August 1996








    Check Fraud: A Sophisticated Criminal Enterprise


                   By Keith Slotter, CPA


________________


Special Agent Slotter works in the Financial Institution         
Fraud Unit at FBI Headquarters in Washington, DC.
________________


(Criminal organizations are using increasingly sophisticated
techniques to perpetrate check fraud.)


Like waves on the ocean, variations of fraudulent activity keep
pounding the shores of the banking industry. Prior to the 1980s,
bank fraud schemes generally involved only a few transactions
perpetrated by a single individual or small group. Losses
averaged less than $100,000 to the victim institution, and law
enforcement investigations were fairly routine in nature.


Following deregulation of the savings and loan industry in 1982
and the initiation of more speculative, risky ventures by those
in charge of these institutions, a new wave of fraud emerged.
During the late 1980s and early 1990s, large-scale frauds
perpetrated by institution insiders and those held in trust
within the banking industry became prevalent. Law enforcement
agencies used massive, task force-oriented investigations to calm
the surge of these frauds. As a result, the banking industry as a
whole has stabilized and continues to insulate itself from
insider abuse.


Conversely, a flood of fraud perpetrated by outsiders, especially
organized ethnic groups, has risen dramatically since 1987.
Outsider fraud now accounts for more than 60 percent of all fraud
against financial institutions.1 The most prevalent problem in
the industry, by far, centers on check fraud, but also involves
other counterfeit negotiable instruments, such as traveler's
checks, credit cards, certified bank checks, money orders, and
currency.


EXTENT OF THE PROBLEM


In its 1994 Check Fraud Survey, the American Bankers Association
(ABA) indicated that the volume of check fraud against financial
institutions increased by 136 percent from 1991 to 1993. During
this same period, dollar losses rose 44 percent, from $568
million to $815 million annually. The country's major financial
institutions attribute fully one-half of all check fraud to
professional and organized group efforts.2


Financial institutions do not suffer alone as victims of fraud.
For the past 2 years, the Forensic and Investigative Services
Division of KPMG Peat Marwick, one of the big six accounting
firms, has compiled an annual fraud survey of the 2,000 largest
U.S. corporations. These companies reported check and credit card
fraud as their most problematic losses during 1994.


The responding companies suffered an average annual check fraud
loss of $360,000, an increase of 38 percent from 1993.
Alarmingly, over two-thirds of corporate executives believe these
losses will continue to mount over the next several years.3 More
than 1.2 million worthless checks are accepted for payment every
day.4


The technological improvements that have fueled the growth in
check fraud schemes have made it difficult for law enforcement to
combat the problem. Forbes magazine reported on the trend in
1989, stating "...the desktop computer did not create the crime
of forgery. All it did was make the tools user-friendly."5 With
the prevalence of laser printers and advanced duplication
systems, the production of quality counterfeit checks has become
commonplace.


In addition, Congress unwittingly aided the business of
duplicating and counterfeiting checks. By passing legislation in
1988, known as Regulation CC,6 Congress made detecting fraudulent
checks even more difficult for financial institutions. This law
requires banks to process checks within a 72-hour period and
ostensibly provides customers with increased access to deposited
funds. While the regulation may have succeeded in making
depositor's funds more accessible, it also made passing
fraudulent checks easier by giving banks less time to confirm the
legitimacy of these transactions.


CHECK FRAUD ORGANIZATIONS


Worldwide, 80 billion checks exchange hands annually; 60 billion
of those are written in the United States.7 As anyone who has
mailed a check to the mortgage company 3 days before payday can
attest, Americans have become enamored with writing checks and
taking advantage of the "float" period, the time during the
check-clearing process. Criminal elements within numerous
immigrant groups in the United States have analyzed American
banking, noting the system's  deficiencies and the fact that it
affords opportunities for fraud. Presently, organized ethnic
enterprises conduct a sizable portion of annual check fraud
activity throughout the country.


The Major Groups


The principal ethnic enterprises involved in illegal check fraud
schemes include Nigerian, Asian (particularly Vietnamese),
Russian, Armenian, and Mexican groups. The majority of the
Vietnamese, Armenian, and Mexican organizations base their
operations in California, especially in the Orange County, San
Francisco, and Sacramento areas. However, they have networked
their operations throughout the country, with a number of
connections in Chicago, Houston, and Washington, DC.


The Nigerian and Russian groups, with bases in the northern and
eastern areas of the country, exhibit more nomadic tendencies.
They roam throughout the United States, stop to pass stolen or
counterfeit checks, and then move on to new locations. The
Russian groups initially established themselves in New York but
have extended their activities to Chicago and the West Coast.


Nigerian groups often solicit legitimate identification and
account information to further their check fraud schemes.
Recently, law enforcement authorities have noted     their
interaction with Vietnamese  organizations in the Chicago and
Houston regions. In the north-east, Nigerian rings have opened
numerous investment accounts within various brokerage houses and
deposited large sums of money using stolen and counterfeit
corporate checks.


Most West Coast Asian gangs began to organize their bank fraud
activities during the 1980s and have continued to expand and
develop these sometimes-sophisticated operations. Many such
groups originated in Taiwan, Hong Kong, and Vietnam and include
the Viet Ching, Big Circle Boys, V-Boyz, Wo Hop To, Wah Ching,
and Red Door gangs.8 Within the Asian gangs, known as triads, the
group leader usually holds the title    of "master" and oversees
all organizational operations.


Current investigations indicate that some Asian groups have been
dealing with Russian counterparts, especially to negotiate
(deposit or cash) counterfeit currency through the banking
system. Recently, members of the Russian Mafia obtained such
currency, which was printed in Montreal, Canada, sold to several
West Coast Vietnamese factions, and distributed throughout
California.


Notably, each of these groups conducts a myriad of white-collar,
drug, and violent crimes. The groups perceive check fraud--unlike
drug trafficking, extortion, or murder--as a "safe" crime; it
carries minimal penalties and a low risk of apprehension.


The Players


Regardless of ethnic origin, groups involved in check fraud
maintain certain universal characteristics. Unlike traditional,
tight-knit, organized criminal groups, such as La Cosa Nostra,
these groups, which may embody several hundred members, usually
are loosely organized. Members often network among several
organizations. Despite the lack of a rigid hierarchy, members
typically fall into one of several roles--leader, check procurer,
counterfeiter, information broker, or check passer.


Leaders


Leaders of an organization generally have an extensive criminal
history and possess above-average intelligence. Often, they have
a degree in business and/or law. These individuals provide the
overall direction of the group, as well as expertise in
understanding American business and the banking system.


Check Procurers


Check procurers obtain authentic checks, usually by stealing them
while employed within a financial institution. Group members then
sell or negotiate the stolen checks as is, or they duplicate the
checks for future use.


Counterfeiters


Counterfeiters duplicate corporate and payroll checks, traveler's
checks, credit cards, certified bank checks, money orders,
currency, and other negotiable instruments, as well as personal
identification. They usually are well-versed in the use of
personal computers, especially in the field of desktop
publishing.


Information Brokers


Information brokers gather personal and financial information on
legitimate individuals. Using this credible information,
associates open new bank accounts, pass counterfeit checks, and
secure loans, which they fail to repay.


Check Passers


Check passers actually negotiate stolen and counterfeit checks
through the banking system and collect the proceeds to distribute
to the group. They often travel throughout the country, opening
new accounts and transporting their illicit proceeds. Typically,
they negotiate only about 10 percent of a group's illicit checks;
the group sells the rest of the checks to other individuals and
organizations. Check passers maintain little contact or status
within the hierarchy and often are the only members whose ethnic
backgrounds differ from the core group.


Ethnic organizations tend to distrust anyone not of their own
heritage, making it difficult for law enforcement to infiltrate
them. Even though police frequently arrest check passers
throughout the country, these street-level criminals generally
possess little information concerning upper-echelon group
members.


TYPES OF CHECK FRAUD SCHEMES 


The variety of check fraud schemes perpetrated throughout the
country ranges from depositing single stolen checks to
counterfeiting thousands of negotiable instruments and processing
them through hundreds of bank accounts. Although it is impossible
to summarize all of the check fraud schemes currently operating,
three schemes in particular--large-scale counterfeiting, identity
assumption, and payroll check fraud--typify frauds being tracked
by bank security officials and law enforcement authorities
throughout the nation.


Large-scale Counterfeiting


The most notorious groups engaged in large-scale counterfeiting
operations are the Vietnamese triads operating out of Orange
County, California. Members routinely get jobs within local
financial institutions in order to collect master original bank
checks, money orders, and corporate/payroll checks for
counterfeiting. The triad masters, who often are counterfeit
experts with a host of duplication devices, manage the groups'
criminal activities.


The groups exchange their counterfeit instruments for cash in a
variety of ways. Check passers directly negotiate a portion of
the counterfeit documents through financial institutions. They
deposit the fraudulent checks, often into new accounts, and
withdraw the funds before the bank can complete the
check-clearing process and discover the fraud. The transient
check passers open accounts in different institutions throughout
the country; however, group members within the organizational
hierarchy ultimately control their activities from a home base.


In order to minimize their ex-posure to law enforcement, the
counterfeiters sell the majority of their phony goods to third
parties for negotiation or further resale. They create most
counterfeit checks in $2,000 to $5,000 increments and sell them
to black market customers at 5 to 25 percent of their face value,
depending on quality and appearance.


Identity Assumption


Seen in various metropolitan areas, identity assumption schemes 
often involve Nigerian and Vietnamese criminal organizations.
Group members obtain employment or develop sources in local banks
and credit agencies so they can acquire otherwise confidential
information on bona fide bank customers. The groups then create
counterfeit identification, including driver's licenses, social
security cards, and credit cards, to assume the innocent person's
identity. Under the assumed identity, the criminals open new bank
accounts, which they use to deposit fraudulent checks and
subsequently withdraw the funds, as well as to secure personal
loans and lines of credit.


Once bank accounts have been established, the financial
institutions become vulnerable to a variety of frauds. Prior to
depositing fraudulent checks and withdrawing the proceeds, the
"customer" is likely to obtain a credit card account with a
substantial credit line. The perpetrators withdraw funds against
the credit line and distribute the money within the criminal
organization, along with any bogus loan money they have procured.
After withdrawing monies pursuant to the deposit of fraudulent
checks, the "customer" leaves town, and the bank sustains a
substantial loss.


Such schemes hurt more than just the banks, however. The innocent
people whose identities were assumed suffer from ruined credit
histories, which may inhibit their future financial activity.


Payroll Check Fraud


A variation of the identity assumption scheme involves placing
group members within payroll check-processing companies. These
firms compile and distribute payroll checks on behalf of their
corporate clients.


The miscreant employees print duplicate payroll checks for
various client recipients. They then steal the checks from the
premises, and the group duplicates them for negotiation.
Concurrently, the group obtains full background identifying data
on the client's regular employees, which can be used in future
schemes.


METHODS OF ALTERATION


New technologies give check fraud perpetrators a wide variety of
schemes and devices for committing their crimes. Chemical
techniques and computers provide the primary means by which
criminals manipulate and counterfeit checks.


Chemical Techniques


Legitimate personal checks can be changed easily by chemical
means. Similarly, someone well-versed in manipulation techniques
can modify corporate checks, traveler's checks, bank checks, and
U.S. Government checks with minimal effort.


Chemical alteration is commonly referred to as "check washing."
Check washers use a variety of acid-based chemical solutions to
erase amount and payee information, while maintaining the
integrity of the preprinted information. They then dry the check
and inscribe a new payee and a significantly higher dollar amount
before presenting it to a bank for payment.


One acid-based solution even allows criminals to revise a check
and subsequently destroy the evidence. In this instance, the
check washers must move quickly because the chemical solution
causes the paper to disintegrate within 24 hours, leaving no
supporting evidence of the transaction.


Technology


Today's computer technology makes it relatively simple to
counterfeit checks. A counterfeiting operation requires only a
laser scanner to capture the image of an original check, a
personal computer to make changes, and a quality laser printer to
produce the bogus check. The necessary equipment can be obtained
for less than $5,000.


Once an original check has   been scanned, its data can be
manipulated and reprinted with ease. Still, the counterfeiter
faces the tough challenges of matching the paper stock used by
the check  manufacturer; correlating complex color schemes, such
as those used  on U.S. Government and traveler's checks; and
overcoming some of   the counterfeiting safeguards currently used
by legitimate check printers.


Yet, counterfeiters can overcome even these hurdles without much
difficulty. A number of unscrupulous printers throughout the
country offer preprinted checks  containing whatever information 
the customer desires, without bank confirmation or concurrence.
Further, today's computers can come very close to duplicating
even the most complex color schemes and check safeguards. A
counterfeiter's success hinges on knowing that most checks will
not be scrutinized closely enough to detect the fraud until they
have been cashed and cleared through the banking system.


FRAUD PREVENTION


In order to prevent fraud, check-printing companies offer a
variety of counterfeiting safeguards.9 All such features make   
attempted alteration detectable in one way or another. Yet, these
enhancements are not foolproof and often prove cost-prohibitive
to the purchaser. In response, financial institutions have begun
to implement a type of biometric fingerprint identifier as a more
cost-effective approach.


In early 1995, Bank of America (BOA) in Las Vegas, Nevada, became
the first financial institution to use fingerprinting technology
to deter check fraud.10 At BOA, when customers who are not
account holders present checks for payment, they must place an
inkless fingerprint next to their endorsement. When bank
officials identify an attempted fraud, the fingerprinting system
provides law enforcement with evidence and background information
never before attainable at the onset of an investigation.


This pilot project has garnered impressive results. BOA officials
report that the biometric identification system nearly has
eliminated check fraud schemes perpetrated by outsiders. It also
has reduced the bank's overall fraud by 40 percent.11


BOA's success in Nevada has spurred the Arizona Bankers
Association to lead a campaign with member financial institutions
to implement a similar program. A core group of Arizona-based
banks implemented this technology in the fall of 1995. Moreover,
BOA officials plan to extend fingerprinting operations to their
branches in Texas and New Mexico. A number of financial
institutions have expressed a desire to expand the program to new
customer accounts, another hotbed for fraudulent checking
activities.


During this implementation process, the banks involved have
become cognizant of the sociological and privacy concerns
underlying such an identification system. Some customers fear the
improper use of identifying information. Bank officials stress,
however, that no central database of fingerprint information will
be maintained and that these records will be furnished to law
enforcement only pursuant to suspected criminal conduct.


LAW ENFORCEMENT SUCCESSES


Criminal investigators working negotiable instrument fraud cases,
especially involving organized groups, have begun to achieve
significant results by using a task-force approach and by
promoting effective cooperation with their international law
enforcement counterparts. In March 1994, officials from eight
federal, state, and local law enforcement agencies in
California12 combined forces to raid a contingent within the Wo
Hop To triad, arresting nine subjects and seizing more than
$500,000 worth of merchandise obtained through counterfeiting
activities.13


The Westminster, California, Police Department's Tri-Agency
Resource Gang Enforcement Team, as well as various San Francisco
Bay area task forces, has conducted successful raids and arrests
targeting Asian criminal organizations involved in check fraud
and counterfeiting enterprises.14 Similarly, the Los Angeles
Division of the FBI successfully investigated a local gang
involved in a check alteration scheme in which the culprits
deposited $600,000 worth of fraudulent checks into accounts at
American Savings Bank and subsequently converted the funds to
gold krugerrands.


Since its inception in 1992, the Phoenix, Arizona, Financial
In-stitution Fraud Task Force has achieved impressive results in
the fight against bank fraud, particularly check fraud. As of
March 31, 1996, this task force15 had indicted 451 subjects with
342 convictions returned.16 Various FBI field offices throughout
the country are studying the success of this particular task
force in the hope of establishing similar programs within their
jurisdictions.


The Interagency Working Group on Nigerian Crime in Washington,
DC, is cultivating cooperation among Nigerian law enforcement
agencies to help combat the growing fraud problems associated
with these groups. In July 1995, Nigerian authorities raided a
Lagos-based organization and arrested numerous locals involved in
check fraud and counterfeiting operations. The Royal Hong Kong
Police have provided great assistance to U.S. law enforcement in
tracking suspects and providing intelligence information on
fraudulent operators believed to have migrated to America.


CONCLUSION


Checks can be either stolen, manipulated, or counterfeited.
Illicitly obtained checks can be negotiated immediately, altered,
or used for future counterfeiting. Generally speaking, only
unsophisticated criminals acting alone will immediately negotiate
stolen checks by forging the signature. Most organized groups
steal checks as a prelude to more enterprising endeavors.


Bank security officials and law enforcement agencies concur that
the problems associated with check fraud and counterfeit
negotiable instruments have reached epidemic proportions. As
criminal organizations become more sophisticated in the devices
they use, law enforcement also must become more creative and
sophisticated in the techniques used in its investigations. To
meet this challenge, the battle against check fraud is best
fought through cooperation--among agencies, bankers, bank
regulators, and the public.


Endnotes


1 FBI Financial Institution Fraud Criminal Referral Statistics
for Fiscal Year 1995, September 30, 1995.
2 American Bankers Association, "1994 ABA Check Fraud Survey,"
November 30, 1994.
3 KPMG Forensic and Investigative Services, "1994 Fraud Survey,"
March 1, 1995.
4 Frank W. Abagnale, "Document Verification and Currency
Transactions Manual," Abagnale & Associates, 1994.
5 David Churbuck, "Desktop Forgery," Forbes Magazine, November
27, 1989, 246.
6 Expedited Funds Availability Act, 12 U.S.C.  4001, et seq.,
passed 8/10/87, enacted  9/1/88.
7 Supra note 4.
8 "Asian Gangs Involved in Credit Card Fraud," Intelligence
Operations Bulletin, Office of the Attorney General, California
Department of Justice, vol. 47, December 1994.
9 Check-printing companies offer a variety of counterfeiting
safeguards, such as embossing, artificial watermarks, laid lines,
chemical voiding features, warning bands, high-resolution
printing, dual image numbering, and security number fonts.
10 Steven Marjanovic, "Arizona Group Pushes Fingerprinting as a
Ploy to Deter Check Fraud," The American Banker, July 6, 1995,
10.
11 Robert Bird, Vice President, Bank of America, San Francisco,
California, remarks at meeting of the Bank Fraud Working Group
subgroup on Check and Credit Card Fraud, Washington, DC, July 19,
1995.
12 Participating agencies include the Bureau of Investigation of
the California Department of Justice; the Antioch, Oakland, and
San Francisco police departments; the U.S. Secret Service; the
Immigration and Naturalization Service; and the U.S. Customs
Service.
13 Supra note 8.
14 "V-Boyz," Intelligence Operations Bulletin, Office of the
Attorney General, California Department of Justice, vol. 46,
November 1994.
15 The task force comprises law enforcement officials from the
FBI; the Phoenix, Tempe, Glendale, Mesa, and Scottsdale police
departments; the Maricopa County Attorney's Office; the Arizona
Attorney General's Office; and the U.S. Attorney's Office.
16 Kathryn Brewer, Financial Analyst, Financial Institution Fraud
Task Force, Phoenix, AZ., telephone interview with author, April
1996.


Sidebar 1


Identifying Fraudulent Checks


To recognize check fraud, law enforcement officials must know as
much about these instruments as the criminals.


Perforation


Almost all legitimate checks have at least one perforated edge;
counterfeit checks are often smooth on all sides.
Federal Reserve Routing and Transit Number 


The routing and transit fraction number in the top right hand
corner (below the check number) should correspond to the
electronically encoded number, known as the MICR, on the bottom
center of the check. Fully 98 percent of all fraudulent checks
have an incorrect Federal Reserve transit number.


Federal Reserve District and Office


The first three digits in the MICR line represent the state and
district office to which the bank is assigned. On fraudulent
checks, these numbers often do not correspond appropriately.


Serial Number Match


The encoded check serial number on the bottom left should
correspond exactly with the check number in the top right corner.


Check Number


Low numbered checks also indicate potential fraud; 90 percent of
all check frauds involving insufficient funds are numbered
101-200.


Source:  Frank W. Abagnale, Document Verification and Currency
Transactions Manual, Abagnale & Associates, 1994.


Sidebar 2


A Typical Scheme


In September, 1994, a San Bernardino County, California,
undersheriff received a letter at his residence from an alleged
Nigerian businessman promoting a typical fraud scheme. The letter
advised that the Central Bank of Nigeria was holding $35 million
in U.S. currency, which was due to him as a foreign contractor.
This "businessman" was seeking assistance in transferring this
money to the United States and needed an American bank account in
which to deposit the proceeds. In exchange for his account number
and temporary use of the account, the undersheriff was promised
30 percent of the deposited funds for his services.


Source:  "Nigerian Schemes Continue," Intelligence Operations 
Bulletin, Office of the Attorney General, California Department
of Justice, vol. 53, February 1995.