Midrange Stuff, OS/400 Edition

Sully-Miller Contracting is completing a huge road-building and paving job at Pier 400, an expansive new 343-acre freight terminal in Los Angeles Harbor. Visible across the harbor is Terminal Island Federal Penitentiary, home for those convicted of check fraud and other crimes. Weeks earlier, more than $100,000 in fraudulent checks were submitted for payment to Sully-Miller's bank account by a well-organized check-fraud ring. Luckily, Sully-Miller had already taken steps to stop these white-collar criminals in their tracks.

Marcella Wilson, Sully-Miller's information systems manager, now gets only slightly rattled by reports of bogus checks. Several years earlier, a similar event paved the way to new paper check safeguards at the company. Now an iSeries host-based positive-pay solution from inFORM Decisions imposes a process whereby every payroll check written is individually validated upon submission to the bank.

Sully-Miller is one of California's largest road construction companies. The company, which is based in Anaheim and has 11 plants throughout Southern California, started building roads around the time Henry Ford started building cars to pack them. Sully-Miller's core business applications for accounting and job costing run on an AS/400 Model 720, which supports 120 local and remote devices. These systems are highly integrated, so they can validate payroll against job costing on a line-by-line basis.

"With the level of detail we have in job costing for jobs and equipment, it's much better to do payroll in-house," Wilson says. "There's no way we could use ADP." Checks are printed automatically and mailed weekly to Sully-Miller's 400 to 500 union and non-union employees.

In early 1989, one of the company's satellite offices was burglarized. Boxes of blank pre-printed checks were stolen, and it didn't take long for forged checks to start appearing at liquor and grocery stores and check-cashing facilities. Although the theft was immediately reported to both the police and the bank, questions arose as to who would shoulder the liability.

Shortly thereafter, in the early 1990s, changes were made to the Universal Commercial Code, introducing "negligence" and "ordinary care" as determinants of liability for check-fraud losses. Before these regulation changes, banks usually absorbed the losses from check fraud in an effort to stay in good stead with their customers. Dan Forster, president of inFORM Decisions, says, "If a bank or merchant's own failure contributes to a forged signature or alteration, then responsibility lies with them."

According to a recent American Bankers Association survey of deposit account fraud, the most common type of check fraud in 2001 was forgery, with about one-third of fraud cases and fraud losses attributed to forged signatures and endorsements. As banks nationwide began to see the frequency of check fraud escalate dramatically, Sully-Miller's financial institution asked them to install a positive pay system. "We had to do it, if we were going to continue to do business with them," commented Wilson.

Positive pay is an inexpensive auditing methodology used to control check fraud. The check-maker passes a file to its bank containing check numbers and amounts. The bank then compares that authorization file against checks that have been submitted for payment. If a correlation is made between the check number and amount, the check gets paid; if check number is not on the list or the amount is incorrect, it gets reported immediately to the check-maker. Checks are typically reconciled daily to maintain a tight link between the bank and its client. Positive pay technology also eliminates posting and encoding errors, and adjustments that are made to correct processing problems.

Since Sully-Miller already had Irvine, California, based inFORM's MICR automated check-printing solution integrated into their AS/400 payroll system, Wilson decided to approach inFORM with her positive pay requirement. "I was very happy with iChecks," she says. The iChecks increase laser-check-printing security by eliminating the need to inventory pre-printed checks. Creating checks on an as-needed basis also reduces the cost of paper, labor, and storage.

inFORM Decisions' iSeries Positive Pay is one component in the company's secure eBanking solutions suite, which includes iSeries ACH (Automated Clearing House), an iSeries-based e-commerce shopping cart, and an iSeries-resident reconciliation module. The iSeries Positive Pay integrates with any automated check-writing software product, including inFORM's iChecks solution. It enables companies to transmit check-processing information directly from iSeries and AS/400 based applications to standard bank interfaces with a high level of security and reliability.

All information pertinent to a check run is saved to a cash-handling file by iSeries Positive Pay. At a scheduled interval, the product sums check amounts and plugs this information into a report, adds a header, trailer, and font/layout template. The iSeries Positive Pay then automatically transmits this report to the financial institution, which is authorized to clear only the check listed in the Positive Pay report. "No one has to remember to do something," Wilson says.

Bisync or FTP through a secured server is the means available to communicate to the bank. Bisync has been a long-time standard for electronic banking interfaces; whereas FTP, which as been recently adopted, gives users and banks additional flexibility.

Wilson reviewed a demonstration of iSeries Positive Pay and decided that it was a good fit. "The price was very reasonable," she says. The software can be licensed for any iSeries or AS/400 model/processor configuration for $3,000. inFORM had an office nearby and offered to help Wilson install and configure the software, and in a few hours it was collecting information on payroll payments. At Sully-Miller, iSeries Positive Pay is configured to communicate with their bank over a bisync line from the Model 720's ECS modem. "This saved money on hardware," Wilson says.

inFORM's Positive Pay includes several report format templates, enabling Wilson to select one that fits their financial institution's standards. "Banks have not set a standard for the file format. For ACH, they have," she says.

Wilson was also sensitive to potential security issues within the company. She reasoned that bogus positive pay reports could be created and sent, which would place responsibility directly on her employer, according to Universal Commercial Code rules. At Sully-Miller, iSeries Positive Pay is configured so it generally cannot be accessed outside of the company's payroll system. The only reports transmitted are those generated automatically by payroll jobs, or ad hoc reports that are initiated by a limited group of users with appropriate authorization.

Can Sully-Miller now make a solid case for iSeries Positive Pay? Weeks after integrating the software into its payroll operations, several counterfeit checks were presented for payment to the company's bank account. Without confusion or uncertainty, they were immediately rejected. "The bank has rejected payments on fraudulent submissions on several occasions," Wilson says. Sully-Miller's bank lets the company go online and get a report each day of items that don't match.

Check fraud losses were estimated at $15 billion in 1999 and are on the rise. Among the reasons for the startling increase given by experts are technological advancements in areas such as laser printing, scanning, and desktop publishing software; the decreasing cost of technology; and difficulty in detection. Given that an estimated 65 billion checks are processed in the United States each year, it isn't possible for banks to visually inspect each check for authenticity. Moreover, high-speed-processing equipment used to clear checks can't discern increasingly sophisticated counterfeit checks from the real thing.

So are companies protecting themselves from fraud? All respondents to the American Bankers Association deposit account fraud survey ranked positive pay as the most effective method available for preventing fraud.

Today Sully-Miller uses inFORM's iSeries Positive Pay solely for payroll, but will soon roll it into its accounts payable system. This will further reduce Sully-Miller's exposure to fraud. Recently, a different bank used by Sully-Miller for accounts payable reported that 10 counterfeit checks--all bearing the same check number and amount--were submitted for payment in different cities throughout the country.

Robert Gast is a freelance writer with several years of experience in covering information technology. E-mail: evantgroup@aol.com