Check Fraud 101

Check fraud is incredibly widespread. In fact, because there are so many different types of check fraud, no one has the exact numbers on how many people are affected or how much money is lost each year.

However, a 2016 global fraud study indicates that the typical organization loses 5% of its revenue every year due to fraud. The biggest culprit in these losses is asset misappropriation, and in that category, check tampering and billing schemes accounted for the biggest threats. Banks and other financial institutions face a heightened risk of these losses, and you need tools in place to protect yourself.

DEFINING CHECK FRAUD

Check fraud refers to any efforts to obtain money illegally using paper or digital checks. This can include someone writing a bad check on their own account, forging a check in someone else’s name, or drafting a completely fake check. But it can also include countless other types of fraud using checks.

Additional Resources:

FAQs About Check Fraud
101 Facts About Check Fraud

THE HISTORY OF FRAUDULENT CHECKS

Although they have changed a lot over the years, checks in some form or another have existed since ancient times, and as trade spread from the Middle East into Europe in the middle ages and even more through the colonial era, checks became increasingly popular because they offered a convenient way to carry large sums of money. In contrast, bags of coins were cumbersome and subjected merchants to the risk of theft. However, fraud always plagued checks, and modern checks were developed around the idea of trying to thwart fraud.

Additional Resources:

6 Infamous Check Fraud Scandals
History of Check Fraud

IDENTIFYING TYPES OF CHECK FRAUD

Check fraud may be committed by your customers, or it may be perpetrated on your customers by thieves or scammers. Here are examples of some of the most common types of fraud:

Paperhanging — When account holders purposefully write bad checks on their accounts.
Check Kiting — When an account holder writes bad checks from their own account and deposits them in another account to create the illusion of a balance of the second account.
Check Floating — When an account holder writes a check to another person or an individual, often in an attempt to buy a little time before they deposit funds into their account.
Check Forgery — When someone forges an account holder’s signature on a check.
Check Theft — When someone steals someone else’s paper check. Then, they use it to pay for goods or services, they deposit it in their own account, or they try to cash it over the counter at your bank.
Identity Check Theft — When someone opens an account in someone else’s name and writes checks from it.
Chemical Alteration — When a thief uses chemicals to erase the ink on a check so they can write something else. For instance, a thief might steal a check from a mailbox, erase the name of the intended recipient, write their own name, and cash the check. Alternatively, a scam artist may change the amount on a check using chemical alteration.
Counterfeiting — When a scam artist steals someone’s checking account information and prints a bunch of checks to use on their account.
Money Order Fraud — With money order fraud, the scam artist convinces the victim to give them a check in exchange for a money order, but when the victim deposits the money order into their account, they discover that it’s fake.

This is just the beginning. Thieves are always working on new ways to use checks in fraudulent ways.

Additional Resources:

Check Fraud Glossary
What is Check Kiting?
How to Spot a Forged Check

FLOATING CHECKS FLIRT WITH DANGER

Unfortunately, many banking customers see floating checks as an innocuous activity. Often, they don’t think much of writing a check a day or two before their paycheck or other deposit hits their account, but contrary to some beliefs, check floating can be very dangerous for financial institutions. In some cases, scam artists use the float time to engineer extensive scams that can lead to significant losses for financial institutions and their customers.

Additional Resources:

Dangers of Floating Checks

THE ECONOMIC IMPACT OF COUNTERFEIT CHECKS

Every year, scam artists draft millions of counterfeit checks worth billions of dollars, and financial institutions, merchants, and banking customers all face costs associated with counterfeit checks and other types of check fraud. To protect your financial institution, you need to understand popular check scams and have tools in place to identify counterfeit checks.

Additional Resources:

How to Reduce the Cost of Check Fraud
How Check Fraud Can Harm Your Bank

CASHIER’S CHECKS AND MONEY ORDER SCAMS

Sometimes, rather than using checks, scam artists use cashier’s checks or money orders to steal money from banks or victims. Although these scams take a variety of different forms, they often focus on convincing the victim to accept a large cashier’s check in exchange for giving the thief some cash. Once the victim realizes the cashier’s check is a fake, the scam artist is long gone with the victim’s money.

PENALTIES FOR CHECK FRAUD

When people commit check fraud, they can face a range of penalties from fines to jail time to paying restitution to their victims. Typically, as the checks become larger or the assets obtained become more significant, the penalties become more severe. In most cases, check fraud is a state crime, but in some cases, check fraud can fall under federal jurisdiction.

Additional Resources:

Check Fraud Penalties

HOW TO DETECT CHECK FRAUD

Ideally, you should have tools and processes in place that help you detect check fraud before it gets out of control. Bank tellers should know how to visually assess a check for signs of fraud, but you should also invest in machine learning software that can identify fraud flags based on the look of the check, its signature, and various other factors while also taking into account the customer’s usual spending habits and looking for aberrations.

Additional Resources:

Check Fraud Detection and Prevention
What Should Be Verified on a Check Before Cashing?
How Automated Check Image Analysis Works
How to Spot a Forged Check

COUNTERFEIT CHECKS EXPLAINED

Counterfeit checks look like they are from bonafide bank accounts, but generally, they are not tied to any accounts. When a financial institution presents these checks for processing, they find out they are not real and cannot be cashed, but by that time, the scam artists are usually long gone. In many cases, account holders withdraw funds against these checks before realizing the checks are no good, and if the account holders don’t have enough money to bring their accounts back into the black, the financial institutions may bear the losses.

Additional Resources:

What Are Counterfeit Checks?

HOW TO TELL IF A CHECK HAS BEEN ALTERED

Altered checks is another manifestation of check fraud. Scam artists may steal checks and alter a range of details from the static information on the check to the details written by the account holder. To protect your financial institution from losses associated from altered checks, you need well trained employees as well as tools that can look for minute alterations that may not be visible to the naked eye.

Additional Resources:

How to Spot an Altered Check

PROTECTING YOUR CLIENTS FROM CHECK FRAUD

To avoid check fraud, you need to educate your customers about the risks. Let them know that they need to be as careful with their digital information as they are with their paper information. For instance, they should always shred old checks before throwing them away, but they should also avoid doing electronic banking on public Wi-Fi and should change their passwords regularly.

Your business clients often face a larger risk of check fraud than your individual clients. In addition to taking the above steps, they should also use automatic bank reconciliation tools so they can spot anomalies right away, and they should know how to avoid phishing scams.

PREVENTING CHECK FRAUD

Perhaps, more importantly, your financial institution also needs tools in place to help you spot fraudulent checks. Ideally, you need software that can automatically inspect on-us checks and look for aberrations that suggest forgeries. Then, if the signature doesn’t match, the font is off, the number out of order, or the information suspicious in any other way, the software flags the check for manual review. At that point, your staff can step in and verify whether the check is real.

You may also want to integrate tools such as SENTRY: Seal. This essentially puts a seal or a unique barcode on every check. That code holds all the check’s vital information, and if anything doesn’t match, your system immediately finds the error.

Additional Resources:

Check Fraud Detection and Prevention

Running a financial institution can be a cutthroat endeavor. You must compete with businesses that are vastly larger than you, and at the same time, you must safeguard your institution and your clients from the constant onslaught of theft and fraud. Let SQN Banking Systems help. To learn more, contact us at 1-609-261-5500.