How likely is it that check fraud could happen to your organization? The following case shines a spotlight on control gaps, as well as drawbacks of checks. Would the same thing have happened with card payments? Keep reading to learn about the crime (the AP perpetrator is currently awaiting sentencing), the control that not enough organizations are using, and what might have occurred if the payment fraud vehicle had been a Commercial Card. 

The Crime

As reported by KSTP-TV, Teresa Garin, former accounts payable supervisor for Hamline University in St. Paul, Minnesota, pleaded guilty last month to felony-level theft by swindle. Between August 2015 and February 2017, she stole nearly $160,000 in approximately 70 university checks, mostly written out to fake vendors that she created. In addition, she had cashed checks made out to legitimate vendors and, when they inquired about late payments, she cut duplicate checks to pay them. 

The university was alerted by their bank, which had noticed checks being deposited into Garin’s personal bank account. A police investigation ensued. Upon getting caught, Garin admitted to the scheme, saying she used the money to pay off bills, help with living expenses, and provide financial assistance to family members. Yes, she was fired. For details, read the article published by KSTP.

Control Gaps

As always when reading about internal fraud, I contemplated what might have allowed the crime to occur, such as:

• Lack of separation of duties for 1) setting up new vendors and 2) cutting checks, including duplicate checks; it appears she could do everything on her own

• No usage of the Payee Name Positive Pay service, which would have prevented her from cashing checks to legitimate vendors; see definitions below

Per AP Now’s 2017 Payment Attitudes Survey (www.ap-now.com), approximately 20% of respondents’ organizations are not using Positive Pay and/or Payee Name Positive Pay. Yet, it is one of the best things an organization can do to fight check fraud—besides scaling back on checks altogether.

Definitions  

Per 101 Best Practices for Accounts Payable by Mary Schaeffer:

• Positive Pay is a service offered by most banks. As part of the service, companies transmit to their banks their check issuance file each time checks are written. The file contains a list of check numbers and dollar amounts. When a check is presented for payment, it is matched against the file. If there is a match, the check is honored and the check number removed from the file. If there is no match, the check is handled according to the preset instructions from the company.

• Payee Name Positive Pay is an enhanced product that includes the payee’s name along with the check number and dollar amount in the file sent to the bank.

What About Cards?

Let’s imagine if Garin tried to accomplish a similar thing with a card. She was after cash, but, assuming an MCC block on cash/ATMs, this would not have been a good option for her. Further, setting up fake vendors to pay via a card (in order to obtain cash) would have been difficult. Even if she went the Square route to pay herself, she would have to provide personal information as part of the set up process.

If Garin made personal purchases with a Commercial Card, the key control would be manager oversight to spot issues. If her manager missed something, then effective auditing would be next. Another detective control is reports. As a program manager, I found value in the following, which would have quickly put Garin on my radar.

• “New Vendors” report showing the first time a particular vendor was used

• Report highlighting vendor spend; for example, when YTD P-Card spend with a vendor reached or exceeded $5,000

Final Thought

Does Hamline University use cards? With 70 checks totaling roughly $160,000, the average amount per transaction is just under $2,300. This is a prime target for P-Cards, which offer notable benefits and stronger fraud protection (e.g., liability waiver insurance). It is time for every organization to actively reduce check payments and expand electronic payments, including Commercial Cards.  

About the Author

Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more…

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