According to survey results released earlier this year by SunTrust Bank, 73 percent of all businesses experience actual or attempted fraud. The most common type of fraud perpetrated against small business is still the bad, handwritten check. Checks, according to Manuel Perdomo, the chairman, president and CEO of SunTrust Bank South Florida, constitute “an open invitation for those who get up in the morning trying to steal.”
The SunTrust survey had even more bad news for Florida small businesses. Florida leads the nation in reported fraud incidents. Over 200,000 fraud complaints were reported to Florida authorities in 2014. How can a small business owner protect his or her operation from the bad check fraudsters? The best strategy is to stop accepting checks entirely and require payments online or with a credit or debit card. Digital and electronic payments not only help businesses eliminate fraud, but requiring digital payments can lead to substantial savings.
Manuel Perdomo explains, “The median cost of processing a paper check, let’s estimate that it’s about $1.50. A company that is processing 20,000 checks a month, that’s $360,000 a year,” Perdomo said. “By consolidating payments, not only does the process become less vulnerable, it’s also less costly and more controlled.” Perdomo also reminds business owners what happened when all of the planes were grounded back in September 2001. Checks were literally sitting on runways, not being processed.
WHY ARE SMALL BUSINESSES SO AT RISK FOR CHECK FRAUD?
Small businesses are particularly at risk for check fraud. Perdomo says one reason is because small businesses develop a business routine, doing things their own way for years, and they’re comfortable handling checks. There’s also a sense that checks are physical – you can hold a check in your hand and read it – unlike an online payment. Small businesses that still operate this way, Perdomo says, “are the folks that need the most help.”
Frank Abagnale teaches at the FBI Academy and advises businesses about dealing with fraud. He says, “Check fraud is a huge, growing problem. It’s gone from $12.6 billion to now more than $20 billion in just ten years. Seventy-five percent of all payments made to another company are made in the form of a check. So as long as there’s an opportunity to forge, alter, and counterfeit checks, there are going to be people willing to take that opportunity with very little risk.”
The set-up costs for a digital payment system seem substantial, but over time, business owners eventually save considerably, and they’re better protected from fraud. A digital payment system also gives a small business more control over how money flows in from customers. Abagnale insists that small business owners must take every reasonable precaution to protect their businesses from fraudsters.
Even a digital payment system is not absolute protection against fraud. Asaf Darash is the CEO of Regpacks.com, which provides businesses and non-profits with registration systems and services. He says, “Even though e-Checks aren’t paper checks, there is still a chance of the account not having sufficient funds and the payment bouncing. However, the one advantage of e-Checks over regular checks is that when done online, the bank can check at that moment whether the account funds will be coming out of has enough to match the payment amount.”
However, Darash also warns, “There is still a chance of it bouncing if the funds are too low when the transfer actually happens, but it severely lowers the bounce rate. When we looked at our client data, out of 1 million e-Check transactions in our system, only .00345% bounced. Which is awesome! Physical checks have about a 2.23% bounce rate.
HOW CAN A SMALL BUSINESSES PROTECT AGAINST CHECK FRAUD?
Small businesses must also be concerned with checks going out as well as checks coming in. If someone forges a check from your company or prints a counterfeit check for, let’s say $50,000, it would put most small businesses out of business. “So I always say the small business person has a lot more to risk than a major corporation,” Abagnale adds. He offers these suggestions for reducing your company’s susceptibility to check fraud:
• Read your contract with your bank. That contract explains your liability for fraudulent checks. Your bank may require certain business practices to support a claim against fraud. Consistent business practices reduce opportunities for fraud and make it easier for your bank to support your claim if you are targeted by fraud.
• Reverse Positive Pay is a fraud mitigation service that lets you verify checks and make pay/no pay decisions. Reverse Positive Pay allows you to review all prior day checks that were presented for payment. If any of these presented checks do not match your issued checks, you can view an image of the check and elect to pay, return, or adjust the dollar amount or check number of the check. Ask your bank about Reverse Positive Pay.
• If you type checks, use a type font of 12 points or larger. Smaller type is easily erased and replaced. Examine new checks when you receive them. Immediately and thoroughly destroy any unused checks from closed accounts. Some checks now have built-in security technology. Ask your bank what’s available.
Jared Gustafson is a CPA and the owner of Gustafson Septic Service in Stanley, North Dakota. He explains how digital payments save his company time while paper checks consume both time and resources: “As a small business owner and accountant, I feel the biggest issue small businesses have with checks is the related use of company time and resources. Many larger companies have moved towards electronic payments which has many advantages.”
Gustafson explains, “At our business, we have about 10-15 regular vendors and about half of them have moved towards accepting electronic payments which we utilize because processing time and related costs are reduced. The rest of our vendors only accept payment by check. It is a more lengthy process for us to issue paper checks to these vendors plus it costs more to print the checks and mail them as well.”
Gustafson also explains the risk of the checks getting lost or not being cashed for an extended period of time: “If a check is uncashed after a certain period of time and if the payee cannot be reached, it could be considered dormant and reportable to the state of the payee’s last known address as unclaimed property. As a small business owner, being up to date on these unique and varying unclaimed property laws is a challenge. In most cases at our small business, we are able to reach out to our vendor and resolve the issue but the time spent reaching out asking a vendor to cash a lost check is another expense of time and company resources that may have been avoided with an electronic payment.”
“On the other hand,” Gustafson concludes, “we do currently have about 125 active customers. Up until the past few years, we only accepted paper check payments. Some of the larger companies we work with requested to pay electronically, so we have gradually set up those arrangements to reduce the amount of customer checks we process each month. A large majority of our other customers still pay by check, which still works well for us, but the mail delay time and the time spent processing the checks or following up on aged invoices is greater.”
WHEN YOU RECEIVE A BAD CHECK, WHAT SHOULD YOU DO?
1. Reach out to your customer. When you receive a bad check, contact the customer first. He or she simply may not have realized that sufficient funds weren’t available to cover the check. If you send a written notice by certified mail, you’ll have documentation that you attempted to contact the customer.
2. If you can’t reach the customer or if the customer is uncooperative, get in touch with your customer’s bank. If funds are in the account due to a subsequent deposit, remit the check for payment at once. If the bank says no such account exists, you may be able to report the check to the police, along with any identifying information you received from your customer.
3. If the check is fraudulent – written on a fake or closed account – or if the check is over $300.00 and funds remain insufficient, contact the police, and provide them with all of the information you have. A fraudulent check in excess of $300.00 constitutes grand theft in Florida, and that’s a felony. A fraudulent check for less than $300.00 constitutes petty theft, a misdemeanor.
You should probably consult with a lawyer – in Central Florida, with an experienced Daytona Beach small business attorney, for example – about the best approach to take when you receive a bad check for less than $300.00. Regardless of the amount of a bad check, you may eventually have to sue the check writer in civil court to get your payment even if the check writer receives a criminal conviction for grand or petty theft.
Daytona Beach small business attorney Melody Lankford cautions business owners that fraud “also occurs with credit cards, but what I have noticed is that the clients of mine that pick up on it the fastest are the ones that closely monitor their financials because they can quickly notice the numbers are off. Most of the time they notice the variations in sales, bringing awareness to the issues.”
Attorney Lankford explains, “Risk management must really be practiced in these areas of exposures. Checks can be causing fraudulent issues simply because they aren’t proper processes in place. Unfortunately, you have to go after those folks, cause it can be difficult to get your money back. This is why background screenings are critical, but you have to make sure you’re complying with the law when running those because of the rules in place for background screenings. If not done correctly, you can open yourself up to discrimination lawsuits. In short, the best advice is to keep a meticulously close eye on financials and your business.”
Every small business in Florida needs a security plan that addresses fraud prevention. Shred the documents you no longer need. Store legal and financial documents securely and ensure that any sensitive data in your computers is protected. Change passwords frequently and keep them confidential. After reviewing your business operation, a small business attorney can make security recommendations based on your company’s particular security needs. Don’t hesitate to seek a business lawyer’s advice regarding fraud or any other legal matter that impacts your business in Central Florida.