Fifteen questions about MICR, Check 21, and fraud

Yes. The Federal Reserve modified Regulation CC, but the requirement itself is unchanged. Checks and substitute checks, also called image replacement documents or IRDs, are legally required to include a magnetic code line in order to be treated as a cash item for processing in the United States payment system.

MICR stands for magnetic ink character recognition, and it describes the characters along the bottom of a check. They are standardized fonts printed with ink or toner that contains magnetic material.

As checks move through processing, reader/sorter machines identify the magnetic toner and recognize each character by its magnetic strength, which translates into fields. All check fields must use MICR toner for efficient processing. Standard toner causes rejection, and fines to the issuer.

The American Bankers Association (ABA) and the American National Standards Institute (ANSI) establish MICR specifications, and the Accredited Standards Committee (ASC) X9 Financial Services reviews them periodically. We hold membership on the ASC X9B Committee on Paper Payment Systems.

Printing onto blank stock removes the expense, the inefficiency and the risk of purchasing, storing, distributing and tracking pre-printed check stock. Blank stock does not become obsolete when an address, an account number or a logo changes.

One stock also handles varied MICR applications such as loan coupons, depository transfers and starter checks, without a separate pre-printed form for each one.

A standard printer running a MICR cartridge is a risk, given how rigid MICR specifications are and the fees that follow non-compliance.

A printer built for the application is engineered around it: certified E-13B and CMC-7 fonts, a low toner warning with an automatic stop, paper tray locks, and datastream encryption. Our MICR printers also include toner we formulate ourselves and a MICR Performance Guarantee against bank-imposed fees, when they are used with approved supplies and maintenance.

Yes. ANSI X9.18, approved by the ABA, recommends 24 pound paper and specifies what the sheet has to do.

What the standard asks for

• Sheffield smoothness between 120 and 150.
• Moisture content of 4.5%.
• Moisture-proof package wrapping.
• No fan-fold cut-sheet paper.
• No ferromagnetic material in the paper.

Check fraud costs American companies billions of dollars each year, which raises bank costs and vendor prices, and it costs victims directly through losses and reputational damage. It affects businesses of every size.

Uniform Commercial Code reforms place responsibility for prevention on the issuer, requiring due diligence and security measures.

The ABA attributes the increase to the availability of sophisticated, low-cost technology, including laser printers and desktop publishing software. Color copiers let criminals mass-produce counterfeits.

Checks are copied, the amount and the payee are altered, and the item is then cashed with false identification. Organized groups create as many as 40 to 50 bogus checks from a single copy of one good check.

Corporate payroll and accounts payable are common targets. All business types and sizes are vulnerable.

The measures divide into what you control inside your own organization and what you arrange outside it. Neither half works on its own.

Inside your organization

• Review bank statements regularly, and keep authorized signers separate from the people who reconcile the account.
• Run background checks on staff who handle vendors, check issuance or reconciliation.
• Assign at least two people to accounts payable.
• Store check stock securely, and verify that boxes arrive unopened.
• Change access keys and codes periodically.
• Require vacations for staff with financial access.
• Run surprise audits.
• Understand your bank contract and your liability under the Uniform Commercial Code.

Outside it

• Use bank services such as positive pay, expedited returns and signature verification.
• Buy blank safety stock from an established vendor.
• Reconcile disbursements and deposits regularly.
• Close an account immediately if it is used fraudulently.
• Do not use a refund account as a check source.
• Store or destroy canceled checks properly.
• Do not give account numbers to people you do not know.
• Compare payroll checks against current employee records.
• Verify transfers between accounts and to new vendors.
• Review canceled checks and endorsements monthly.

The UCC sets out responsibilities for banks and companies handling check fraud. It was updated in 1993 and adopted by all 50 states, and that update moved responsibility for prevention from banks alone to businesses and corporations, requiring shared safeguards.