Forged endorsement scheme is a form of fraud in which an employee coverts a check by signing a third party in the endorsement line (Chapter 5, 2007). The check becomes payable to the third party instead of the intended recipient. This fraud is a unique form of forgery because it involves dealing with prepared checks, and the commission of the fraud starts by intercepting checks in the process of delivery to intended recipients. The second step is for the fraudster to forge the payee’s signature and cash it. In some cases the fraudster may need to use double endorsement, especially in situations where the payee’s identity is requested (Chapter 5, 2007).
There are various ways and situations in which employees in an organization are able to intercept checks. The role of some employees provides them with opportunities to intercept checks between the point of signing and delivery to the payee (Armstrong & Mistry, 2011). Those responsible for delivering checks in organizations are the best placed to intercept checks by picking them from outgoing mails. Alternatively, these employees can deliberately change the recipient’s mailing address to ensure that they can be able to retrieve the mail containing the check at a later time.
Employees can obtain signed checks by taking advantage of poor internal practices in handling signed checks. These poor practices include the storage of signed checks before delivery and failure to monitor the people involved in the disbursement chain. Poor storage of signed checks creates opportunities for anyone with their access to commit forged endorsement. For example, leaving signed checks on the desk creates opportunities for other employees to pick them and cash them through forged endorsement (Chapter 5, 2007). The people involved in the chain of disbursement can intercept checks by failing to deliver to complete the chain of delivery within an organization. This situation can occur when senior employees use intermediaries in delivering various documents without confirming about their delivery status. In many cases, the senior employees are misled by a belief that certain employees are honest and can assist in the chain of delivering sensitive documents. Employees responsible for handling returned checks are also in a good position to commit forged endorsement fraud because the checks are already signed but not yet cashed.
The most effective strategy to prevent Forged Endorsement Schemes is to implement internal controls on handling of checks in organization. There should be clear separation of roles in which the person responsible for requesting for payment is not involved in signing checks or delivering them. Likewise, the person responsible for signing checks should not be involved in their disbursement. The purpose of the separation of roles in handling checks is to minimize the opportunities for a corrupt employee to commit endorsement tampering on prepared checks. According to Armstrong & Mistry (2011), the fraudsters should have the motive, opportunities and rationalization. Reduced opportunity for success reduces the motivation by those involved in handling checks, and thus the rationalization to attempt tampering.
Organizations should also establish systems to ensure easy detection of forged endorsement schemes. Some cases of check tampering result to big losses because of difficulties to identify anomalies with accounts, or receiving complaints of non-payment by the intended recipients. The detection process can be enhanced by ensuring that the person responsible for reconciling accounts is not involved with handling of checks. The accounting system should be able to recognize duplicate payments and issue alerts. Also, the person responsible for receiving complaints of non-payment should not be involved in processing payments through checks. These strategies are meant to ensure that the corrupt employees are not able to cover their tracks by tampering with accounts and the system responsible for tracking payments. Additionally, organizations should be proactive in ensuring receipt of checks by the intended recipient, and this can include making random calls to confirm delivery of checks (Chapter 5, 2007). Thus, a signed check must first be intercepted for forged endorsement fraud to occur, and organizations can prevent the fraud by implementing internal controls to reduce chances of success on interception, while increasing chances of detecting anomalies in the payment system.
- Armstrong, P. & Mistry, S. (2011). Cheque fraud. KPMG LLP. Retrieved from https://www.feicanada.org/enews/file/Webinar/April
- Chapter 5. (2007). Check tampering. 130-134. Retrieved from http://higheredbcs.wiley.com/legacy/college/wells/0470128836/sample/c05.pdf