Check fraud is a booming business. Estimated losses to banks are in the billions of dollars. In less technological times, the main method of check fraud was simple forgery—essentially, the falsification of a signature on somebody else’s bank account.
Today, check fraud is more complex. Check-fraud artists are as technologically adept as any corporate computer scientist. They are comfortable with personal computers, scanners, color printers, publishing software, and chemistry, as well as with the clearing processes of the banking industry. They can take a blank check, make multiple copies that can’t be distinguished from the original, and use them to obtain cash. Or they can steal or buy an employee’s payroll check and chemically alter it, changing the payee name, amount, and so on. Luckily, there are means available to foil most check fraud attempts: magnetic ink character recognition (MICR) laser check printing and the various elements of an MICR laser-check-processing solution that are associated with it.
There are three key elements involved in check-fraud defense: check-processing software, MICR laser printers, and blank safety check stock. The software stores check forms electronically. When a check run is required, it accepts data from financial-management software systems, formats it by merging it with the electronic form, and spools it out for printing on the MICR laser printer.
Instead of using preprinted checks, which are highly vulnerable to theft and alteration, the complete, signed checks are generated on blank sheets of safety paper that usually incorporates multiple features that resist duplication or chemical alteration. The checks are printed with MICR toner, which contains iron oxide that is magnetized and read by a specialized check reader. The printed checks include company information, logos, graphics, payee information, MICR lines (bank transfer codes, customer account number, etc.), and a signature. All of this information is held securely in the software or is housed in a secure PCMCIA card that can be inserted into a card reader option on the MICR printer.
Development of MICR
By today’s standards, business methods were primitive and mainly manual prior to World War II. The state-of-the-art business machine was the typewriter. Checks were mainly business instruments, not used universally by consumers as they are today.
After the war, business began to boom, with corresponding increases in payment volumes, and consumers also began to recognize the convenience of personal checks. By 1952, the estimated annual volume of checks stood at eight billion. Banks began to realize that their manual check-sorting procedures were no longer adequate. An appreciation for technology was in the air, and it was to technology that the industry turned.
Bank of America technologist Alfred Zipf had joined Bank of America in the mid- 1930s as a transit clerk—a check reader/sorter—and, by the early 1950s, he had become the bank’s director of equipment research. In that position, he conceived and installed the first large-scale general-purpose computing system in the banking industry, and he was its director of operations.
He was also leader of a Stanford Research Institute team that was developing MICR technology. MICR technology enables you to encode and read data in characters in which the ink or laser-printer toner has been infused with iron oxide. In the clearing process, the characters are first magnetized and then read by the reader/sorter device. The MICR characters are known as the E13B MICR font, and every check written in the United States and Canada is processed by means of the MICR coding on its face. European countries have their own MICR encoding protocol, which is called CMC7 and follows essentially the same reading/sorting procedure. A magnetic ink character reader was also developed along with MICR: the Electronic Recording Machine Accounting (ERMA) system. The sorter reduced banks’ check sorting time by 80 percent.
MICR check processing continued pretty much without change for about 30 years. Banks provided consumers with MICR-imprinted checkbooks, and electronic data processing became the norm in companies. Businesses had their checks preprinted with company information and MICR lines on continuous forms that could run through their impact printers.
By the early 1980s, the PC had arrived, followed closely by laser-printer technology from such companies as Xerox, Hewlett-Packard, and Apple. PCs opened the technology door to just about everyone, and software soon proliferated, with applications for every conceivable need, even desktop publishing. Scanning devices made it possible to input not only words but also images.
From this combination of technology emerged a whole new industry: large-scale check fraud. Now, with the technology used in business widely available to the bad guys at low cost, check-fraud artists were able to take a single check, alter it or reproduce it multiple times, and score big hits on company treasuries.
Enter MICR laser check printing. Forward-looking thinkers looked at MICR technology, laser-printer technology, and check fraud and found a connection. The idea was this: Don’t use risky preprinted forms. Preprinted forms can be misappropriated and forged.
The MICR Font
Besides the numbers 0 through 9, the E13B MICR font includes some specialized characters, each of which is actually two symbols, serving as brackets as well as signifiers for functional sets of numbers:
• The Auxiliary On-Us symbol indicates that the sorting criterion is determined by the organization that is doing the sorting on the field—usually the originating bank. It is an optional field and is used only on business checks.
• The Transit symbols and the numbers between them define the instructions on how to clear the check. They indicate such factors as the Federal Reserve district from which the
check should be cleared, the federal bank or branch in the area where the check was drawn, and the bank number.
• The On-Us symbols enclose the account number and sometimes the bank’s branch number and the check number. The format can be defined by the individual bank.
• The Amount symbols enclose the field that contains the amount of the check. It is MICR- encoded by the bank of first deposit.
Enhancing the Printer for MICR
What makes a MICR laser printer different from a conventional laser printer? The engineering required to MICR-enhance a network laser printer does not alter or modify the actual printer technology. Rather, it is a five-step process that vendors of MICR solutions perform in close collaboration with the engineers who designed the printer. The process ensures that the printers continue to function well in the more stressful MICR check- processing task and that they provide the critical security required for check and sensitive- document processing:
1. MICR toner is like other toner, but the iron oxide it contains makes it more abrasive. Durability and strength testing ensure that the printer engine can handle the tougher toner.
2. A unique E13B MICR font (United States and Canada) must be developed specifically for each model of printer. Each character must produce American National Standards Institute (ANSI) specification signal strength and positioning. While font characters may look the same on checks, viewed under magnification or by a MICR reader/sorter or tester, character and point sizes appear to be different from printer to printer.
3. MICR laser printers are used both in limited-access, totally secure environments and in open environments where one printer performs both MICR and conventional printing. Multiple security features must be developed for either situation.
Toner sensors are one essential security element of MICR enhancement. MICR-only printers, normally housed in a secure environment, are equipped with a single sensor that prevents operation if a conventional toner cartridge is inserted. Printers that handle both MICR and non-MICR printing include a second, non-MICR sensor and a three-position key-lock switch that enables conventional printing.
Font cartridge security is the other major element, and this is maintained by digitizing not only the font but also the customer’s corporate information, logo, MICR line(s), and signatures and placing the information on a removable PCMCIA card. Inserted in the printer, the information is placed in memory when the check stream enters the printer. Some types of printers have no provision for removable media, so some vendors have developed an external PCMCIA card reader that attaches to the printer’s parallel port. At the conclusion of the print run, the PCMCIA card is removed and stored securely.
4. The printer’s fuser temperature is critical to the MICR toner’s adherence to the check stock. Reengineering a laser printer for MICR includes testing and adjustment until toner- fuser temperature performance satisfies specific adherence test criteria.
5. Once the MICR enhancement has been completed, the MICR solutions provider tests the printer in various ways. In one stress test, for example, 3,500 checks are run through a reader/sorter 20 times, analyzing the quality of the printing before and after each run. This analysis examines formatting, character spacing, and any other problems that might be
identified on checks rejected by the reader/sorter. ANSI specifications require a reject rate of less than 1 percent, and some vendors are even more stringent.
There are several other tests:
• Software compatibility testing to ensure that check processing continues to work with all financial management software
• Printer driver testing
• Paper path and stock testing, including weights, bonds, and paper sizes
• Accessory testing, such as high-capacity feeders, duplex units, envelope feeders, and output devices
• Customer-requested devices and features
• Preliminary testing and recommendations on special requirements proposed by customers
• Beta testing with selected customers, often on a day-to-day basis, to determine the viability of the product under actual MICR laser check production
MICR toner has regular toner as its base, but iron oxide and other ingredients, such as charge agents and resins, are added to make it conform to the standards established by the ANSI and the American Bankers Association. Because each laser printer engine is unique to its model, MICR toner must be formulated specifically to work with each model of printer in order to ensure that the signal strength is not only correct but also retains its readability as it moves through the various clearing procedures. Moreover, it must have strong adhesive characteristics because a common fraud practice involves lifting characters off the check with adhesive tape and replacing them. Ideally, MICR toner is used with printers that have been enhanced for secure check processing, but there are toner kits available to enable MICR check processing on non-MICR laser printers.
By far, the greatest amount of check alteration is based on a bleaching process to remove the printing on checks. Treating paper so that it is difficult to remove or change the toner ink from laser-printed documents is a standard feature. Additional standard features include Brownstain, which causes a brown stain to appear when activated by a chlorine-based eradicator; fluorescent fibers, which appear only under ultraviolet light; and a diagonally positioned artificial watermark, which differentiates the new stock from the predecessor product, which had horizontal watermarks.
Check Protect stock features a chemical stain, which causes a multilingual “VOID” (in English, Spanish, or French) to appear when chlorine bleach-activated. It also carries the diagonal watermark.
Connecting Laser Printers to the AS/400 Environment
IBM AS/400 users converting from conventional MICR check processing (with impact printers and preprinted forms) to MICR laser-check-printing solutions are confronted with a communications technology dilemma: Should they go directly to the printer, or should they access the printer through a local area PC network server?
There is a compatibility problem in connecting the AS/400 computer directly to a laser printer. The problem arises because the EBCDIC data streams produced by AS/400
computers are mostly intended for output to online printers. These printers communicate with the computers over twinax cable, as do their computer terminals. Laser printers do not do EBCDIC or twinax. They do ASCII, communicating via Ethernet, Token-Ring, or other PC network protocols using parallel cables.
Historically, bridging the AS/400 environment over to the PC environment and making MICR laser check printing possible has required laser printer controllers. These are small boxes with a twinax or Ethernet interface on one end and a parallel interface to a parallel printer cable on the other. Between the two interfaces, the IBM code is changed into the ASCII code that laser printers understand.
While protocol converters are still in widespread use, newer technologies have begun to replace them. For example, newer releases of OS/400 have built-in networking capabilities, which enable the machines to spool data streams directly to Ethernet-connected devices. It is estimated that some 60 percent of AS/400 shops now connect to laser printers with IP addresses on Ethernet networks and that perhaps another 20 percent are Ethernet- enabled.
Another alternative to twinax is IBM’s Client Access, which allows AS/400 sessions to be performed on a PC. In check-processing operations, users can activate the check run and print the checks directly to the printer from the PC.
What is the best solution? Often, it is the one that is easiest to implement and fits best into the overall IS topography.
MICR in Three Easy Lessons
There are three important lessons in any discussion of MICR laser check processing. The first, which impacts the financial side of the house, is that MICR laser check processing is a systems approach to the pervasive problem of corporate check fraud, combining a number of elements to produce a highly effective solution. The second, which directly impacts the IS department, is that it is a highly efficient, secure solution that can, if desired, transfer full control over the process to the payment-originating departments. The third lesson is that it is relatively easy to implement. Check forms and accounts are implemented in software using pilot or existing forms as a basis, and a tape is provided that can be read directly into the AS/400. From there, it is a virtually automatic process.