Cheque Theft – Stealing Business Cheques

What is Occupational Fraud?

Occupational fraud is fraud committed by an employee on an employer in the course of their employment. They are more common and cause more financial loss to businesses than frauds committed by third parties. As employees will continue to work at the business, they will generally try to hide these frauds permanently, meaning that occupational fraud can be committed over an extended period of time.

What is cheque theft?

Employees may have the opportunity to steal the cheques as they flow through the business system. There are two types of cheques in the system:

1. customer’s cheques coming in; and
2. the business’s cheques.

Theft of the customer’s cheques as they come into the business (from sales or debtor collection) is covered in the papers on Skimming. This paper deals with the theft of the business’s own cheques.

Major Headings

Description of Cheque Theft

1. Do they steal a blank cheque or a cheque made payable to a supplier?
2. How do they steal a cheque?
3. Who do they make the cheque out to?
4. How do they get the cheque signed?
5. How do they hide the fraud?

Lessons to be Learned
Prevention and Detection

Description of Cheque Theft

A business’s cheque book or cheque preparation process needs protection from dishonest employees. Relying on the use of authorized signatories on cheques is not an adequate control as those signatures can be forged. Employees can steal blank cheques or cheques made payable to another party before they are mailed and forge signatures to a higher enough standard that they will pass the bank’s scrutiny.

In theory the cheque theft is easy, but as the employee conducts this fraud, they must ask themselves the following questions:

1. Do they steal a blank cheque or a cheque made payable to a supplier?
2. How do they steal a cheque?
3. Who do they make the cheque out to?
4. How do they get the cheque signed?
5. How do they hide the theft?

1. Do they steal a blank cheque or a cheque made payable to a supplier?

Employees can steal blank cheques or cheques already made out to another party. Both of these cheques have benefits and problems.

(a) Blank cheques are just that – blank. The employee can make the cheque payable for any amount, to anyone, on any date, and use the cheque at any time.

The problem is that a signature will have to be forged onto the cheque. Without a believable signature, or two if required, it is just another piece of paper. The fraudster must decide between forging the signature, or having an authorized person sign the cheque believing that it is a legitimate payment (see Billing schemes).

Given the amount of cheques processed by banks every day, the chances of a decently forged signature being discovered is probably remote. As long as the forgery is not traceable back to the fraudster, there is limited chance of the forged cheque being traced back to the employee even if the forged cheque is discovered. But the cheques need to be cashed or given to someone for a purchase, and this process may prove difficult to do with anonymity.

But this may be better than stealing a pre-completed cheque.

(b) Cheques made payable to other parties are already signed may be stolen before they are given to the intended recipient.

But, the cheque is made payable to someone else and is useless without changing the payee or forging an endorsement. The cheque is made out to a specific amount and on a certain date. These may need to be altered before use, or the fraudster will be stuck with those particular details. Finally, someone is expecting to receive that cheque and will ask questions when it is not received. This fraud will be discovered.

2. How do they steal a cheque?

This is usually the easiest part of the fraud. Do be able to determine how easy that could be, business owners can answer the following questions:

  • Where are cheque books or cheque stock kept, particularly after hours?
  • Who has access to them?
  • Who enters the information from the cheque book into the business records?

Stealing a blank cheque may be as easy as taking a cheque out of the cheque book, or blank cheque stock from a cheque printer (gaining access to the cheque printer after hours). Unless there is some form of physical security, anyone can steal a blank cheque.

Stealing signed cheques is more difficult and usually has to be done by someone in accounts payable or mailing area before they are mailed out. They may be the only employees that have physical access to the cheques before they are mailed. Of course, anyone may be able to steal them if they are left on someone’s desk overnight or are otherwise accessible. Physical security is also important to stop these thefts.

3. Who do they make the cheque out to?

The cheque has to be payable to someone, and there are three possibilities. The fraudster may make the cheque out to:

1. themselves;
2. cash; or
3. a third party (whether an accomplice or not).

Making the cheque payable to oneself is not be the most sensible course of action. Anyone giving the cheque even a cursory glance will probably guess that something is wrong and examine it more closely. Even if it is not seen before it is used, obtaining a copy of the cheque will lead any investigator to the employee.

Making the cheque payable to cash is better. If found, the cheque cannot be traced back the employee as it does not have a name on it. The cheque will have to be cashed and this is a place that the employee could be caught or leave an identity trail. Once it has been converted to cash, there is no way of tracing the money. As many businesses have policies against making cheques payable to cash, if the cheque is discovered after it has been cashed, it may be obviously that it was part of a fraud.

The cheque may be made payable to a third party, whether they are an accomplice or innocent. The cheque is used to purchase something that the employee wants, but in the name of the business. Smart employees will not want to purchase something that has to be delivered somewhere, as that would leave a trail to an address. If the cheque is examined, only the third party will be found as they are named on the cheque. The fraudster will want to ensure that there is no link between them and that third party, or that the accomplice has his story straight.

4. How do they get the cheque signed?

How the fraudster gets the cheque signed is dependent upon what type of cheque is stolen, and where they work in the business process. If they are authorised to sign the cheque himself, this part is easy, the theft just needs to be hidden.

If the employee steals a blank cheque and does not have authority to sign it, they are left with the options of either forging a signature themselves or attempting to pass the cheque through the business’s usual authorization process. It is more common to forge a signature. If the cheque has already been signed, the fraudster may forge an endorsement to themselves or to a third party.

An alternative to endorsing the cheque is changing the name of the payee on the face of the cheque, making the cheque payable to either oneself or to a third party. In this case, a third party may become suspicious if they are given an altered cheque. The old name may have to be completely removed from the cheque and a new name inserted. This is possible, but ‘washing’ cheques takes skill. Of course, the original party is still expecting the cheque and will ask questions when they do not receive it.

5. How do they hide the fraud?

The problem with stealing cheques made payable to other people is that these other people are expecting to receive their cheque. They will eventually ask questions and this will usually start a review. A quick examination of the system should find the cheque was issued. That cheque can then be searched and the trail discovered.

A stolen blank cheque will be discovered in the normal bank reconciliation process unless something is done to put a believable entry in the banking records. If the fraudster is the person that updates the business records, the fraud will be easy to hide. An entry can be placed somewhere in the system to balance the bank account with the general ledger – similar to a billing scheme – and the reconciliation will balance. In small businesses, where no audits are performed, the fraud is likely to go unnoticed.

If the employee is not authorised to place entries into the business system, they may be able to hide the fraud by making the cheque appear as a legitimate payment by creating the documents that indicate that it is an authorized payment, thus causing an entry to be made. This is the reverse of a billing fraud where the transaction leads to the payment, but the theory is the same. Once the cheque has cleared and, if the documents show an authorized payment, the payment will be considered legitimate.

If the employee cannot control the reconciliation or cause entries to justify the payment, they may still be willing to commit the fraud, knowing that it is likely to be noticed. They will not make the cheque payable to themselves or to an accomplice, but make the cheque payable to an unknowing third party. The employee will use the cheque to purchase something that can be collected and carried away, or will have it delivered to a false address, so that there is no trail back to them. This is the most risky version of this fraud.

Lessons to be Learned

1. Your cheque book or blank cheque stock may be stolen.

2. Signed cheques made payable to suppliers and creditors can be stolen and misdirected. Just because you have signed the cheque does not make it safe.

3. Being able to detect the fraud after the event may not deter an employee from committing it, as long as they believe that it will not be traced back to them. Detecting it may not mean uncovering who did it.

4. Hiding the fraud may be easy if the fraudster is in charge of reconciling bank statements and making the necessary entries into the businesses records.

Prevention and Detection

Some things to look for

(i) Cheques that have not been entered into the records and are discovered during a bank reconciliation may indicate that the cheque has been used improperly. They certainly should indicate a transaction outside the normal approval process.(ii) Cheques that are not cleared in sequence or that are missing from the bank statement where cheques numbered around that cheque are cleared, may indicate a cheque that has been stolen and the perpetrator is waiting to use it.

(iii) Blank cheque butts are always suspicious. Computerized payments systems and cheque printers reduce this problem.

(iv) Creditors and suppliers complaining about not receiving their payment, when your system shows that the payment has been made. This may be an indication that the cheque has been diverted, especially when it has been cleared by the bank.

Some basic controls

(i) Regular bank reconciliations by someone that does not have other duties in the payments area of the business. This is basic separation of duties.(ii) Physical control over cheque stock is important. Some cheque writing software have controls over the production and recording of cheques, but cheque stock needs to be protected.

(iii) Reconciling cheques that have cleared the bank account with the authorized documentation may show cheques that were not properly authorized. This process should be outside the usual bank reconciliation process – as it may be that person that is committing the fraud.