April 9, 1996
TO: COMPLIANCE COMMITTEE No. 8-96
MEMBERS - ONE PER COMPLEX No. 27-96
RE: STOLEN CHECKS USED FOR FUND INVESTMENT
______________________________________________________________________________
The Institute has been advised of potentially fraudulent activity involving the use of
allegedly stolen checks to establish mutual fund accounts. The scheme allegedly
operates as follows. An individual steals a check while the check is in transit from the payor to
the payee. An individual submits the stolen check to a mutual fund complex with an account
application. The application is often for a corporate account with check-writing privileges. The
name listed on the account application generally matches the name of the payee on the stolen
check. The address listed on the account application, however, usually does not match the
address of the actual payee.
When the account is established, blank check drafts are generally sent to the address of
record. If the stolen investment check subsequently clears, an individual begins to write checks
drawing on the new account. Since the legitimate payor and payee on the stolen check are
generally unaware for some period of time that the check has been stolen, the shareholder is
often able to deplete the fund account without suspicion. When the legitimate payee
eventually determines that the check has been stolen, the payee often contacts the mutual fund
and requests reimbursement. We understand that several fund groups have sustained
significant losses as a result of this scheme.
In light of this fraudulent activity, provided below are number of precautionary
measures that we urge you to consider:
1. Refuse to open any accounts with third party checks. A number of fund
groups refuse to open any account with a third party check, that is, a check made payable to
someone other than the fund or fund group. This procedure reduces the possibility that an
individual will open an account with a stolen check, since the stolen checks in this scheme are
generally payable to organizations other than the fund group.
2. Refuse to open corporate accounts with third party checks. Since many
of the reported incidents involve corporate fund accounts, some fund groups have reportedly
adopted procedures to reject third party checks submitted to open corporate accounts.
3. Develop an account profile that prompts increased scrutiny of certain
account applications accompanied by third party checks. Some fund groups have established
procedures so that certain types of account applications accompanied by third party checks will
be scrutinized more carefully. For example, some fund groups routinely examine corporate
account applications with third party checks more closely. Since many of the reported incidents
have involved the use of a post office box or suite number in New York City as the address of
record, some fund organizations subject account applications with these characteristics to
additional review. Some fund complexes have established procedures so that third party checks
over certain threshold amounts (e.g., $50,000) are routinely confirmed with appropriate parties.
4. Examine account address and other application information. If a fund
group continues to accept third party checks to open fund accounts, the fund may wish to
routinely compare the address of record listed on the account application with the address that
sometimes accompanies the payee name on a check. This procedure has been one of the most
successful methods of detecting third party check fraud since many corporate checks include an
address with the payee name.
Fund groups also may wish to compare the fund account registration with the
registration on any bank accounts that are designated to receive wire transfers for any
discrepancies. Fund groups may want to investigate the social security number on a suspect
application by checking the number through a credit agency.
5. Confirm the establishment of the account with the payee. If a fund
group is suspicious about the establishment of a new account with a third party check, the fund
group can use directory assistance to verify that the telephone company listing for the payee
matches the address and phone number listed on the account application. If discrepancies exist,
the fund group can attempt to confirm the transaction with the payee at the number provided by
directory assistance.
Fund groups report that attempting to confirm information by calling the
telephone number listed on an account application is not necessarily an effective method of fraud
detection. In some instances of alleged third party check fraud, telephone numbers listed on
account applications have been answered by answering services or by other individuals using
the payee name.
6. Delay sending blank check drafts to new accountholders. In some of the
reported third party check frauds, the preferred method for depleting the fraudulent accounts is
through check-writing. Delaying the mailing of blank check drafts to new shareholders for a
period of time after an account is opened may give the legitimate payor and payee on a stolen
check more opportunity to detect the theft before the fund account is depleted.
Some fund groups will not send shareholder drafts until the initial hold period on
an account has expired or until good funds have been confirmed on the initial investment check.
At least one fund group has revised its account application so that check-writing privileges can
only
be established through a subsequent written request submitted to the fund group. At least one
fund group has concluded that check-writing capability will not be offered as a routine account
privilege on corporate accounts.
Dorothy M. Donohue
Assistant Counsel