Bank Check Fraud: How Financial Institutions Can Safeguard Themselves
Bank check fraud continues to be a significant concern for financial institutions in an increasingly digital age. The resurgence of this threat underscores the importance for banks to re-examine their processes and strategies to more effectively protect themselves and their customers.
As a global leader in the field of check fraud detection and prevention, we at OrboGraph understand the importance of staying ahead of the curve in addressing this challenge.
In order to successfully safeguard assets against check fraud, financial institutions require a deeper understanding of the different types of check fraud at play in the industry. Leveraging technology in combating fraud is crucial for banks in their ongoing efforts to minimize losses and maintain a secure environment for customers. Continuous evaluation of resources and technology is necessary to ensure the adoption and implementation of the most advanced solutions for detecting and preventing check fraud.
Understanding Bank Check Fraud
Check fraud is a type of financial crime that comes in various forms, including counterfeits, forgeries, and alterations. Fraudsters often target vulnerable individuals or initiate scams through channels likedirect mail and sophisticated online schemes. By altering a check in some way or creating a new check, scammers can deceive banks into passing fraudulent checks, leading to significant losses for both the bank and its customers.
Recently, we’ve seen a major surge in robberies of mailboxes and mail carriers – with the goal of stealing checks. These checks are either utilized for check fraud immediately, or the criminals will sell these checks on the dark web or other encrypted messaging platforms like Telegram. This is check fraud has become common across the USA.
Here are the types of bank check fraud that financial institutions need to be aware of:
Counterfeits
Counterfeit checks are created by fraudsters using easily attainable printers and software to generate fake checks, often by copying a legitimate check’s information. These checks appear genuine and may be difficult to detect during standard processing. Banks must adopt advanced technological solutions, such as our Anywhere Fraud solution, to identify and prevent counterfeit check fraud.
Check Washing/Alterations
Check washing/alterations involve the removal of ink from a legally issued check, which allows the fraudster to alter the payee name, amount, or other important information. This type of fraud can be challenging to detect, as the washed check is originally legitimate. Utilizing advanced image recognition technologies can assist banks in identifying these sorts of altered checks promptly and effectively.
Forgery
Forgery involves the unauthorized signing or endorsement of someone else’s checks. This process typically begins with the acquisition of stolen blank checks or checkbooks. The perpetrators proceed by adding their personal information and forging signatures on these stolen checks. To further distance themselves from the crime, fraudsters often enlist intermediaries known as “mules” to either deposit or cash these forged checks, creating a layer of separation between themselves and the illicit transactions.
Check Kiting
Check kiting is the process of taking advantage of the “float” – the time it takes for a check to clear between two banks – by writing a check from one account to another without sufficient funds while covering the deficit with another check from a different account. This creates the illusion of available funds when none exists. Banks can meet this challenge by monitoring accounts for unusual transactions and implementing real-time processing systems to minimize the risk of check-kiting.
Stolen Checks
Stolen checks can be obtained by intercepting mailed checks, burglarizing homes or businesses, or stealing checks directly from bank customers. Once a check is stolen, it may be altered, washed, or used to create counterfeit checks. Additionally, stolen checks are becoming available for sale on the dark web and other encrypted messaging platforms like Telegram.
The Impact of the Pandemic on Check Fraud
The pandemic has significantly influenced the financial landscape, causing a shift in transactions and an increase in mobile banking usage. This has inadvertently created opportunities for more fraud activity, including check fraud.
During the pandemic, people were compelled to conduct financial transactions remotely, resulting in a surge in mobile banking. The increased dependency on remote transactions created an opportunity to exploit vulnerabilities in the traditional banking system. The Richmond Fed has reported that check fraud cases have escalated since the beginning of the pandemic.
This has led to a major increase in “drop accounts.” Criminals are able to open a new account with little verification, establish the account with small transactions to avoid detection, and then utilize the account to deposit fraudulent checks.
Preventing Check Fraud: A Multi-step Approach
As global leaders in check fraud detection and prevention, we believe that a robust, comprehensive, and technology-based strategy is essential for banks to safeguard themselves against check fraud.
Machine Learning and AI in Fraud Detection
Machine Learning and Artificial Intelligence have proven to be valuable tools for fraud detection. By analyzing large datasets of historical transaction information, machine learning algorithms can identify patterns and flag potential check fraud attempts. Furthermore, AI-powered systems can adapt to new fraud tactics and adjust accordingly. Utilizing these advanced technologies, banks can refine their fraud detection processes and stay one step ahead of potential threats.
Check fraud technologies that leverage machine learning and AI include:
- Behavioral Analytics – monitoring transactions and account behaviors for anomalous behaviors
- Image Forensic AI – analyzing the image of newly deposited checks to identify signs of counterfeits, forgeries, and alteration
Consortium Data
Consortium data enables financial institutions to share information to other financial institutions. This includes transactional data, account information, as well as images of previous flagged fraudulent checks. By joining consortiums, financial institutions are banding together to fight against check fraud.
Positive Pay Systems
Positive pay systems are an essential tool for business account check fraud detection. Traditional positive pay systems read and extract the account number, serial number, and amount from the image of checks to compare to the issuer file from the customer. However, recent updates to traditional positive pay systems now enable financial institutions to compare payee names to the issuer file – known as Payee Positive Pay.
Dark Web Monitoring
As noted earlier, the USA is experiencing a major surge in mailbox and mail carrier robberies – with the goal of stealing checks. According to research from Dr. David Maimon, nearly 10,000 stolen checks are ending up for sale on the dark web and encrypted messaging platforms like Telegram. This is from monitoring only 80 channels – a small sample size compared to the size of the markets.
Financial institutions need to deploy a dark web monitoring service to scour the dark web for account information and stolen checks to protect themselves and their customers.
Protecting Consumers and Businesses
The following are measures proven to protect personal check users and business accounts alike from check fraud.
Protecting Personal Check Users
Personal checks are still widely used by consumers, making them a prime target for fraudsters who may steal checks through means such as U.S. Mail theft. To protect personal check users from fraud and identity theft, the following steps should be implemented:
- Encourage consumer education: Financial institutions should provide resources to help consumers understand common check fraud tactics and how to avoid them.
- Utilize technology: Leverage state-of-the-art check fraud detection software to identify counterfeits, forgeries, and alterations while monitoring customer accounts.
- Enhance verification measures: Implement multi-factor authentication for check transactions, such as using unique identification numbers or requiring additional paperwork from the recipient.
Safeguarding Business Accounts
Business accounts are particularly vulnerable to check fraud due to the higher volume of transactions. To protect these accounts, financial institutions should adopt the following strategies:
- Utilize technology: Leverage state-of-the-art check fraud detection software to identify counterfeits, forgeries, and alterations while monitoring customer accounts..
- Adopt advanced Positive Pay features: Standard Positive Pay focuses on reading the MICR account information and transaction amounts. Investing in advanced technologies, such as payee positive pay, will enable payee name extraction for enhanced comparison and fraud detection, particularly for business checks.
- Educate business customers: Ensure businesses are aware of the risks and take proactive steps to safeguard their accounts, such as using tamper-resistant checks and regularly auditing their accounts for suspicious activity.
Our commitment to remaining at the forefront of fraud detection and prevention includes continuously evaluating and improving processes, resources, strategies, and technology-related aspects within the financial industry. By working together, we can better protect consumers and businesses from the ever-evolving threat of check fraud.
Role of Government and Law Enforcement Agencies
Financial Crimes Enforcement Network (FinCEN)
An important player in fighting check fraud is the Financial Crimes Enforcement Network (FinCEN). Their mission is to safeguard the financial system from illicit use and combat money laundering. FinCEN collects, analyzes, and disseminates financial intelligence that banks and credit unions can use to identify fraud. By collaborating with FinCEN and taking advantage of their information, financial institutions can improve their check fraud detection efforts and minimize risk exposure.
U.S. Postal Inspection Service
The U.S. Postal Inspection Service is also an essential partner in combating check fraud. Their jurisdiction includes fraud schemes that involve the U.S. mail system, which often encompasses check fraud. By working with the Postal Inspection Service, banks and credit unions can help detect and prevent cases of check fraud that involve mail theft.
U.S. Government
The increase in mail carrier and mailbox robberies garnered the attention of government officials. They addressed the issue at a hearing on September 7, 2022, and U.S. Senator Sherrod Brown, D-Ohio, sent a letter on November 6, 2022 to the US Postal Service Board of Governors asking them to quickly take action on mail theft and postal robberies.
More recently, in New York State, Rep. Nicole Malliotakism, a Republican from Staten Island, and Queens Rep. Grace Meng, a Democrat, introduced the USPS Subpoena Authority Act, which seeks to give the U.S. Postal Service the ability to crack down on postal crime.
Check Fraud and the Future of Banking
As a global leader in the field of check fraud detection, we at OrboGraph understand the importance of staying ahead of the evolving landscape. With advances in technology, artificial intelligence, and machine learning, financial institutions can upgrade their check fraud prevention systems, safeguarding their customers and themselves against emerging threats.