1. Cheque Fraud Partnering Session & Mitigating Fraud , Bank Offered Solutions Hosted by: Global Transaction Solutions June 23rd, 2007.

2. Introductions & Agenda
The Basics of Cash Management
Cheque fraud prevention
Mitigating Fraud , Bank Offered Solutions
Questions & Answers
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

3. Disbursement Solutions Information & Control Solutions
Cash Management Solutions
Money Flows In
Money Flows Out
Supplier Payments
Payroll
Customer payments
Company
Collection Solutions
Provides your business with greater certainty around the timing of deposits and allows you to accelerate cash inflows through increased efficiencies & alternate payment options
Disbursement Solutions
Enable your business to more efficiently manage corporate payments and increase control over the timing of payments
Information & Control Solutions
Enables your business to assign varying levels of online permissions and authorities to individual users and allow them to monitor and manage financial transactions in their current account, helping them to operate their business more efficiently and mitigate risk effectively
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

4. What is Cheque Fraud? Fraud on the front
Counterfeit - A fake cheque that has been completely reproduced or copied to resemble a legitimate or authentic cheque.
Altered - An unauthorized change to an original and legitimate cheque, such as the payee, sum payable, and date or cheque number. The alterations are made prior to being presented for negotiation.
Forged Drawer/Maker– The payer signature on the front of the cheque is not the legitimate signature (forged) of the account owner/signing officer.
Fraud on the back
Forged Endorsement - A forged payee signature on the reverse of the item (person cashing the cheque)
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

5. Evolution of Fraud The Nineties 2000… The Eighties
Fraud threat technically unsophisticated, unorganized and locally focused
Fraud threat limited to credit cards and “bad” cheques
Limited use of technology to detect and prevent fraud
Limited budgets applied to fraud effort
2000…
Fraudulent activity is controlled by organized criminal groups using highly sophisticated technology
Fraud goes global
All delivery channels and products subject to fraud
The full fraud value chain is managed under the direction of a single executive
Prevention/detection centralized
Technology spend is culturally ingrained
Benchmarking with leading US financial institutions
Development of fraud detection model to target high risk transactions
State of the art technology to detect fraud is deployed
The Nineties
Fraud threat becoming more sophisticated and organized criminal groups emerging in Canada
Debit cards and ATMs become increasingly vulnerable
Prevention and detection effort is regionalized in business silos with increased technology
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

6. Cheque Fraud Evolution
Stolen cheque stock with forged signatures
Counterfeit cheques
Altered amounts/payees
Forged and improper endorsements
How cheques are compromised?
Theft from the mail and couriers
Internal employee theft or selling of account information
Dumpster diving
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

7. Responsibility for Prevention
Cheque Fraud Detection Partnership
The Issuer
The Receiver
The Bank
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

8. The Numbers Individual items can be small to multi million.
Growth rate is believed to be over 40% year over year.
62% of 1000 Canadian Corporations surveyed have experienced cheque fraud. *
Cost to Canadian business is between $1B and $2B annually. *
Per capita fraud in the GTA is approximately $41.00 per person – equivalent to US ratios. *
One US study – company employees commit 82% of all fraud – 1/3 by management and 3 of 4 go undetected.
* 1997 Nielsen Report
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

9. Impact of Cheque Fraud in Canada
5,000 cheque fraud attempts annually totalling $300MM*
Some frauds are over $1 million
One RBC client had 10 incidents totalling >$2 million in 6 months
Business cheques are a favourite target – acceptability
As senior clients implement protective procedures, fraudsters move down market
Northbound migration of cheque fraud techniques
* Extrapolated from RBC experience
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

10. What does cheque fraud mean to business clients?
Time/expense of investigations and risk mitigation
Repeated reconciliation, Investigation, police report, tracing documents
Costs per occurrence can run to 4-figures before the write-off
Affidavits; new accounts required, new cheques to be printed
Governance issues for larger clients
Shareholder/board oversight for larger clients
Expanded audit scope = longer time = higher fees
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

11. What does cheque fraud mean to business clients?
Cheques issued
Reconciliation is complicated
Complicity investigation risks staff morale
Risk to Vendor relationship
Cheques deposited:
Revenue risk: Reluctant to accept any cheque
Loss risk: Bank may return cheque after fraudster obtains goods
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

12. How does Cheque Fraud work?
Pick a bank…
some weakness shown in the past,
does not pursue police action
Pick a company…
good reputation = high acceptability
Test the waters…
Try a small cheque
Full counterfeit
Raise the amount
Alter the payee
Try some big ones…or a really big one
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

13. Impact of Technology Scanner technology
Excellent scanners at any computer store
Printer technology
High quality laser and inkjet printers
Digital image enhancement software
Photoshop©
Barriers to entry
Hardly any… price for scanner, printer, software together <$2,000
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

14. Cheque Fraud Image Partnership
Companies
Segregated responsibilities
Risk assessment
Secure cheque stock, unissued and paid
Separate accounts for high-value
Maximize use of bank’s verification tools
Otherwise, self-verify
Bank
Mitigation tools
Positive Pay reconciliation tool
Payee Name Match
Self-verification tools
Existing Web availability of both MICR-line and images
High-volume MICR-line option
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

15. National Fraud Detection Group (NFDG)
NFDG is located in Toronto and operates 24/7
They look after the prevention, detection, and investigation of fraud for client card, cheques, online banking, and branch transactions.
Look for unusual transaction activity on a client’s account.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

16. NFDG ~ Cheque Fraud Team
Within NFDG, there is a department that specializes in Cheque Fraud.
The Cheque Fraud department has 4 teams: Kiting, Altered, Counterfeit and Endorsements
With use of system technologies, fraud detection rules, and the experience of each team member, they are responsible to detect and prevent losses due to fraudulent US and CDN RBC cheques.
Detection may occur at point of presentment or after in form of a post review.
Important to remember, NFDG will only see select items after it has been presented for payment.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

17. RBC Mitigating Risk Solutions Review
Positive Pay Cheque Matching
Payee Name Match
Cheque Imaging
Electronic Balance & Transaction Reporting
Electronic Payments
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

18. Positive Pay Cheque Matching
Daily reconciliation of all cleared cheques is one of the best defences to protect against cheque fraud.
Positive Pay is a reconciliation tool that shifts the onus for daily reconciliation to your financial institution.
An input file of cheques needs to be sent to bank when cheques are issued.
Any exception items need to be reviewed and decisioned on a daily basis.
Some banks offer automatic returns on any exception items.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

19. Payee Name Match
Payee Name Match helps provides the best possible protection against 'fraud on the face’ of negotiated cheques.
Tighten Operational Risk Control
Payee Name Match helps clients meet more stringent control and governance requirements often required by regulators*, auditors, etc.
For US-owned firms, Sarbanes-Oxley is the regulatory driver. Similar Canadian legislation is expected in the near future.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

20. Payee Name Match Protect Vendor/Supplier Relationship
We have seen in cases where Payee Name Match had identified the payee name fraud, and replacement cheques issued before the beneficiaries knew that the cheques had been stolen
Save Time, Expense And Aggravation
Handling an altered cheque becomes routine. Saves the time, expense, and aggravation of investigating an item after the fraudster received value or funds.
Your current processes for MICR-line fraud detection (Positive Pay), in-house cheque reconciliation, and stop payments are unchanged.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

21. How does Payee Match work?
Cheques must meet new CPA Guidelines and must be OCR- compliant.
Customer sends Issued Item information to bank at time of issuance
Payee Name and full Payee Address, as printed on the cheque
The image is captured when the cheque is delivered into bank clearing.
Optical Character Recognition (OCR) is used to digitize payee name and address
The cheque information is compared to issued item information
Exception cheques are presented for customer decisioning
Items are “paid” if not decisioned
option to “return” if not decisioned
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

22. Payee Name Line Match
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

23. Account Imaging Services
With the implementation of the new CPA Standards, banks can now provide access to high quality digital images of items processed through your accounts.
Access to images of cheques and deposits is convenient, saves time, allows you to provide better service to your customers, and can help minimize the risk associated with cheque fraud.
Images also provides an economical option to long term cheque storage, and for business continuity purposes.
Account Images can be delivered in the following formats:
Daily access via online reporting system.
Delivery via regularly scheduled CD Rom’s (monthly, bi-weekly, etc.).
Daily access via downloaded image file (must have an image archive system to manage images).
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

24. Balance Reporting Services
Balance & Transactions Services can also be an effective way to help protect against cheque fraud.
Often these tools are delivered via an Internet channel, and provide ongoing access to all activity through your bank accounts.
Very often these tools have some type of built in export functionality to allow you to complete your own bank reconciliation on a daily basis.
This is often the most cost effective way to complete a bank reconciliation as long as it can be completed every business day.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

25. Internet Banking vs. Cash Management Platform
Functionality
Standard Internet Banking
Dedicated Cash Management Platform
Ability to assign user permissions No
Yes
Establish payment approval rules for multiple signing officers
Export balance & transaction information to aid in automated reconciliation
Possibly, but often very limited functionality
Reporting for accounts held at different financial institutions.
Ability to add other services into platform (such as Wire Payments, etc, ACH Direct Deposits or Direct Payments)
More differences between OLB & RBC Express
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

26. Electronic Payments
The best overall option available to protect yourself against cheque fraud is to move as many cheques to electronic payments as much as possible.
An electronic payment system:
Can be significantly more cost effective than cheque issuance.
Can save time, speed up reconciliation, and provide better control over outgoing cash flows.
We have seen some clients use an electronic payment system to negotiated better trade discounts with large suppliers because of their ability to pay on any specific date.
Types of electronic payments:
Financial EDI Payments (Corporate Payments)
ACH Direct Deposits (Primarily Retail Payments in Canada, but can also be used for Corporate/Retail Payments into the US.
Wire Payments
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

27. Electronic Payment Solution
ROYAL BANK OF CANADA 123 ANY TOWN ANY CITY
Accounting System
Single Payment File
Remittance details sent to Receiver
Trading Partners
Other Banks
$$$$Payments$$$$
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

28. Considerations when Implementing Electronic Payments Strategy
Set Clear Goals about where you want to be with electronic payments in 6 months, 12 months, etc.
Review existing controls/processes for cheque issuance and ensure they are replicated or enhanced with electronic payments.
Develop marketing tools to gain buy-in from vendors, and determine who the tools will be sent to.
Consider setting specific transaction limits on an individual vendor basis for added controls.
Lock down access to fields of vendor database that hold bank account information, or segregate information for added controls.
Convert cheques written to suppliers out of Province and to US destinations first.
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management

29. Questions? CAUBO 2007 - Fraud Prevention and Risk Management
June 23rd, 2007
CAUBO Fraud Prevention and Risk Management