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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.

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.

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 or not 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.

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

Additional Resources

6 Infamous Check Fraud Scandals

History of Check Fraud

Check Fraud Penalties

Check Fraud Detection and Prevention

Dangers of Floating Checks

101 Facts About Check Fraud

Check Fraud Glossary

FAQs About Check Fraud