Cheque Fraud

In association with:
 Introduction
Moderator:
Tim Zahavich, CFO, St. Joseph Communications Inc.

Presenters:
Peter Armstrong, Senior Vice President, KPMG Forensic Inc.
Sunil Mistry, Partner, KPMG Enterprise
Jasbir (Jas) Anand, Senior Director, Fraud Strategy, CIBC
Jennifer Hill, VP, Financial Institution Practice, Marsh Canada Ltd.
 Cheque Fraud

Peter Armstrong, KPMG Forensic Inc.

Sunil Mistry, KPMG Enterprise

Prepared by: KPMG LLP

 Overview
Introduction
Statistics and Trends
Schemes and Methods
Fraud Triangle
Internal Controls – Lessons Learned
Detecting Cheque Fraud
Conclusion

Prepared by: KPMG LLP

 Statistics
Payment Fraud Survey - US
 Respondent Organizations reporting attempted or actual payment fraud in 2008
 91%
 Fraud financial losses by payment method

Payment Method Percentage of Respondents

Cheques 60%
ACH debits (automated 20%
clearing house)
Consumer credit/debit cards 10%
Corporate purchasing cards 5%
Wire transfers 1%

• Source: JP Morgan Treasury Services Whitepaper on Payment Fraud, 2008

Prepared by: KPMG LLP

 Statistics and Trends

 Cheques are the payment form most vulnerable to fraud attempts (JP Morgan Fraud
Survey)

 Clustered attacks (alterations and counterfeits) are common over an extended period

 Large companies processing many cheques are the most common target

Prepared by: KPMG LLP

 Schemes and Methods

 Cheque kiting

 Cheques for cash – substitution schemes

 Personal cheques in the cash drawer

 Unauthorized disbursement schemes

 Forged authorization
 Authorized signatory
 ‘Redirecting’ pre-signed cheques

 Concealed cheques
 Relies on poor review by authorized signatory

Prepared by: KPMG LLP

 Schemes and Methods

 Cashing duplicate cheques

 Stealing and converting blank cheque stock

 Split deposit (or less cash deposit)

 Forged endorsement schemes

 Altered/counterfeit cheques
 Cheque ‘washing’

– For internal perpetrators to remain undetected in the long-run, they need access to the
cheques, bank statements, financial books and records

Prepared by: KPMG LLP

 Schemes and Methods
Cheque Fraud Recent Example
 Montreal, Quebec
 $195 million in counterfeit cheques
 Schemes detected during Canada Post investigation into forged postmarks
 Schemes (two examples):
 Recipients were told they had won the lottery and needed to cash a cheque
and wire the funds to the fraudsters to cover prize fees
 Recipients were told they were performing market research by cashing the
cheque and sending money via wire transfer - this was to help “evaluate the
effectiveness and efficiency of a payment system”
- Montreal Gazette, December 2007

Prepared by: KPMG LLP

 Schemes and Methods
Cheque Fraud Recent Example
 Kemptville, Ontario
 Construction firm book-keeper – theft of more than $1.2 million
 Misappropriation over 6 years
 Charged with theft over $5,000, fraud over $5,000, uttering forged documents,
falsification of books and records, possession of property obtained by crime, and
laundering money
- Ottawa Citizen, February 2008

Prepared by: KPMG LLP

 Schemes and Methods
Cheque Fraud Recent Example
 Canada – KPMG Example #1
 Fraudster employed as a clerk at a public sector organization
 Defrauded employees of more than $300,000 over a number of years
 Scheme:
 Deposited cheques payable to other staff into the fraudster’s bank account

 Ontario – KPMG Example #2

 Following an investigation, an employee admitted they provided blank cheque stock
to a ‘friend’ who made a request – cheque stock was unsecured
 ‘Friend’, or their ‘friends’ processed a series of larger dollar cheques and obtained
payment on some while others were flagged

Prepared by: KPMG LLP

 The Fraud Triangle

Opportunity Motive

Rationalization
Prepared by: KPMG LLP
 Internal Controls
Lessons Learned With Hindsight
 Cheque security controls
 Purchase cheque stock from known vendors

 Establish employee order/reorder policy for stock

 Keep cheque stock and related equipment secure and establish custody procedures

 Cashier’s office should be in a room with a lock (not in an open plan area or with
moveable partitions)

 Strict rules on access to cashier’s office and security/monitoring practices (physical,

audit, etc.) consistent with the risks

 Use cheque stock containing security features

Prepared by: KPMG LLP

 Internal Controls
Lessons Learned With Hindsight
 Cheque processing controls
 Segregation of duties between key functions

 Avoid using cheques (however, alternatives are not perfect either)

 Perform bank reconciliations on a timely basis

 Stamp cheques on receipt “payable to XYZ only”

 Payee details should never be abbreviated

 Minimize manual or “rush” cheques

Prepared by: KPMG LLP

 Internal Controls
Lessons Learned With Hindsight
 Cheque processing controls (continued)
 Envelopes used to send cheques should not be separately identifiable

 Cheques should require two signatures, be supported by original documentation

 Never pre-sign blank cheques under any circumstances

Prepared by: KPMG LLP

 Internal Controls
Lessons Learned With Hindsight
 Post handling controls
 Contents of envelopes which contain cheques should not be visible through
window

 Envelopes containing cheques should not be left in an accessible location overnight

 Secure incoming or outgoing post bags

Prepared by: KPMG LLP

 Internal Controls
Lessons Learned With Hindsight
 Other internal control issues
 “Clear desk” policy overnight – enforce

 Access control over contractors’ staff should be strict and always adhered to

 Reasonable physical security over building should be maintained at all times

 Timely investigation of vendor complaints

 Monitor unusual spending patterns

Prepared by: KPMG LLP

 Detecting Cheque Fraud
Red Flags
 Unusual looking cheques

 Frequent cheques in the same amount

 Frequent cheques in round numbers

 Cheques to banks

 Deposits not made daily or intact

Prepared by: KPMG LLP

 Detecting Cheque Fraud
Red Flags
 Supporting documentation for cheques is not available or has been prematurely destroyed

 Irregular cheque endorsements

 Cheque numbers, payee, date and amount don’t agree with entries in the cheque register

Prepared by: KPMG LLP

 Detecting Cheque Fraud
Red Flags
 Voided cheques are not retained

 Cheques issued to individuals for large, even dollar amounts

 Cheques clear the bank significantly out of order

 Variations on the name of the payee

Prepared by: KPMG LLP

 Conclusion

 Cheque fraud continues to be a serious problem – smaller organizations are equally exposed

 Organizations have an important role in preventing and detecting cheque fraud

 Those without sufficient internal controls or who fail to follow their policies are exposed

 Organizations can have a significant impact on the risk of cheque fraud losses

Prepared by: KPMG LLP

 Restrictions

• This summary has been prepared for informational purposes only for participants at the presentation
made by a representative of KPMG Forensic.

• This summary is no substitute for informed professional advice in each specific circumstance. This
document should not be misconstrued as representing legal advice.

• KPMG Forensic Inc. assumes no liability whatsoever from any reader having relied on the information
contained herein.

• Additional reproduction and distribution of this document must be approved in advance and in writing by
KPMG Forensic Inc.

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of
KPMG International Cooperative (“KPMG International”).

Prepared by: KPMG LLP

Reducing the Risk of Fraud

Jasbir (Jas) Anand

Senior Director, Fraud Strategy
CIBC
Agenda
1) Payment Fraud
2) Payment Fraud Prevention
Payment Fraud

Payment fraud types

Percent of organizations that reported payments fraud
occurring through the corresponding methods:

93% - Cheque Fraud

25% - ACH Debits (EFT)
4% - ACH Credit (EFT)
23% - Consumer credit/debit cards
15% - Corporate/Commercial Cards
4% - Wire Transfers Associate of Financial Professionals 2011 Fraud
Survey (U.S.)

Percent of Organizations that reported cheque fraud

occurring through the following techniques*:

61% - Payee Name Alteration on Issued Cheques

57% - Counterfeit Cheques with firm’s MICR info and
another firm’s name
41% - Loss, theft and counterfeit of employee pay
cheques

* Based on actual incidence of loss www.checkfraud.com

Payment Fraud

Common 3rd Party Cheque Fraud Techniques

•Altered Cheques
– Cheques are intercepted
– Payee name and amount are removed through chemical processes or through
scraping the ink from the paper
– New payee name and/or amount are applied to the cheque and the cheque is
deposited
• Counterfeit Cheques
– Cheques are intercepted
– Copies of the cheque are produced, changing the cheque sequence numbers
as needed
– Copied blank cheques are filled out and deposited
• Forged Endorsements
– Cheques are intercepted
– Payee’s signature is forged
Payment Fraud

Cheques – the preferred target

 Confidential information used for illegal activity
 Cheques are paper based and can be duplicated quite easily (low cost)
 Transportation of cheques (i.e. Canada Post) presents opportunities to
intercept
 Criminals exploit the clearing process hoping to receive funds prior to
fraud being detected through cheque reconciliation; physical items still
travelling across the country to be negotiated
 Canadian landscape finally migrating to image but will be a long
transition phase
Payment Fraud

Cheques contain valuable information

Customer Name & Address Cheque Number

Leifs Inc.
Date 109
459 Lonely Way W.
Toronto, ON, M7U P6K
June 7, 2007
Pay to the $ 50,000
Order Of
Tree Limbs Ltd.
Fifty Thousand Dollars Only ------------------ /100 Dollars
Security Features
Included,
Details on Back
Money Bank of Kanada
123 Monies Way
Toronto, ON, M7J 5T7

Memo

MP

Bank & Address Signing Officer’s

Bank Account & Cheque Stock Name & Signature
Transit Number
Payment Fraud

How information on cheques can be exploited

Leifs Inc.
• Canadian banks 459 Lonely Way W.
Toronto, ON, M7U P6K
continue to receive
fraudulent wire July 7, 2007
instructions year over Ref#4395803
To: Money Bank of Kanada
year
With reference to our earlier discussion, kindly debit the
account for $50,000 (Fifty thousand dollars CAD) from
Account #12345 Transit #456
• $20MM in 2010 alone
sent to China Beneficiary: Chucky Chukster
Country: Sukothai, Thailand
targeting North Branch: Shailau
American business Swift Code: HJDE45H
Account #: 8598-983943
Date: August 30 2003
Thank You

Regards
Billy Bob
Payment Fraud Prevention

Improving Control Efficacy in Payments

Machine STRONG
Electronic, Machine-
Enforced Processes

Enforcement
Method
Paper-based
Policy-enforced
Processes
Process/
Policy WEAK

Detective Control Type Preventative

Payment Fraud Prevention

Overview of cheque clearing process

1st Detection
Opportunity

What steps are CIBC taking to help ensure you as a Client are protected?
• CIBC clearing centres have installed with a Counterfeit Cheque Detection System
 System identifies suspect items based on historical cheque writing patterns on a per
account basis
 Suspect items are subject to further scrutiny including physical inspection and as
required, client contact for validation
• Continue to invest in the latest technology – migration to image based processing has begun
Payment Fraud Prevention

Overview of Electronic Payments

Transforms policies from process-enforced to machine-enforced
• Electronic payment processes eliminate risk of lost or stolen cheques in mail or transit
• Processes can be tailored to meet different risk needs
• Administration features enable user level transaction limits and authorities
• Authentication protocol moves from signature (poorly protected) to passwords (highly protected)
• Payment automatically sent to reoccurring payees, eliminating risk of non-payment
• Audit trail for all events

Transforms detective controls into preventative controls

• Controls cannot be readily circumvented
• Reduces social engineering risks

Reduces perception of opportunity and…Is more operationally efficient!

• Simplifies payment process, utilizing fewer resources and saving costs
Payment Fraud Prevention

Customizing your Accounts & Account Activity

Simple and cost effective suggestions:
• Multiple signing officers deters internal fraud
• Having collections or deposit only accounts
• Separate wire and cheque disbursement accounts; and low value and high value
disbursement accounts to identify irregular activity with ease
• Use only one set of cheques per account
• Use a continuous set of serial numbers when re-ordering cheques
• Issue unique passwords to those responsible for laser-printing cheques
• Use plain envelopes instead of window envelopes when mailing out cheques

Controls are never one size fits all. Avoid stretching low
value processes to serve high value needs.
Managing the risk of cheque fraud

Jennifer Hill
Vice President, Marsh Canada Limited
 Crime Insurance
• Exposure
– No company is immune from exposure to theft or fraud
• Even the most robust internal controls are not “foolproof”
– Experts estimate that 96% of all companies will
experience some type of employee theft
» The average organization loses 5% of its total annual
revenue to fraud and abuse committed by its own
employees
– It is estimated that it takes approximately $20 dollars in
sales to recover each dollar of theft
– The medium loss for Private companies in 2010 was
$231,000
• Sources of Claims
– Common crime claims allege employee dishonesty,
embezzlement, forgery, robbery, safe burglary, computer fraud,
wire transfer fraud, counterfeiting, and other criminal acts.
 Crime Insurance
• Insurance Solutions
– Crime policies have been developed to provide broad indemnity to
organizations suffering loss from theft of fraud.
• Prudent organizations will always have procedures in place to
minimize the opportunity for loss a crime insurance policy
provided an additional security safety net beyond internal risk
management procedures
• Risks Covered
– Loss of money or securities that have been embezzled by an employee
through an act of fraud or dishonesty
– Forgery or alteration of a financial instrument such as a cheque or
draft issued by the company
• Alteration includes washing and copying
– Loss as a result of a financial institution transferring money or
securities based on a fraudulent document purported to have been
sent by the insured organization
– Loss of money, securities or other property for which the insured
company is legally liable
Crime Insurance
• Risks Covered (cont’d)
– Extortion – some policies will extend to cover monies paid away as a result of
a direct threat to inflict bodily injury on a director or an employee of the firm
or to damage or destroy any property owned by the insured firm
– Loss to money, securities and property (eg. stock) as a result of “hacker”
activities
– Many policies contain a very broad definition of employee which can include:
any director or trustee; part time or temporary employees; students;
volunteers; or any person provided to the insured by an employment agency
– Coverage under some policies will extend to undiscovered acts committed
before the insurance was purchased
• Loss Discovered versus Loss Sustained
– Provide cover without the requirement of identifying who caused the loss or
where it occurred
– No requirement to secure prosecution or conviction of employee who caused
the loss
Crime Insurance
• Last thoughts
– Crime losses are costly and difficult to detect
• Many frauds can go on for years undetected leading to an
enormous ultimate net impact
– The most common method for detecting fraud in privately held
companies is simply by accident

– A well constructed Crime Policy can protect you from

potentially serious financial consequences for relatively
little cost
 Disclaimer
Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.
This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are
intended solely for the entity identified as the recipient herein (“you”). This document contains proprietary, confidential
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as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for
which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent
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reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

Copyright 2011 Marsh Inc. All rights reserved.

Live Q&A
Tim Zahavich Jasbir (Jas) Anand
Chief Financial Officer Senior Director, Fraud Strategy
St. Joseph Communications Inc. CIBC
[email protected] [email protected]

Peter Armstrong Jennifer Hill

Senior Vice President VP, Financial Institution Practice
KPMG Forensic Inc. Marsh Canada Ltd.
[email protected] [email protected]

Sunil Mistry
Partner
KPMG Enterprise
[email protected]