Crain’s New York Business

November 2000

THIEVES GET MORE BANK FOR BUCK:
Check fraud is easy to commit, notes investigator Michael Kessler, and proliferating electronic detection systems have weak points.

Checkmate
Institutions help D.A. snare local fraud ring; need steel resolve to fight $2 billion problem

The Manhattan district attorney’s office is closing in on a criminal gang that has written more than $1 million worth of bad checks on New York banks.

With the help of at least six of the region’s major banks, the New York Police Department and the state Department of Motor Vehicles, “Operation Facelift” has uncovered the group that has been preying on more than 200 unsuspecting bank customers.

“This particular ring has been stopped,” says David Woodcock, security officer for GreenPoint Bank in Manhattan. “But there are a lot of them operating out there, and they are a major problem to us all.”

Check fraud, especially the counterfeiting of checks and the opening of new accounts in order to cash spurious checks, is becoming an ever-bigger headache. Such fraud has doubled to $2.2 billion in 1999 from $1.1 billion in 1997, according to the American Bankers Association.

Newer technologies, like desktop computers and laser printers, are making it much too easy for sophisticated groups to counterfeit checks. And tactics like Dumpster diving, which involve digging through banks’ trash cans, are being used to obtain customers’ names and account numbers for unscrupulous purposes.

“You have to have eyes in the back of your head, because there are always innovative fraud situations developing,” says Mr. Woodcock. “New York never fails to disappoint us.”

Experts say that these organized rings have made major attacks on New York’s big banks. They study the institutions they are targeting and use the Internet to gain more information about customers.

Infiltrating banks

“Those groups talk to people in banks,” says Charles Bock, director of fraud prevention and investigation at Chase Manhattan Bank. “They try to develop relationships and associations. They learn practices and procedures, and then they say, ‘This bank does not have its act together.’”

Once they have obtained the identities of bank customers, these criminal rings use the information to open fraudulent checking accounts. The gang that is currently targeted by the district attorney’s office, for example, used hundreds of phony driver’s licenses to open accounts all over the city, according to Mr. Woodcock.

Other institutions participating in the sting included Astoria Savings Bank, Citibank, HSBC Bank, Dime Bancorp and European American Bank, a security official says.

Mr. Woodcock says that the investigators were able to identify some of the so-called “passes,” who were used to cash the checks. After these individuals were arrested and questioned, law enforcement officials were able to get to the ringleaders.

“Passes usually don’t know anything about the guys who run the rings,” Mr. Woodcock says. “But in this case, they did.”

One popular scheme many of these groups use is to steal company and government checks from the mail, produce perfect computer copies and cash them under other people’s names through the bank accounts they have obtained.

Michael Kessler, a private investigator and head of Kessler International in Manhattan, points out that the thieves are long gone by the time the company or the government reconciles its ledgers and contacts the bank to complain.

“Check fraud is an easy fraud to commit,” he says. “There is no violence involved.”

Others blame lax prosecution against white-collar criminals for the rise in check fraud. “You have a problem with law enforcement to some degree,” says Nessa Feddis, senior federal counsel at the American Bankers Association. “Who would you rather meet in the back alley: a white-collar criminal, or a person who murdered somebody?”

The bankers association says that banks lost $679 million in 1999 due to check fraud, up from $512 million in 1997.

In addition to facing big losses from check kiting, banks are being hit with the growing expenses associated with fraud prevention. “It’s not only the cost of losses, but also the cost of remedial measures that you have to put in place to combat this kind of thing,” says Mr. Woodcock.

Besides staffing up security departments to detect fraud, banks are working closely with law enforcement officials. Mr. Bock of Chase says that he has frequent meetings to discuss the latest fraud trends, which, he adds, often originate on the West Coast.

Suspicious patterns

And more and more banks are implementing sophisticated systems that alert them to suspicious patterns. Mr. Woodcock says that GreenPoint has an electronic system that sends warnings to all of its branches in a flash.

But Mr. Kessler, the investigator, is skeptical. “That software is only as good as the information that you put in,” he says. “If the information is not accurate or there is a change in the pattern, the software can’t pick it up.”

In the meantime, check fraud rings have been diversifying into other areas. Once they have stolen a bank customer’s identity, it is easy for them to fraudulently obtain credit cards and other financial tools.

“They apply for loans in other people’s names,” says Mr. Woodcock. “We’ve even had situations where people applied for mortgage loans. It’s an area of great concern to us.”

Auto loans are another field where fraud is growing. Dean Naum, investigative manager of corporate security at HSBC Bank in Manhattan, says that there have been many cases in which unsuspecting individuals were informed they were behind in payments for auto loans of as much as $20,000 for which they’d never applied.

While these new kinds of crimes are on the rise, old-fashioned bank robberies are declining. “Those days are gone,” says Mr. Bock. According to the American Bankers Association, the number of bank robberies fell to 6,988 in 1999 from 7,876 in 1997.

Security officials point out that bank robbers are taking a risky approach that produces little cash and has a high failure rate. On average, such thieves steal only $2,200 and have a 70% chance of being caught.

That’s because institutions have set up a number of defense systems, such as installing “bandit barriers,” to keep robbers from jumping over the counter; employing guards, who are constantly on the watch for suspicious behavior; and setting strict limits on the amount of cash available.

Also, banks routinely slip dye packs into stolen money. These cover robbers in a cloud of red dye, making them easy prey for the police.