Check fraud is soaring in the US, with losses exceeding $24 billion in 2024. Fraudulent checks cause financial pain for the individuals and businesses that are targeted, as well as a great deal of work and stress for bank check fraud investigation teams.
It’s one of the hardest types of financial crimes to investigate and prevent. According to our own research, check fraud is so challenging that more than one-third of all fraud alerts are not dealt with in time. They slip through the net and are only discovered further down the line, if at all, when the defrauded individual notices an incorrect payment or the intended recipient complains that they didn’t receive the check.
In this article, we’ll discuss check fraud investigations and what’s involved in them.
What is Check Fraud?
Check fraud is a type of financial crime where thieves use checks to steal money from individuals and businesses. It causes billions of dollars of losses every year, and is a serious headache for banks and financial institutions.
Thieves utilize many different tactics and methods in check fraud schemes. These include creating fake counterfeit checks, forging stolen checks, changing the details on genuine checks, and even account takeover (ATO) schemes, where criminals write checks against a real account without the owner’s knowledge.
Early Check Fraud Signs
It’s notoriously difficult to detect fraudulent checks, but there are some red flags that everyone should watch for. First of all, fraud teams look for discrepancies in the check’s appearance, like smudged or uneven printing, missing security features like watermarks or microprinting, and warning signs like missing the company logo or incorrect routing numbers. These can be signs of counterfeit or fake checks.
Bank fraud teams also check whether critical details have been altered, like the payee name or amount, and if the signature looks like the accountholder’s usual signature. Checks issued for unusually large amounts, to an unexpected recipient, or written in different colors of ink or different handwriting should also ring alarm bells. These can all indicate a stolen check that’s been altered by thieves, in what’s called check-washing.
Another indicator of check fraud for bank personnel is suspicious activity related to the transaction – we’ll talk a bit more about this below. Bankers should also of course keep an eye out for checks that were reported as stolen or have duplicate serial numbers.
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What to Do When You Suspect Check Fraud
If a consumer or business suspects that they or their business has fallen victim to check fraud, it’s important to act quickly. They should immediately notify the bank and provide them with details about the suspected fraud, including copies of the check in question if possible. They can ask the bank to place a hold on the account or monitor it closely for unauthorized transactions.
Banks should counsel their customers that if they receive a check they think is fraudulent (for example, someone asks them to cash a check for them and pay them most of the money, giving them an easy way to get some cash), they shouldn’t cash or deposit it, because that could make them liable for the stolen funds. Instead, they should report the incident to the proper authorities. If possible, they should notify the issuing bank listed on the check and file a police report.
Banks may also want to inform customers that they can contact agencies like the Federal Trade Commission (FTC) or their local consumer protection office for further guidance. Taking these steps promptly helps protect their finances and assists in investigating fraudulent activity.
The Role of Banks in Check Fraud Detection
Banks play a critical role in detecting red flags for check fraud, both the maker bank (which promises to pay out for the cashed check and hosts the check-writer’s account) and the bank of first deposit (which receives the check for deposit). They need to be constantly vigilant for attempted check fraud, using verification systems to authenticate transactions and ensuring that checks are genuine.
Bank personnel should always be on the lookout for suspicious activity when someone deposits a check. This could include a sense of urgency from the payer, or requests to cash the check immediately, both of which may indicate that someone is pressuring them for the funds. These scenarios can be part of overpayment scams, where the check amount exceeds what was owed, accompanied by instructions to wire the excess funds back. Bankers should also watch for checks that were reported as stolen, or have duplicate serial numbers.
Banks leverage advanced technologies, robust security measures, and vigilant monitoring systems to help them detect check fraud. These include automated fraud detection tools, such as artificial intelligence and machine learning, to identify unusual patterns or suspicious activities, like altered checks, duplicate transactions, or unauthorized access to accounts.
In addition to technology, banks rely on customer communication and proactive measures. They educate account holders about fraud risks and encourage reporting of suspicious activity. Regular account monitoring, fraud alerts, and secure processes for handling checks and transactions are part of their approach to safeguarding customer assets and mitigating fraud.
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How Banks Investigate Check Fraud
When banks investigate fraudulent checks, they are working under time pressure and in very difficult circumstances. They only have a few hours in which to decide whether a check is fraudulent or if they should approve it, and there’s a lot riding on their decision. They could be liable to repay funds if they approve a fraudulent check, or damage customer trust by questioning an account holder about a check that’s legitimate.
Here are some of the best practices and investigation steps that go into a check fraud investigation.
Gathering and Preserving Evidence of Check Fraud
Banks begin investigations by collecting all the relevant evidence, such as copies of the fraudulent check, account statements, financial records, and transaction logs. They carry out forensic analysis to examine the check for alterations, forged signatures, or missing security features.
Preserving this documentation is crucial to maintain its integrity for legal procedures. Banks may also secure video footage from ATMs or branches where the transaction occurred, and document all their findings.
Working with Financial Institutions
Collaboration with other financial institutions is essential in tracing fraudulent transactions. Banks may contact the issuing bank to confirm the legitimacy of the check and verify account details, and to find out if this check is consistent with the account holder’s usual pattern of transactions.
Check fraud investigation teams also work with clearinghouses, payment processors, and regulatory authorities to track the flow of funds and prevent fraud from spreading across institutions. This cooperation helps to identify patterns of fraud, and protect customers across the banking network.
Tools and Technologies for Check Fraud Investigations
There are various tools and technologies that banks can use to help them investigate suspicious activity. For example, fraud detection software, machine learning algorithms, and automated systems can flag suspicious checks based on criteria like check amount, payee name, or frequency of transactions.
Banks might also use specialized imaging tools, to help analyze checks for forgeries or alterations. Signature verification software compares signatures on checks with stored samples, helping to identify inconsistencies.
Common Investigative Techniques
When it comes to best practices for investigating fraudulent checks, the most reliable way is still to ask the accountholder. The person who allegedly wrote the check is in the best position to confirm whether it’s a genuine check, and if it’s been tampered with in any way.
Most banks who carry out customer outreach do so over the phone, although some use emails and text messages. A growing number of banks use Refine’s Digital Customer Outreach for Check Fraud, which sends a digital inquiry that takes customers less than a minute to complete.
Other common investigative techniques include comparing the fraudulent check with legitimate samples from the account holder to spot inconsistencies, analyzing the handwriting to verify signatures, and examining transaction histories for unusual patterns. Investigators might examine past transactions to see if they’re consistent with the amount and payee on the check that’s under suspicion. But these aren’t always reliable or accurate.
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The Role of Law Enforcement in Check Fraud Cases
Check fraud isn’t only a concern for banks and financial institutions. It’s also an issue for law enforcement bodies. Once a check has been reported as possibly fraudulent, the authorities work to investigate and prosecute the case. They’ll cooperate with banks, victims, and other stakeholders to gather evidence, such as fraudulent checks, surveillance footage, and transaction records.
Law enforcement agencies often collaborate with specialized financial crime units, to analyze the methods used by fraudsters and trace the flow of stolen funds. Their role extends to identifying and apprehending suspects, often involving interstate or international efforts when fraud networks are sophisticated or widespread.
Of course, law enforcement also helps deter future crimes through prosecution. They work with legal teams to present strong evidence in court and apply penalties like fines, restitution, or imprisonment.
Legal Considerations in Check Fraud Investigations
There are a number of legal considerations that check fraud investigators need to bear in mind as they move through investigation steps.
For a start, liability issues can cause a lot of difficulty. According to US law, the maker bank is liable for counterfeit or forged checks, while the bank of first deposit has liability for genuine checks that were altered or checkwashed. However, there’s disagreement about whether checks that were manipulated and/or deposited using digital means, like through mobile deposits, are considered altered checks or counterfeit checks. Smaller banks, in particular, can struggle to establish liability for larger banks.
Check fraud investigators have to maintain compliance with laws relating to privacy and data protection, like the GLBA or other regional regulations, when they access and share sensitive financial information. Sometimes due process means they need to obtain a subpoena or court order before they can access certain records.
Another legal issue concerns chain of custody. This refers to carefully preserving evidence so that it can’t be challenged in court and weaken a case. Investigators must document every step in handling evidence, such as fraudulent checks, transaction logs, or surveillance footage.
How to Prevent Future Check Fraud Incidents
Prevention methods for future check fraud incidents involve a combination of secure practices and advanced technology. Individuals and businesses should use checks with robust security features like watermarks, microprinting, and tamper-evident designs, and never send checks through the mail. “Positive Pay” is a great way to prevent check fraud, but it can be costly for customers, and not every bank offers it. For customers, regularly monitoring bank accounts for unauthorized transactions and reconciling bank statements promptly also helps detect check fraud signs early.
Banks and organizations should adopt robust fraud detection and analysis tools, and enforce protocols for check issuance and processing. It’s important to educate customers about tracking the progress of checks they write, to train employees and customers in recognizing fraudulent activity, and encourage electronic payments, which are more secure and traceable, to reduce reliance on physical checks.
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