[Federal Register Volume 68, Number 221 (Monday, November 17, 2003)]
[Notices]
[Pages 64914-64916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28667]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4892-N-01]


OIG Fraud Alert: Bulletin on Detecting and Preventing 
Counterfeiting of Housing Authority Checks

AGENCY: Office of the Inspector General, HUD.

ACTION: Notice.

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SUMMARY: This Federal Register notice provides important information 
recently issued by HUD's Office of the Inspector General on detecting 
and preventing counterfeiting of local housing authority checks.

FOR FURTHER INFORMATION CONTACT: Bryan P. Saddler, Counsel to the 
Inspector General, Office of Legal Counsel Office of Inspector General, 
Room 8260, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC 20410-4500, telephone (202) 708-1613 (this 
is not a toll-free number). Persons with hearing or speech impairments 
may access this number through TTY by calling the toll-free Federal 
Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    The HUD Office of Inspector General is established by law to 
provide independent and objective reporting to the Secretary, the 
Congress, and the American people through its audit and investigative 
activities. HUD's OIG works to promote the integrity, efficiency and 
effectiveness of HUD

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programs and operations to assist the Department in meeting its 
mission. HUD's OIG is charged specifically with combating waste, fraud, 
and abuse in the administration of HUD programs and operations.
    Consistent with this charge, Section II of this notice presents 
OIG's recently issued bulletin on detecting and preventing 
counterfeiting of local housing authority (HA) checks.

II. Fraud Information Bulletin: Detecting and Preventing Counterfeiting 
of HA Checks Purpose

    This Bulletin highlights a recurring problem in the production of 
counterfeit Housing Authority checks across the country.

Background

    OIG's mission is to provide policy direction for HUD and to 
conduct, supervise, and coordinate audits, investigations, and other 
activities for the purpose of promoting economy and efficiency in the 
administration of the programs and operations of HUD and preventing and 
detecting fraud and abuse in such programs. HUD administers Federal aid 
to local housing agencies (HAs) that own and operate housing for low-
income residents at rents they can afford. During the course of audits 
and investigations of, and relating to, HAs, OIG has detected numerous 
bank fraud schemes victimizing HAs across the country. Examples of 
these schemes follow.

Examples

    In Cleveland, OH, fourteen individuals were indicted for conspiracy 
to defraud local banks, merchants, businesses, and the Cuyahoga 
Metropolitan Housing Authority (CMHA). These individuals allegedly 
comprised a loosely connected ring formed to counterfeit payroll and 
business checks. The ring was led by a felon with a prior uttering 
conviction. He used ``recruiters'' who, in turn, would seek out 
individuals who were willing to provide their identification, and in 
some cases, their own bank accounts, to deposit counterfeit checks 
which he made on a personal computer. The felon, the recruiters, and 
check utterers would then split the proceeds. Counterfeit check amounts 
ranged from as little as $300 to more than $16,000. Six of the 
defendants were indicted for passing counterfeit checks that displayed 
either the payroll or Section 8 account numbers of the CMHA. CMHA's 
loss estimates exceed $49,500.
    In St. Louis, MO, an individual was indicted on two counts of bank 
fraud for allegedly manufacturing counterfeit checks drawn on accounts 
of the City of St. Louis and St. Louis County Housing Authority 
(SLCHA). The individual engaged in his scheme beginning in October 2002 
and continuing until April 2003, and over $80,000 in fraudulent SLCHA 
checks were created and uttered in the St. Louis metropolitan area. 
SLCHA lost over $28,000 from its Section 8 account.

What Happens

    As part of a counterfeiting scheme, bank routing and account 
numbers of HAs are used to create counterfeit checks. Among other 
means, counterfeiters obtain the routing and account numbers from: (1) 
HA employees and vendors who receive payroll checks or other checks 
from an HA; and (2) HA residents who receive utility or other checks 
from an HA. Counterfeiters then employ personal computers, commercially 
available software, and check stock to manufacture bogus checks using 
the legitimate routing and account numbers. In some cases investigated 
by OIG, the counterfeit checks were used to buy computer equipment, 
which in turn was used to manufacture more fictitious checks.

The Problem

    Federal funds are at risk, and from an HA's standpoint avoiding 
victimization can be difficult. First, even tiny HAs have numerous 
employees and vendors who regularly receive HA checks, and it only 
takes one such employee or vendor to open an HA to fraud. Second, many 
HAs issue utility checks directly to residents via the U.S. mail. These 
residents may participate in a scheme against the HA, or their utility 
checks could be intercepted from the mail by a third party. Third, 
check stock and business check software is readily available at local 
office supplies stores. Fourth, counterfeit checks are usually cashed 
at local mom/pop stores that don't have check authentication equipment 
or protocols. Fifth, numerous false identities accompany the 
counterfeit checks, and local merchants don't necessarily have the will 
or ability to detect false identifications.

Red Flags

    An accounting discrepancy detected by monthly bank reconciliation 
performed by the HA. A discrepancy in the check stock (e.g., color, 
design) ordinarily used by the HA. Suspicious endorsements on cancelled 
checks. Unusual disbursements.

HA Responsibility. What Can Be Done?

Internal Controls
    The first step in preventing this type of scheme is for HAs to 
enhance procedures for preventing and detecting fraud and mismanagement 
(i.e., to improve internal controls). The most effective internal 
control concept is separation of duties. An ideal system of internal 
controls will separate three functions: (1) Authorizing transactions; 
(2) keeping books; and (3) handling funds. When staff size is too small 
to permit separation of duties, closer supervision is needed to 
occasionally check for problems. Other steps that can be taken to 
improve internal controls include HAs paying for all disbursements by 
sequentially pre-numbered checks, reconciling accounts receivables to 
the general ledger on a monthly or more frequent basis, reviewing 
cancelled checks for suspicious endorsements and unusual disbursements, 
and requiring timely audits.
External Controls
    Positive Pay Agreements. The most effective external control 
concept is Positive Pay Agreements (a/k/a Check Registries). This form 
of external control protects the HA from absorbing the loss involved 
with counterfeit checks if a bank fails to identify a counterfeit check 
and makes payment. Many banks will enter into a security contract 
(Positive Pay Agreements) with HAs, whereby the HAs are responsible for 
submitting electronic registries to the bank indicating checks that 
have been legitimately drawn of the HA's operating account. Upon 
receipt of the registry, the bank compares all checks received for 
payment against the registry. Any check that is not listed on the 
registry is rejected for payment. The bank makes a copy of the 
unverified check and forwards it to the HA for appropriate 
investigation. The bank returns the unpaid check to the original 
depositor and the HA will not incur a loss on the unverified check. In 
the event the bank pays a counterfeit check, the HA is not responsible 
for the amount paid out by the bank. While the registry does not 
prevent the production of counterfeit HA checks, it does reduce the 
financial loss to the HA and the Federal Government. Positive Pay 
Agreements have been an effective tool in the detection and prevention 
of check fraud. At least one bank fraud scheme that is currently under 
OIG investigation is the result of a Positive Pay Agreement detection.
    Electronic Payment Systems. HAs may also consider converting to an

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electronic payment system. By eliminating utility and/or payroll checks 
HAs will reduce access to routing and account numbers and, thus, the 
opportunity for counterfeiting. In that regard, conversion to 
electronic fund transfers for resident utilities and direct deposit of 
payroll would close off two avenues that OIG investigations have 
demonstrated allow fraud to occur.

    Dated: November 12, 2003.
Kenneth M. Donohue,
Inspector General.
[FR Doc. 03-28667 Filed 11-14-03; 8:45 am]
BILLING CODE 4210-78-P