Technology has made it easier and less expensive to produce high-quality fraudulent checks. While e-commerce helps to mitigate the risk of fraudulent checks, few local governments conduct business without issuing at least some paper checks.
Positive pay and reverse positive pay are two methods of deterring check fraud. They work by comparing checks presented to the municipality's bank for payment to a file containing data about what checks have been issued. Since checks must exactly match the information on file, the dangers from stolen account numbers and altered checks are minimized.
Positive pay is the more highly recommended practice, because it offers a greater degree of protection against bad checks. The municipality prepares a data file containing payment information such as check number, amount, and date of issue, and transmits the file to the bank. The bank then compares each check they receive for payment to ensure it matches what was issued by the municipality. If there is a discrepancy, the bank notifies the local government, which determines whether or not the check should be honored.
Reverse positive pay works in a similar manner, but the verification is done by the municipality, instead of the bank. The bank compiles a list of checks presented for payment and transmits this information to the municipality. The municipality then compares this information to its records and determines what should or should not be paid.
Not all banks offer positive pay or reverse positive pay services, and there may be a fee involved. Also, you will need to find out from the bank whether or not it requires specific software and other details of its file transfer procedures.
In addition to positive pay or reverse positive pay, there are a number of easy steps you can use to protect yourself from check fraud. The Government Finance Officers Association (GFOA) has a list of recommendations for check fraud protection, including the use of check stock with security features, securing forms and printers, and setting dollar limits for individual checks. GFOA's guidelines [pdf] are posted on their website.