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Digital Fraud Wiki

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Check Fraud: What Is It and How to Stop It

Checks are one of the oldest forms of sending payments. They’re still one of the first things you’ll get when you open a checking account. Though in modern times they have been mostly replaced by digital banking, checks are still a common method of payment—and one that is highly vulnerable to fraud.

What is check fraud?

Check fraud is fraud committed using a check without authorization or altering a legitimate check to steal money from an individual or business. Check fraud can take many forms, with some of the most common methods being the use of counterfeit checks, stolen checks, or doctored checks.

The victims in a check fraud scheme aren’t always limited to the individuals whose accounts are being exploited. In some cases, fraudsters will acquire checks by attacking postal workers transporting checks or stealing from bank tellers through force. While the FTC offers a guide on avoiding check fraud schemes, they continue to rise in popularity based on their ease and difficulty of detection.

Businesses that cash these fraudulent checks as well as financial institutions and credit unions that approve falsified checks are also victims. Businesses receiving fraudulent checks lose out on revenue and compensation for work and services. Banks and credit unions can be fooled by bogus checks or stolen checks. In fact, this type of attack is increasing in popularity as banking account origination continues to become a digital-first practice.

How does check fraud happen?

One of the most common methods of check fraud is counterfeiting. Counterfeiters will create fake checks that look identical to legitimate checks, often using high-quality printers and special paper to make them as realistic as possible. They will then use these fake checks to purchase goods or withdraw money from a bank account.

Another common method is check washing. This occurs when criminals steal checks from mailboxes or trash cans (an activity sometimes referred to as dumpster diving) and then use chemicals to erase the ink on the check. They will then write in a new amount and payee and use the altered check to steal money.

Check fraud can also occur through the use of stolen checks. Criminals will steal blank checks from an individual or business and then use them to make unauthorized purchases or withdraw money.

In each case, the fraud is caused by theft, account holder manipulation, or fraud against the bank or credit union.

What are common types of check fraud?

There are several types, with each attack exploiting a different vulnerability that checks inherently possess.

Some of the most common methods you may see include:

  • Forgery: This occurs when someone alters a check or creates a fake check using someone else’s account information.
  • Paperhanging: This occurs when an account holder fills out a check knowing they don’t have the funds to cover it, then takes advantage of the “float” time between when the check is written and when it is deposited
  • Check kiting: Similar to paper hanging, this occurs when a check is written from an account without sufficient funds, but the amount is added to the account before deposit to cover the missing funds.
  • Counterfeiting: This occurs when someone creates a fake check that appears to be legitimate.
  • Chemical alterations: This occurs when a fraudster erases the ink on a check using special chemicals, allowing them to write new fraudulent information.
  • Stolen checks: This occurs when someone steals a check and alters the payee and/or amount before cashing or depositing it.
  • Check washing: This occurs when someone erases the ink on a check and changes the payee and/or amount before cashing or depositing it.
  • Alteration of dollar amount: This occurs when someone alters the dollar amount on a check.
  • Post-dating: This occurs when someone writes a check with a future date, in order to make the check appear to be valid later.

Check fraud can happen in a variety of ways, including through mail theft, online scams, and the use of skimmers at ATMs or point-of-sale terminals.

What is an altered check?

An altered check is a type of check that has been modified or changed after initial issue, often without the account holder’s permission and for fraudulent ends. Fraudsters present altered checks as valid ones in order to deceive banks or individuals into accepting them as valid, resulting in loss for both financial institutions and account holders.

There are many ways to alter a check. In some cases, fraudsters add new information to the check, like numbers to the amount field to make $100 read $1,000 or list themselves as the new payee name and change the date. In some cases they remove information, like the name of the person who wrote the check or the account holder’s signature.

In some cases, fraudsters will alter a check to make it look like it was written by someone else, possibly a fake identity, in order to try to trick the bank or the recipient into accepting it.

Counterfeit checks explained

Counterfeit checks are entirely fake checks created to resemble legitimate checks an account holder would use and a financial institution would accept. Fraudsters favor them for use in sophisticated schemes aiming to trick individuals or businesses into accepting them as payment and depositing them, so the fraudsters can later withdraw the funds and complete their scam before the bank or account holder discovers the check is illegitimate.

Fraudsters can create a counterfeit checks using a computer or scanner so it includes the same logo and design as a legitimate check, or they might alter a legitimate check by changing the payee name or the amount. They might also create a fake check from scratch, using blank check paper and magnetic ink to make it look like a real check.

In addition to fake checks allowing bad actors to “pay” for goods or services without actually spending any money, they’re also often sent in the mail as part of a fake lottery or sweepstakes scam. Once the recipient has deposited the fake check, the scammer will ask that they send a part of the funds back or to a third party. Once they have the bank account information from the transfer, they can compromise the victim’s account and even steal their identity.

What is closed account fraud?

Closed account fraud happens when a person uses someone else’s closed or inactive account information to make unauthorized transactions. The fraudster might use a stolen debit or credit card number to make purchases or use someone else’s old closed account information to open a new account without their knowledge.

In some cases, closed account fraud can occur when a person neglects to properly close an account, leaving it open and vulnerable to fraudulent activity. In other cases, fraudsters may obtain closed account information through data breaches or other means of unauthorized access.

Is check fraud a felony?

The penalties for check fraud are severe. In the United States, it is considered a felony and can result in prison time and significant fines.

How to prevent check fraud?

Many financial institutions report a sharp rise in check fraud issues. These could likely be caused by fraudsters turning to more low-tech forms of committing fraud as firms everywhere strengthen the safety of their digital channels.

Fortunately, banks and credit unions have tools they can use to detect and prevent check fraud before the damage occurs. The most important aspect of a strong check fraud prevention strategy is integrating it into a holistic fraud practice. Financial institutions need to make the most out of all the data available to them when it comes to detecting check fraud.

Continuous account monitoring is especially valuable to banks and credit unions seeking to prevent the various forms of check fraud described in this article. By staying in the know about how specific accounts behave (i.e. what other accounts they interact with, how big their “normal” transactions are, etc.), they can be in a much better place to judge the risk profile of a specific check transaction.

For financial institutions, it’s important to prevent these kinds of attacks with a strong fraud detection platform. It is essential to incorporate check fraud prevention measures to a holistic strategy

Can AI stop check fraud?

Artificial Intelligence (AI) can also be used to detect and prevent check fraud. Machine learning algorithms can be trained to recognize patterns and anomalies in check transactions, which can help to identify fraudulent activity more quickly and accurately.

One example of this is using computer vision to detect counterfeit checks. AI can be trained to recognize the unique patterns and features of legitimate checks, such as watermarks, holograms, and security thread, and compare them to the check in question.

Ultimately, AI and machine learning can also learn to track sophisticated changes crime rings make to their fraud methods. This enables banks and credit unions to stay ahead of organized criminal activity, including schemes that leverage checks to commit fraud.

In conclusion, check fraud is a serious crime that can cause significant financial losses for both individuals and businesses. By understanding the different methods fraudsters use and implementing prevention and detection methods, you can help protect yourself and your finances. Additionally, the use of AI technology can be helpful in detecting and preventing check fraud. It’s important to be vigilant and report any suspicious activity to the authorities immediately.

Want to learn more about how DataVisor can help your bank or credit union stop check fraud for good? Schedule a demo now!