Check Fraud Examples and Prevention Strategies for Banks

Feeling the sting of check fraud? Worried your current defenses aren't enough? Check fraud is a persistent threat, but it doesn't have to be an inevitable loss.

Let’s explore real-life examples of check fraud and equip you with practical prevention strategies. We'll show you how banks can fortify defenses and safeguard assets—all by understanding the tricks of the trade and making the most of the latest technology.
Picture of Ravi Sandepudi

Ravi Sandepudi

June 21, 2024

Did you know that in 2018, check fraud accounted for a staggering 47% of all deposit account fraud, leading to $1.3 billion in losses?

Despite the surge in digital payments, checks remain a vital part of business transactions, especially in B2B settings. This ongoing reliance on checks makes them an attractive target for criminals, posing substantial financial risks to businesses.

A recent survey revealed that 63% of organizations faced attempted or successful check fraud, highlighting the persistent threat.

Given these alarming statistics, it’s crucial for financial institutions (FIs) to understand how to protect themselves against this form of fraud.

We will explore common check fraud schemes, provide real-world examples, and discuss how AI-powered solutions can help detect and prevent check fraud, safeguarding your business from significant losses.

What is Check Fraud?

Check fraud is a criminal act that involves the unauthorized use of checks to obtain money or goods illegally. This happens when someone changes, fakes, or copies a check to trick a bank or business into giving them money.

Common signs of check fraud include forged signatures, changed payee names or amounts, and using fake or stolen checks.

The consequences of check fraud extend beyond immediate financial losses. Businesses may also face reputational damage, legal issues, customer churn, and increased operational costs.

Types of Check Fraud

Let’s take a closer look at some of the common types of Check Fraud.

Forged Signatures 

This occurs when a fraudster signs a check without the account holder’s authorization. This typically involves stolen or intercepted checks, which are often obtained through break-ins, mail theft, or insider access. 

After acquiring the blank checks, the fraudster carefully forges the signatures to appear authentic. They fill in the check with a large amount, payable either to themselves or an accomplice. The fraudulent checks are quickly deposited or cashed at banks or check-cashing services to secure the funds before the fraud is detected.

Altered Checks 

This involves modifying legitimate checks to change critical information such as the payee or the amount. Fraudsters use chemicals like acetone or bleach to erase the original details, then employ advanced software and high-quality printers to overlay new information.

This process can be meticulous, as they match the ink, fonts, and handwriting to make the changes appear authentic. Once altered, the checks are deposited it into the fraudster’s account or an accomplice’s account to illicitly obtain the funds.

Counterfeit Checks 

This fraud involves creating fake checks that appear legitimate. Fraudsters use sophisticated printers and high-quality check paper, often incorporating security features like watermarks to enhance authenticity. They typically acquire real account numbers through illegal methods like phishing or malware.

Check Kiting 

This fraud scheme exploits the delay in processing checks between banks, known as float time. Fraudsters open accounts at different banks and write checks between the accounts, despite insufficient funds. They continue this process, creating artificial balances by timing the deposits and withdrawals so that each check appears to be covered by another. This allows them to withdraw money before the banks realize there are no actual funds to support the transactions, leading to significant financial losses.

Stolen Check Stock

This fraud involves criminals obtaining blank checks illegally and using them to create fraudulent checks with real account details from scams or hacking. Criminals break into offices or mail rooms to steal checks, or even purchase them on the dark web.

Once they have the check stock, they create counterfeit checks and use accomplices, known as “mules,” to deposit and withdraw the funds before the banks detect the fraud.

Account Takeover

In this, criminals gain unauthorized access to a person’s bank account using methods such as phishing, malware, or data breaches. Once they have the account details, they may contact the bank, posing as the account holder, to request changes like a new address or new checks.

The criminals intercept the new checks and forge the account holder’s signature to cash or deposit them. Additionally, they may use the stolen account details to create counterfeit checks, which are then deposited and withdrawn by others, perpetuating the fraud..

How Does Check Fraud Work? 

Here’s a breakdown of how a fraudster typically operates check fraud.

Acquisition: They obtain checks through methods such as theft, mail interception, or insider access. For example, they might steal checks from a mailbox or buy them from the dark web.

Forgery: They forge signatures to make checks appear legitimate using techniques like tracing, freehand imitation, or rubber stamps. This allows them to create checks that look authentic to unsuspecting victims and financial institutions.

Alteration: They chemically wash legitimate checks to remove the original details. They then rewrite the checks with larger amounts or change the payee information to their names or aliases, making the checks appear genuine to unsuspecting parties.

Impersonation: They use fake IDs or recruit accomplices to impersonate check owners or authorized payees. By presenting false identification, they attempt to cash the fraudulent checks at banks or check-cashing services, deceiving the institutions into believing they are legitimate recipients.

Fraudulent Remote Deposits: They exploit Remote Deposit Capture (RDC) technology, which allows checks to be deposited electronically. They use this technology to deposit counterfeit or altered checks remotely, making it more difficult for banks to detect fraud during the deposit process.

Clearing and Verification: After the fraudulent checks are deposited, they go through the standard clearing process. During this time, banks attempt to verify the legitimacy of the checks. However, due to the high volume of checks processed daily and the limited time available for verification, some fraudulent checks may go undetected.

Withdrawals: Once the fraudulent checks clear or appear to have cleared, fraudsters quickly withdraw the funds from the account. They may make multiple withdrawals at different locations or transfer the money to other accounts to avoid raising suspicion and to make it harder for the fraud to be traced back to them.

Covering Tracks: To conceal their activities and evade detection, fraudsters often move the withdrawn funds to other accounts or convert them into untraceable assets. This additional layer of confusion makes it more challenging for authorities to track and recover the stolen funds.

Implement comprehensive risk management solutions to protect your business from check fraud.

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Check Fraud Prevention Strategies for Banks and Businesses

To effectively combat check fraud, banks and businesses must adopt a multi-layered approach. Here are some key strategies for preventing check fraud:

1. Robust Verification Processes 

Banks and other FIs should implement strict identity verification processes during customer onboarding and other processes. This ensures that customers are who they claim to be when cashing checks or opening accounts.

Utilizing technology such as biometric authentication and ID scanning can enhance the verification process. Additionally, it’s essential for banks to establish clear guidelines on acceptable forms of identification and train employees to detect fraudulent IDs.

2. Positive Pay and Payee Verification

These systems require businesses to provide a list of authorized checks, which is then compared to the presented checks to detect discrepancies.

Utilizing payee verification techniques ensures that checks are deposited into the intended recipient’s account. Offering customers the option to receive real-time alerts for check transactions above a certain threshold can further enhance security and reduce the risk of fraud.

3. Enhanced Check Security Features 

Incorporating advanced security features into check designs makes them harder to replicate or alter. Consider using watermarks, micro-printing, and thermochromic ink to enhance security. 

High-resolution printing and secure ordering processes prevent unauthorized access to blank checks, thereby reducing the risk of check fraud.

4. Customer Due Diligence and Risk Assessment

Conduct thorough due diligence on new business customers, including background checks and credit history review, to assess their risk profiles. Evaluate each customer’s risk based on factors such as industry, transaction volume, and location. Implement enhanced monitoring and stricter controls for high-risk customers and transactions to mitigate potential fraud risks.

5. Fraud Detection Technologies 

Investing in advanced fraud detection technologies is essential to combat check fraud. Artificial intelligence (AI) and machine learning (ML) models boost real-time transaction monitoring and can help identify suspicious check activity and flag potential fraud. Automated systems that compare check signatures against customer signature files can also be effective.

6. Employee Training and Awareness

Regularly train employees on fraud prevention techniques and the identification of red flags. Ensure they are well-versed in proper check handling procedures, including verification and deposit processes. Foster a vigilant culture where staff feel safe reporting suspicious activity.

7. Customer Education and Engagement

Educate customers on the risks check fraud risks and best practices for prevention, such as securely storing checks and promptly reporting any lost or stolen checks. Provide resources to help them detect common fraud schemes and encourage regular reviews of their account statements. Also, emphasize the importance of immediately reporting any discrepancies.

8. Collaboration and Information Sharing 

Work closely with law enforcement agencies to share intelligence on emerging check fraud trends and potential suspects. Engage in industry forums and working groups to exchange best practices and stay updated on new fraud prevention techniques. Leverage shared databases and fraud alert systems to identify known fraudsters and prevent repeat attacks.

9. Regular Audits and Penetration Testing

Conduct regular audits of check processing systems to identify vulnerabilities and ensure compliance with security protocols. Perform penetration testing to evaluate your defenses against fraud and cyber threats. Use the insights gained from these assessments to enhance your security measures and stay ahead of emerging threats.

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Let our team help you integrate and scale your risk processes for lasting success.

Real-World Check Fraud Examples

Here are some real-world examples that illustrate the various methods fraudsters use to exploit check systems.

1. Interlogic Outsourcing Inc. Check-Kiting Scheme

Najeeb Khan, owner of Interlogic Outsourcing Inc. (IOI), a payroll company in Michigan, orchestrated a check-kiting scheme that caused a loss of almost $150 million. Starting in 2014, Khan manipulated his company’s bank accounts at multiple FIs to illegally obtain funds.

The scheme involved writing checks and making wire transfers between IOI accounts at Lake City Bank, KeyBank, and Berkshire Bank. This created artificially inflated account balances, making them appear higher than they actually were.

As a result, the banks honored checks even when there were insufficient funds. Khan used the money from the scheme to grow his business and live a lavish lifestyle.

The impact of this fraud was significant, with KeyBank and other financial institutions suffering substantial losses. The case highlights the importance of robust fraud detection systems and strict adherence to anti-money laundering (AML) regulations.

Key Takeaways:

  • Implement advanced fraud detection algorithms to find suspicious account activity
  • Enhance due diligence for high-risk clients and monitor their transactions closely
  • Regularly review and strengthen your internal controls, including wire transfer protocols
  • Create a culture of watchfulness by encouraging workers to report any strange behavior quickly

2. Boston Man’s Counterfeit Check Scheme

Hui Zhang, a 41-year-old man from Quincy, Massachusetts, executed counterfeit checks fraud totaling more than $1 million.

Between June 2020 through at least May 2022, Zhang opened fake bank accounts under false names and electronically deposited approximately 114 counterfeit checks. The checks were drawn on the account of a Boston-based retailer.

After depositing the counterfeit checks, Zhang withdrew a substantial amount of cash from these accounts via ATMs. This scheme caused big financial losses for the affected banks and the Boston retailer whose account was exploited.

This case underscores the importance of robust identity verification processes and fraud detection systems within the banking industry. 

Key Takeaways:

  • Implement stringent identity verification procedures when opening new accounts to prevent the creation of fraudulent accounts
  • Develop advanced algorithms to detect and flag suspicious check deposits and ATM withdrawals
  • Strengthen collaboration with retailers and other businesses to detect and report any instances of counterfeit checks promptly
  • Regularly train employees to recognize and report suspicious account activity and potential identity fraud
  • Invest in advanced technology solutions to detect and prevent fraud with real-time transaction monitoring

3. Alaska Man’s Check Kiting and Identity Theft Scheme

Jared Wilkes Post, a 26-year-old from Fairbanks, Alaska, rolled out a complex check kiting and identity theft between 2017 and 2021, Along with his partner targeted Post targeted several individuals on social media referring to them as “Plays.” 

They persuaded these individuals to share their bank account information under the guise of depositing legitimate checks.

Post and his accomplice deposited stolen and altered checks into the “Plays'” accounts. Before the banks could identify the checks as fraudulent, they quickly withdrew the money. The scheme particularly targeted elderly and vulnerable people, leading to significant losses to the banks, the “Plays,” and the original victims, who were left with overdraft fees and other financial hardships.

The impact of this fraud was substantial, with multiple banks and individuals suffering losses of at least $100,000. This shows the need for better fraud detection systems and enhanced due diligence procedures. It also highlights the need for banks to educate their customers about the risks of sharing account information.

Key Takeaways:

  • Implement advanced fraud detection algorithms to identify suspicious account activity
  • Enhance due diligence procedures for high-risk clients and monitor their transactions closely
  • Educate customers about the risks of sharing account information and the importance of verifying the legitimacy of requests
  • Collaborate with law enforcement agencies to investigate and prosecute fraudulent activities promptly

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Bank Check Frauds: AI to the Rescue

As check fraud evolves, staying ahead requires the adoption of cutting-edge technology and proactive strategies. Traditional methods often miss fraudulent activities that slip through manual reviews and rule-based systems. This is where artificial intelligence (AI) shines.

AI in bank fraud detection has emerged as a key tool today, particularly in analyzing unstructured data like handwriting and signatures on checks. Machine learning algorithms can learn to recognize and compare signatures, spotting forgeries with remarkable precision. This automation reduces manual reviews and minimizes human error.

AI-powered solutions, such as those from Effectiv, analyze vast amounts of data in real-time, swiftly identifying patterns and anomalies that indicate potential fraud. 

Effectiv’s comprehensive fraud detection platform seamlessly integrates with a bank’s existing systems, enabling real-time monitoring of check transactions and automated fraud alerts. The platform’s customizable risk rules and thresholds allow each institution to tailor the system to detect the most relevant types of check fraud.

Protect your business from check fraud by leveraging the power of AI. Request a demo today and take the first step towards a more secure and efficient fraud prevention strategy.

FAQs

1. How do banks investigate check fraud?

Banks investigate check fraud by analyzing transaction patterns, examining check images, and collaborating with law enforcement to gather evidence and identify perpetrators.

2. How can banks and fintechs effectively detect and prevent check fraud in real time?

Banks and fintechs can detect and prevent check fraud in real time by implementing AI-powered solutions that analyze checks for anomalies and suspicious patterns.

3. What are the potential financial and reputational consequences for banks and fintechs that fall victim to check fraud?

Check fraud can lead to significant financial losses, damage to a bank’s reputation, and loss of customer trust, potentially impacting their long-term success.

4. How can financial institutions educate their customers about check fraud prevention best practices?

Financial institutions can educate customers through targeted campaigns, online resources, and in-person workshops that highlight check fraud risks and prevention best practices.

5. Is the bank responsible for cashing forged checks?

Banks may be responsible for cashing forged checks if they fail to exercise reasonable care and follow proper verification procedures.

6. What technologies are available to combat check fraud?

Technologies like AI, machine learning, biometric authentication, and positive pay systems can help combat check fraud effectively.

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