Check Fraud is on the Rise
Steps Law Firms Should Take to Avoid Problems
Fraud Protection Requires a Good Defense
If your firm relies upon paper checks sent through the mail to pay vendors and transfer client funds — your financial resources are at risk.
A Cautionary Tale – One of 4L’s law firms recently ran a batch of 31 checks, stuffed them into separate window envelopes, affixed the appropriate postage, and deposited the envelopes that evening into a standard USPS blue box in front of a nearby post office.
After a few days, the national banking system presented 10 checks to the bank, each identical in all respects – the look, check number, date amount, even the signature – except the payee names were changed.
GOOD NEWS: The bank’s Positive Pay software detected the name alteration and notified the firm by email. The firm notified the bank to reject the 10 checks and stopped payment on all 31.
BAD NEWS: Firm and 4L personnel spent numerous hours completing fraudulent claim forms, but it may take three-to-four months for the banking system to determine which banks were at fault for accepting the 10 fraudulent checks and the funds (more than $40,000 in this instance) are restored to the law firm’s bank account.
Check fraud has entered a new area and checks sent through the US Mail in window envelopes are especially vulnerable. If you are interested in more information about this sort of check fraud, see We Can’t Stop Writing Paper Checks. Thieves Love That. New York Times, December 9, 2023.
Due to the rise in check fraud linked to mail theft, 4L is advising law firms: (1) to implement Positive Pay procedures with banks – all bank accounts; and (2) to reduce their usage of paper checks by moving to ACH to process recurring payments.
What is Positive Pay?
Positive Pay is an online service provided by most banks to detect check fraud. Whenever your firm writes a check, the accounting system generates a checks-issued data file that is uploaded to the bank’s Positive Pay database daily. As checks hit your bank for payment, the bank’s Positive Pay software compares the account number, check number, date, amount, and payee to the check-issued data previously provided. If everything matches, the check will clear. If not, the bank sends an email asking you to either approve or reject the check. Easy/peasy. Talk with your banker about Positive Pay and introduce 4L so we can work out the data transmission details.
Alternatives to Paper Checks?
While paper checks have been the staple for payment processing for decades, businesses are increasingly moving to electronic payment methods like ACH (Automated Clearing House) transactions. ACH payments are a type of electronic funds transfer that allows businesses to send and receive payments securely through the banking system when the sender knows the recipient’s bank routing and account numbers in advance. ACH payments move funds from bank-to-bank transfers and are similar to wire transfers, the principal difference being that wire transfers are completed same day and are significantly more expensive than ACH payments that typically take 1-3 days to clear.
There are four main advantages to using ACH payments instead of paper checks:
- Lower Costs –ACH payments are cheaper to process when all time and material costs are included. Paper checks are printed (first by a printing company; then printer toner consumed); envelopes and postage purchased; printed checks manually folded and stuffed into envelopes, postage affixed. It is a Rube Goldberg process as compared to electronic payments.
- Faster Payment Settlement – ACH payments complete electronically within a few business days while paper checks are subject to the vagaries of the postal system, difficult to track if misrouted, and stop payment/reissue costs do add up when paper checks are lost.
- Increased Security – Because they are electronic transfers, ACH payments are more secure than paper checks that require physical transportation or handling. Additionally, ACH transfers can be monitored allowing options to trace payments should anything go awry.
Compared to other methods of payments like credit and debit cards or eChecks, ACH payments are far less expensive with a median cost of $0.26 to $0.50, depending on your bank.
How to implement ACH Payments
4L strongly recommends that law firms implement ACH payment procedures for all recurring vendors and other repeat payment recipients currently paid by paper check. Implementation is a three-step process:
- Request banking information from recurring payees. Obtain the payee’s bank routing number and bank account number (same data the law firm provides on its invoices to encourage electronic payment of client fees). 4L has a form for this purpose.
- ACH setup with the bank. 4L will work with your bank to set up ACH batch file procedures to allow processing of multiple payments in a single electronic upload.
- Payment authorization procedures. 4L will work with your firm to establish procedures – satisfactory to the firm – to ensure review and prior authorization for each ACH payment depending upon whether the firm elects to process each ACH batch transaction or delegate that action to 4L.
If you have any other questions or concerns about ACH payments or other services provided by 4L, contact us.