In 2022 alone, banks issued 680,000 reports of check fraud to the Financial Crimes Enforcement Network (FinCEN) — an increase of 94 percent over the previous year.
How does check fraud happen? And, what is the impact of check fraud on banks and credit unions?
Read on to learn more about this troubling trend and how financial institutions can protect themselves against the growing threat of check fraud.
Stolen, Counterfeit, “Washed:” How Does Check Fraud Happen?
Check fraud is the process of cashing stolen or counterfeit paper checks to steal funds directly from a victim’s bank account. The most common form is “check washing” where fraudsters steal a check from the mail, change the name of the payee and the amount, and then, cash the fraudulent check and pocket the funds. Criminals alter stolen checks using technology, household products like nail polish remover or cleaning solvents, and in some cases even by scraping ink off the check or lifting it with tape.
While the process may sound simple, check fraud is often committed on a large scale by sophisticated criminal operations. From stealing mail out of USPS mailboxes or even directly from mail trucks and carriers, to setting up fake businesses and training individuals to appear more legitimate when cashing the fraudulent checks, these highly organized perpetrators are causing significant financial losses to financial institutions.
How Does Check Fraud Affect Banks and Credit Unions?
Banks and credit unions accepting fraudulent items as ‘the bank of first deposit’ may be responsible for reimbursing account holders, who are victims of check fraud. As incidents increase, so do the losses incurred by financial institutions.
As reported by Banking Journal earlier this year, “The Financial Crime Enforcement Network reports that in 2021, financial institutions filed more than 350,000 Suspicious Activity Reports (SARs) of potential check fraud, a 23 percent increase over 2020. This upward trend continued into 2022, when the number of SARs related to check fraud reached over 680,000, nearly double the previous year’s filings. This compares to 96,786 suspicious activity check fraud cases reported in 2014.”
In addition to financial losses, instances of check fraud can generate negative publicity and tarnish a financial institution’s reputation, which can be detrimental to its success.
While encouraging account holders to opt for electronic payments instead of paper checks is an important step to reduce fraud, small businesses and other commercial clients are reluctant to stop using checks entirely for a number of reasons: their account holders may be resistant to ACH, they need checks for refund issuance, and the government still requires some payments to be made by check. As a result, financial institutions need to take proactive measures to protect themselves and their business accounts against check fraud.
What Can Financial Institutions Do To Protect Against Check Fraud?
At the most basic level, financial institutions should train branch employees to be vigilant in monitoring for signs of check fraud. For example, out-of-order check numbers, or checks that are disproportionately larger than is typical for a particular account holder, can be indicators that a check is not legitimate.
Additionally, financial institutions can offer a variety of treasury management solutions: Check Positive Pay, Payee Positive Pay, and Reverse Positive Pay as solutions for their business clients. Check Positive Pay allows the financial institution’s business clients to upload records of issued checks from their accounting systems. Then, as the checks are cashed or presented, the check serial numbers, amounts, dates, and payee names can be validated against those check issue files. Discrepancies automatically generate alerts to the bank or credit union and account holder, allowing the institution or account holder to quickly identify fraudulent or stale-dated checks. The business can block unauthorized transactions and avoid closing their account due to an unauthorized check clearing.
In addition to helping prevent financial losses, adopting Check Positive Pay helps financial institutions demonstrate they are invested in safeguarding their business accounts and protecting their account holders against the growing threat of check fraud.
Lastly, implementing Check Positive Pay and other fraud prevention measures, such as ACH Positive Pay, can help banks and credit unions and their account holders meet various compliance requirements.