losses were unacceptable in the Las Vegas area. It decided to try fingerprinting for new accounts there.
According to Douglas Kidder, vice president and corporate security manager at USBancorp, anyone who comes into the bank in Las Vegas to open an account is fingerprinted. The fingerprint is used only if a problem arises.
For telephone account openings, the bank does not force a customer to come to the bank for a fingerprint, but requires the person send a certified form of identification, such as a notarized copy of a driver's license, before the account can be used.
"We really have had no problems with customer objections on new accounts," Kidder explained. "I guess our feeling would be that if someone rejected opening up a new account because of identification requirements, we probably don't want to do business with that individual," he commented.
USBancorp plans to look at each location that has successfully implemented fingerprinting on checks six months after that process is begun to see if it's feasible to require fingerprinting for new accounts. And it won't spread to all locations. Reno, Nevada, for example, which is not as transient as Las Vegas, does not require fingerprinting to open a new account.
But where the program does go into effect, the bank has high hopes of cutting losses. "We felt fingerprinting on new accounts would have as positive an impact as on check fraud prevention, and we were right," Kidder explained.
Reactions to fingerprinting programs:
From highly supportive to the bizarre
Talk to almost any banker who has implemented a fingerprinting program in conjunction with other bankers in the community, and they will say that the reaction to fingerprinting programs has been mostly favorable.
One reason, according to Joe Fenninger, director of loss avoidance and risk management, Clearing House Association of the Southwest, is that the media has been "very objective in reporting the program. In Texas, they recognized early on that this is an effective means of protecting against check fraud, which can only benefit society."
It also is a program supported by law enforcement officials. And while regulators will not endorse commercial programs or products, they will say they have no objections, and that the program has potential.
As Nicholas J. Ketcha Jr, Director of the Division of Supervision, FDIC, wrote in a May 31 letter to ABA:
"The program as outlined ... does not appear to violate any Federal law or FDIC regulation or policy, so long as it is applied in a nondiscriminatory manner. Moreover, the program should aid investigation by law enforcement authorities, have a deterrent effect on check fraud, and may reduce bank losses from such fraud."
Such support, combined with intense efforts on the part of banks to educate their customers and the general public, have resulted in very few complaints. And most of those have been based on misunderstanding that usually can be cleared up by explanation.
Still, a few isolated incidents have occurred that defy even explanation. Fenninger referred to two such incidents that occurred in Texas.
The case of the high-level communicator
A woman who was a noncustomer at one of Texas' participating banks felt that she should not have to provide a thumbprint.
The woman explained to the teller that she knew she did not have to give her thumbprint because she "was in communication with the highest level of government officials," Fenninger recalled. The woman went on to explain that she was "in constant communication with them ever since they implanted a communications chip in my brain," Fenninger quoted.
"We didn't think she had a valid argument to make," he added.
The case of the concerned chemist
Another noncustomer of a participating bank, when asked to give his thumbprint, looked at the ink pad and told the teller: "You need to first tell me what is the chemical composition of the ink pad," Fenninger said.
When the teller explained that she was sorry, but she didn't have that information, the man left the bank and went home to write a letter of protest.
"Being a chemist, I work with my hands all the time, and I have small cuts and abrasions on my fingers. I'm concerned about touching certain chemicals, and I also have a nervous habit of putting my fingers in my mouth," Fenninger quoted.
He also wanted to know if the ink pads had been approved by the Food and Drug Administration.
"The bank could have suggested to the man that he refrain from eating ink pads, since those pads were not designed to be consumable," Fenninger joked.
"But of course, bank officials simply explained that they'd be happy to cash his check if he met their identification standards and that he had the option of cashing or depositing the check at his own bank," Fenninger said.
Copyright © 1996 Bank Security & Fraud Prevention. Originally appeared in Bank Security & Fraud Prevention, Vol. 3, No. 6, 6/96
First published on 06/01/1996