Types of Check Fraud and How Banks Can Recognize: A Concise Guide

In recent years, check fraud has continued to be a significant concern for banks, as criminals have turned their attention to checks.. As a global leader in the fields of check fraud detection, prevention, and image recognition solutions, we at OrboGraph understand the importance of staying ahead of these threats. With the increasing sophistication of fraudsters, it is essential for banks to employ intelligent technology to protect their customers and themselves against various types of check fraud.

Some common types of check fraud include counterfeit checks, altered checks, and checks with forged endorsements. To efficiently recognize and combat these fraudulent activities, banks need to evaluate their current processes, resources, strategies, and technologies. By leveraging state-of-the-art image recognition and machine learning techniques, financial institutions can effectively identify and prevent losses from fraudulent checks from entering their systems.

By adopting advanced fraud detection and prevention solutions, senior executives in the fraud department of banks can ensure the security of their financial systems and stay ahead of the evolving threats. At OrboGraph, we are committed to remaining at the forefront of this field and supporting banks in their ongoing efforts against check fraud.

Understanding Check Fraud: Methods and Execution

Check fraud encompasses a range of deceptive practices used by fraudsters within the banking system. This discussion sheds light on the various methods employed by these individuals without delving into specific technological countermeasures. From counterfeiting and alterations to forgery and identity theft, each tactic highlights the resourcefulness of criminals seeking unlawful financial gains. Understanding these fraudulent avenues is pivotal in fortifying defenses against potential financial losses and identity theft.

Counterfeit Checks

Counterfeit checks are fabricated by fraudsters to mimic authentic ones, employing various techniques to deceive unsuspecting individuals and financial institutions. These fraudulent practices often involve the use of sophisticated computer software to replicate check stock accurately. Perpetrators then employ readily available desktop printers to produce these counterfeit checks, aiming for a convincing appearance. To avoid detection, these forged checks are frequently deposited through Mobile Remote Deposit Capture (mRDC), exploiting the system’s limitations in scrutinizing magnetic ink and physical check attributes, thus evading easy detection and raising significant challenges for fraud prevention.

Alterations

Alterations in checks involve the illicit modification of crucial details like payee names or amounts, orchestrated by criminals for their own financial benefit. These deceptive practices encompass various techniques, including the use of chemicals to erase ink or employing white out to cover specific details. Moreover, fraudsters resort to sharp objects to scratch off original information, replacing it with their preferred data. Following these alterations, the manipulated checks are often deposited via Mobile Remote Deposit Capture (mRDC) to sidestep thorough physical check scrutiny, exploiting the limitations in detection capabilities and perpetuating their fraudulent schemes.

Forgery

Forgery involves the unauthorized signing or endorsement of someone else’s checks, a fraudulent act that criminals employ for their personal gain. This deceitful 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 a deceptive scheme involving the opening of multiple bank accounts aimed at manipulating account balances within the float period. This fraudulent tactic entails writing checks from one account to another, creating a false impression of higher balances, and exploiting the time delay in check processing. By utilizing this strategy, fraudsters artificially inflate account balances, allowing them to write checks that would typically bounce due to insufficient funds, thus exploiting the banking system’s time lapse to facilitate their deceptive financial maneuvers.

Stolen Checks/Mail Theft

Stolen Checks/Mail Theft involves acquiring checks through various illicit means, primarily via mail theft or robberies. Perpetrators employ direct theft from mail carriers or intercept checks from mailboxes, exploiting vulnerabilities in the postal system. Additionally, gaining access to USPS mailboxes using arrow keys has been a prevalent method. Subsequently, these stolen checks are used in check fraud activities or sold on the dark web or encrypted platforms, enabling criminals to profit from these pilfered items while remaining anonymous in their illegal transactions.

Identity Theft

Identity theft is the illicit practice where criminals exploit an individual’s personal information for fraudulent activities, often gaining access to sensitive details from various sources, including checks. Exploiting the information readily available on checks, such as account numbers and personal data, serves as a common avenue for these perpetrators. A concerning trend has emerged wherein criminals reverse engineer stolen checks to acquire valuable identities, subsequently utilizing this pilfered information for a range of fraudulent activities, emphasizing the importance of safeguarding personal data to prevent such exploitation and financial harm.

Effects and Ramifications of Check Fraud

Check fraud can cause significant financial losses for both banks and their customers. When fraudulent checks are successfully cashed or deposited, banks bear the brunt of the loss. In addition to the direct financial impact, banks may also experience damage to their reputation, as customers may lose confidence in their ability to safeguard their funds. For individuals affected by check fraud, the emotional toll can be just as devastating as the financial loss. Victims may experience stress and frustration in trying to resolve the issue and recover their money.

Fraudulent checks come in different forms and can typically be categorized as counterfeit, altered/”washed,” and checks with forged endorsements. These types of fraud present unique challenges to banks as they work to identify and prevent them. It is crucial that banks stay ahead of the curve and continually evaluate their current processes, resources, strategies, and technologies to combat check fraud.

One way banks can recognize check fraud is by utilizing advanced technology. Machine learning and artificial intelligence-based systems can help identify irregular patterns and anomalies in checks, such as alterations or discrepancies in payee names, amounts, and signatures. By implementing these technologies, banks are better equipped to detect and prevent check fraud, in turn minimizing losses and maintaining customer trust.

Another consequence of check fraud is the strain it puts on the U.S. mail system. Mail theft often leads to check fraud and can result in further negative consequences for mail carriers and postal facilities. When mail containing checks is stolen, it can disrupt the delivery process and negatively impact the efficiency and trustworthiness of the U.S. mail system. Ultimately, maintaining security measures is vital for postal services to counteract this growing problem.

In summary, check fraud creates a ripple effect across financial institutions, individuals, and the U.S. mail system. It is essential for banks to proactively identify and prevent check fraud to protect their customers, minimize losses, and maintain trust. By leveraging technology and continually evaluating internal processes, banks can stay vigilant in the fight against this pervasive issue.

How Banks Detect Fraudulent Checks

In this section, we will discuss several technologies and solutions that financial institutions can utilize to detect fraudulent checks.

Image Forensic AI

Image forensic AI takes a forensic documentation approach – a subcategory of the forensic field, dealing with the authenticity of the documents – to analyze the images of deposited checks. The technology leverages a multitude of analyzers including:

• Check Stock Validation (CSV-AI) to identify any discrepancies in the check stock from previously cleared items.
• Automated Signature Verification (ASV-AI) to verify the authenticity of the signature(s) on the check.
• Writer Verification (WV-AI) to analyze the handwriting style of the check for consistency on the deposited item and consistency from previous cleared items.
• Alteration Detection (AD-AI) to analyze the check style along with amount discrepancy.  

Behavioral/Transactional Analysis

Behavioral/Transactional Analysis leverages artificial intelligence and machine learning to identify anomalous behavior and transactions within an account. By monitoring the account activity, the technology is able to sort through hundreds, if not thousands, of transactions to learn the account holder’s financial spending to not only identify anomalous behavior/transaction but also identify if accounts are being used for nefarious purposes. 

Payee Positive Pay

Payee positive pay for business checking accounts extracts the payee name, amounts, and account number to be compared to the issue file or negative/positive payee lists. This enables banks to identify if a check’s payee or amount fields have been altered, or if a counterfeit check has been created and deposited before the payment is posted. 

Consortium Data

Consortium data (an agreement, combination, or group(as of companies) formed to undertake an enterprise beyond the resources of any one member) enables banks to share transactional information with other consortium members. This enables financial institutions to run different verification checks such as counterfeit, non-sufficient funds (NSF), Closed Accounts, Duplicate, and other fraudulent items. 

Dark Web Monitoring

Dark web monitoring searches the dark web, along with other messaging platforms, to identify if an account holder’s information or checks are available for sale. This enables the financial institution to close the account and notify their customers of the threat of identity theft.  

 Measures to Mitigate Check Fraud

In this section, we’ll discuss some measures banks can take to mitigate check fraud, focusing on process improvements.

Bank Processes

Improving internal bank processes is the first line of defense against check fraud. Regularly evaluating current processes, resources, strategies, and technologies can help banks identify potential vulnerabilities and areas for improvement. For instance, banks can implement real-time monitoring systems, like Anywhere Validation, to detect unusual transactions and stop payments before they are processed.

Security Features

Incorporating advanced security features into checks can also be an effective way to deter fraud attempts. Examples of security features include:

• Watermarks
• Microprinting
• Holograms
• Heat-sensitive ink
• Security threads

By using checks with these features, banks make it more difficult for fraudsters to alter or counterfeit them.

Stop Payment

Finally, account holders can use stop payment services if they suspect check fraud. This allows them to block payment on a specific check or a range of checks, providing an added layer of protection.

By implementing these measures, banks can significantly reduce the risk of check fraud and protect both themselves and their customers. As a leading provider of fraud detection and prevention solutions, we at OrboGraph are committed to staying at the forefront of this industry and helping our clients defend against ever-evolving threats.

Customer Education

Customers trust their financial institutions to ensure that their funds are safe and secure. But FIs are not able to do this alone, and it is important that FIs are in constant communication with their customers on how to keep their accounts safe – from not falling for the latest scam to keep their checkbooks in a secure location. 

Role of Financial Institutions and Law Enforcement

In this section, we will discuss the role of financial institutions in recognizing check fraud and the importance of collaboration with law enforcement agencies.

To maintain trust, financial institutions have a responsibility to recognize and prevent check fraud. This requires evaluating our compliance risk management processes, resources, technologies, and strategies. 

Implementing advanced fraud detection technologies is just one part of our strategy. Financial institutions must also collaborate closely with law enforcement to investigate potential check fraudsters and prosecute those who attempt to alter checks. We work closely with state and federal law enforcement agencies, like the Federal Trade Commission, to ensure that our efforts align with their standards and regulations.

Developing strong working relationships with law enforcement agencies is essential, as these partnerships enable us to share crucial information about check fraud trends and techniques. Regular communication and collaboration with law enforcement help us implement best practices for prevention and detection.

In conclusion, financial institutions play a crucial role in the fight against check fraud. By investing in advanced technologies and collaborating with law enforcement agencies, we can be more effective in detecting and preventing fraud – and ensuring that our customers’ trust in us remains unshakable.