The Return of Check Fraud

Although technological advancements have led to a decline in overall check use, in recent years financial institutions have experienced a significant increase in various types of check fraud. FinCEN reported 680,000 instances of known check fraud in 2022, and those trends continued into 2023 and 2024. Check fraud is the use and manipulation of traditional paper checks to fraudulently obtain funds from a bank account.

How does check fraud work?

Check fraud is a financial crime, and is committed by illegally using a check, either by forging a signature, altering the amount or payee information, or unlawfully duplicating a valid check, to obtain funds without the account holder’s knowledge nor permission.

There are various ways in which check fraud is committed ranging from simple acts of individual forgery to elaborate schemes involving entire groups or networks. Fraudsters use a variety of different types of check fraud to steal money from individuals and businesses. The most common types that may impact your business are counterfeit checks, altered checks, and checks negotiated with a forged endorsement.

Counterfeit checks

Counterfeit checks are checks that have been created fraudulently with the purpose of stealing money. A counterfeit check is often a true duplicate of a valid check, and replaces the genuine authorized check in its entirely, with a fake alternative.

Oftentimes, a counterfeit check looks completely normal at first glance.

Altered checks

 Altered checks are original checks that have been physically or electronically altered, modified, or effaced in some manner. An altered check often has a valid signature, but the payee or dollar amount have been modified.

If you examine an altered check close enough, they often have one or more visible irregularities upon arrival to the receiving financial institution for payment.

Check negotiated with a forged endorsement

Checks negotiated with a forged endorsement are checks clearing a bank account with a fraudulent payee signature in the endorsement section of the back of a check. Alternatively, an endorsement may be forged by signing a different name altogether in the same section and depositing that item into a bank account belonging to a completely different individual or organization.

In these instances, instead of making alterations to the check, the individuals committing fraud forges only the endorsement of the item and deposits the funds to a mismatched account.

How do customers and businesses expose themselves to check fraud?

Fraudsters are targeting paper checks sent through the mail. Once they have intercepted your mail, they use various techniques including chemical “washing” to change the amount of the check or change the payee of the check to themselves or an organization involved in the scheme. Once the changes have been made, the check is then negotiated by being deposited into a bank account or cashed for payment.

Fraudsters not only intercept mail for access to checks, but they’re always on the lookout for physical checks and financial documents that have been stored or disposed of inadequately. They’re known to dumpster dive for access to checks that have been inappropriately disposed of or checks that were meant to have been shredded.

Sensitive financial and account information could be used by fraudsters to recreate fraudulent physical and electronic checks. Inadequate storage of electronic data can leave your business unprotected, and your account information could be exposed that way as well.

How can businesses protect themselves against check fraud?

Protect your mail

 To avoid having your mail intercepted enhance your mail security. Utilizing secure courier services, picking mail up promptly after delivery, taking outgoing mail to the post office as opposed to dropping them in a drop box, can all help reduce the risk of theft. If you’re expecting a high-value check and you haven’t received it yet, contact the sender promptly.

Protect your checks

In addition to using high-security checks with advanced security features, be sure to review your checks when you receive your initial or subsequent orders. Review them to ensure they are correctly printed and that you received all of them. Store the checks in a safe, locked, environment. If you find an error on your checks, don’t receive an order you’re expecting, lose checks or have them stolen, contact your bank immediately. Voided checks, account statements and unused deposit slips should be shredded or torn into small pieces.

Establish internal controls

Implementing internal controls is an important step in protecting your business against the dangers of check fraud, check theft, and theft of financial information.

Checks and balances

Authorization

Implement an internal authorization process where a manager provides final approval on a transaction before an employee takes overt action to complete it.

Separation of duties

Maintain a separation of duties and responsibilities. Determine who in your organization can sign checks, and who is responsible for reconciling your accounts. The individuals in each of those roles should not be the same person. This will not only keep an extra set of eyes on all data but will also ensure that there is visibility across the organization of all authorized (and potentially unauthorized) activity.

Conduct periodic surprise internal audits to ensure that the separation is maintained, and to evaluate effectiveness of your internal controls.

Dual control

Maintaining dual control throughout your organization combines authorization and separation of duties for an additional later of security where authorization, recording, and custody are all handled by different people.

Secure Storage

Physical checks and records 

Maintain secure check storage and handling throughout your organization. Store blank checks in a secure location with restricted access and implement a “clean desk” policy to ensure sensitive financial documents are not left unattended.

Electronic financial data

To avoid exposure of electronic data, create secure login processes. Enable two-factor authentication and change your passwords regularly. Doing so could alert you if an unauthorized third party is attempting to access your electronic records. Where feasible, access your accounts through a VPN, and always encrypt sensitive files. Lastly, secure all end-user devices, and be sure to keep those devices updated.

Take advantage of Treasury Management options

In addition to internal processes, take advantage of external procedures or treasury management products at Mission Bank that can help you prevent payment fraud on your accounts.

Mission Bank - Treasury Management Online Banking Platform

Use our Treasury Management Online Banking platform to review daily transaction activity on all your business accounts, and check for irregularities in activity. Doing so can help you discover fraudulent activity sooner and increase the likelihood of the recoverability of those funds.

Mission Bank - Positive Pay

Positive Pay services help you cross reference and verify each check that your business issues to the checks being presented for payment against your account. Utilizing a predetermined set of parameters, the system will either pay the item, or issue an ‘exception,’ which is a reported discrepancy.

Mission Bank - ACH Origination

In an effort to avoid check fraud, where possible, opt for electronic payments over physical checks. Mission Bank’s ACH Origination services can help you do just that. ACH Origination allows you to electronically pay or debit other businesses or individuals, thereby minimizing the number of physical checks your company writes. This is especially helpful and secure for businesses that need to process large volumes of payables for payroll and vendor payments.