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 of check fraud, each exploiting a different vulnerability that checks inherently possess.

These schemes can involve anything from altering details on a check to creating entirely fake checks. Here are some of the most common methods:

• Forgery: Forgery involves altering a check or creating a forged check (fake check) using someone else’s account number or other financial information. The fraudster may forge signatures or create counterfeit checks that look nearly identical to legitimate personal checks or cashier’s checks, allowing them to steal money directly from a victim’s account.
• Paperhanging: Paperhanging occurs when an account holder writes a check knowing they do not have sufficient funds to cover it, then. The individual takes advantage of the “float” time—the delay between when the check is written and when it is deposited—to make purchases or withdraw cash.
• Check Kiting: Similar to paperhanging, check kiting occurs when a person writes a check from an account without sufficient funds and then covers the amount by transferring funds between multiple accounts before the check clears. This manipulation of timing and account balances exploits the time delay in depositing checks.
• Counterfeiting: Counterfeiting involves creating fake checks that mimic legitimate money orders, cashier’s checks, or personal checks. Fraudsters often use high-quality printing techniques to make these checks appear genuine, tricking victims into depositing them. Once the check is deposited and later discovered to be fake, the victim is left responsible for the lost funds.
• Chemical Alterations (Check Washing): This method, also known as check washing, involves using chemicals to erase the ink on a check, allowing the fraudster to alter the payee or dollar amount. After these changes are made, the check is then cashed or deposited, with the fraudster pocketing the fraudulent funds.
• Stolen Checks and Check Theft: When a check is stolen—whether from the mail, a business, or an individual—it can be altered before being cashed or deposited. Fraudsters may change the payee’s name or the dollar amount and then attempt to cash the stolen check. In some cases, checks are stolen and sold to criminal organizations, which further increases the potential for fraudulent activity.
• Check Washing: A variation of chemical alteration, check washing involves removing the ink from a legitimate check using chemicals. The fraudster then rewrites the check with new information, changing the payee or the amount before attempting to cash it.
• Alteration of Dollar Amount: In this scheme, the fraudster modifies the dollar amount on a check without altering the payee. This typically occurs with legitimate checks that have been stolen or forged, where only the value of the check is increased.
• Post-Dating: Post-dating refers to writing a check with a future date to delay when it is cashed or deposited. Fraudsters can exploit this by misleading recipients or taking advantage of the float period, giving them time to commit fraud before funds are discovered to be insufficient.
• Bad Checks: Bad checks occur when someone intentionally writes a check from an account with insufficient funds. These checks are often passed off in exchange for goods or services, leaving the business or individual who accepted the check without the promised payment once it bounces.
• Fake Check Scams: Fraudsters may send fake checks to victims, often as part of a larger scam involving a job offer, sweepstakes, or sale. Once the check is deposited, the victim is asked to wire part of the money back. By the time the check is discovered to be fake, the fraudster has already received the wire transfer, and the victim is left liable for the full amount.
• Identity Theft and Check Fraud: Fraudsters may also engage in identity theft, where they steal personal information such as account numbers to create fraudulent checks or make unauthorized transactions. Victims of check fraud often find that their personal or financial data has been compromised, making them vulnerable to further fraud.
• Cashier’s Checks and Money Orders: Fraudsters often counterfeit cashier’s checks and money orders, which are generally perceived as more secure than personal checks. Once these fake checks are deposited, they can take weeks to be identified as fraudulent, leaving the victim financially responsible for the lost funds.
• Wire Transfers and Fraudulent Transactions: Fraudulent checks are often tied to broader schemes involving wire transfers. Victims may be asked to deposit a fraudulent check and then wire a portion of the money back to the scammer, who disappears once the check is flagged as fake. This combination of fraudulent checks and wire transfers makes it difficult to recover the lost money.

Security Features in Checks

The inherent vulnerabilities of checks, such as the time it takes for transactions to clear and the physical nature of the check itself, make them attractive targets for fraudsters. Security features such as watermarks, microprinting, and holograms make them more difficult to forge. However, fraudsters continue to develop sophisticated methods to bypass these protections, making it essential for businesses and individuals to be vigilant when handling checks.

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.

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 one of the serious financial crimes 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!