You are preparing the bank reconciliation for an association you manage and there is a check that has cleared the bank for an amount that is not included in your check register. You look at the copy of the check attached to the bank statement and the check looks very similar to ones you issue out of your office, but wait…it is slightly different. In fact, there are several differences, including an incorrect signer on the account. What has happened? How could this happen?

The above description actually happened. The bank terms this a form of “identity theft”. Someone with a little knowledge of computers, some blank check stock and the coding information for an association’s bank account taken from a properly issued check, has prepared a completely forged check.

In this particular instance, the perpetrators got away with approximately $3,000. The bank covered the loss as the signer was not valid. The good news is that it was caught quickly, the account closed and the issue resolved fairly painlessly.

A few details of the case that are specific to this instance, but may be of interest to the readers of this article:

• Some of the checks were written to appear to be payroll type of checks, e.g. X hours at $X.XX and they were written for “odd” amounts.
• Most were cashed at check-cashing places.
• The checks were very similar to the actual checks, but they went a step further and even included the bank’s address, which was not included on the association’s true checks. (In my opinion, this may have been required by whatever software they were using to write the checks). Also, there was only one signature line on the checks.
• It appears that the criminals got the check information from stealing them.
• There was a debit charge from Sprint also on the statement.

So, what can you do to prevent this type of fraud?  Unfortunately, the options are limited because as soon as you issue any check, the information is out there to be misused.   You can start by ensuring that checks are not laid around for everyone to view, mail the checks promptly and hope that the recipient deposits the checks in a timely manner.  Beyond that you would have to remove paper checks completely out of the equation, in order to protect the coding information on your check. 

As Kris Gjylameti with Community Association Bank suggests, you can pay bills without paper checks using ACH – The Automated Clearing House “network” operated by the Federal Reserve and the Electronic Payments Network (EPN and formerly Chase). He states “It is administered by the not-for-profit NACHA.  The ACH processed 16 billion debits and credits last year, and gaining share of the estimated 36 billion checks and 128 billion consumer payments nationwide.  The ACH is gaining in popularity due partly to its convenience for both the homeowners and the management firms but also because of the reliability factor. By using ACH, you do not have to worry about having your check lost in the mail, or worst, stolen. This is possible because unlike most Bill Pay providers ACH electronically deposits funds into to the payees account.  ACH payments include: Direct Payment of consumer bills such as assessments, utility bills, Direct Deposit of payroll and tax refunds.  Financial Institutions and software packages have begun to provide tools to help streamline the ACH process for a large customer base, so check with your institution or software provider to see if they offer ACH solutions.”

The additional issue with ACH is ensuring that proper internal controls and approval process procedures are in place to ensure that the Board has approved all expenses. Thus, I generally find it mostly used for recurring items such as utilities, management fees and standard contract costs.

When using checks, however, what you can do is find the fraud early by timely monthly bank reconciliations. Bank statements should be reconciled on a monthly basis for all bank accounts and you should review the copies of the checks that are attached to the bank statement. That is why it can’t be emphasized enough that bank reconciliations must be performed monthly, soon after the receipt of the bank statement. This management company was very diligent in its accounting practices and saved its association a lot of grief and hassle.