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Checking Account Fraud Is Increasing

Automated Payments Give Rise to Scams

By Caroline E. Mayer and Griff Witte
Washington Post Staff Writers
Monday, July 19, 2004; Page A01

When Shereen Greene recently scanned her bank statement, she found a $139 charge from a company she had never heard of -- Pharmacycards.com.

The Atlanta paralegal dug out her canceled check and easily saw it was fake. The name on it was her maiden name, which she had not used in seven years. The address was five years old and her signature was missing. In its place, was a brief message: "Authorized by your customer. No signature required."

"This is the e-commerce equivalent of a mugging," said Howard Beales, director of the FTC's consumer protection division. (Lawrence Jackson -- AP)

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Still, the numbers at the bottom of the check belonged to Greene's bank account, and in the increasingly automated world of check processing, that was all that mattered.

Greene is one of the latest victims of checking-account fraud. In her case, it was a large-scale scam that tried to extract $12 million from 90,000 bank accounts, according to a lawsuit filed by the Federal Trade Commission in May.

"This is the e-commerce equivalent of a mugging," said Howard Beales, director of the FTC's consumer protection division.

Such scams are on the rise, partly riding the huge increase in the volume of automated checking account withdrawals and deposits as part of the nation's wide acceptance of online banking. The system that processes all these requests is now clearing 10 billion electronic transactions a year as consumers abandon paper checks to have their payroll or Social Security funds deposited directly to their accounts or have many of their bills -- such as their mortgage, monthly gym fee or telephone bill -- automatically debited from their accounts.

Regulators at the Federal Reserve issued a warning to banks last year citing "alarming changes" in the automated check-clearing process, in which "dishonest persons are using the automated clearing house to originate unauthorized debits."

Some scammers are also using sophisticated and cheap technology to print checks and take advantage of a banking practice that allows companies to write unsigned, paper checks on a consumer's behalf for one-time transactions, such as when a consumer wants to pay a bill at the last minute or buy from a telemarketer.

Through these unsigned checks and automated withdrawals, thieves can seed thousands of bogus payment requests into that huge system, which was built on the underlying belief that the money in an individual's account is not available without the customer's permission. Crooks who find their way into that flow can walk away with millions without having so much as a phone conversation with the people they are defrauding.

Banks are supposed to refund any unauthorized withdrawals, but there are fewer consumer protections than there are for fraudulent credit card charges. It is not always easy to convince a bank that a charge is fraudulent, since banks often argue that using the correct account number is proof it was authorized, consumer advocates say.

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