Despite the increasing adoption of digital payments, check fraud remains a significant challenge for financial institutions.
According to FinCEN, check fraud losses in the U.S. totaled $21 billion in 2023, representing nearly 80% of global check fraud losses. The FTC reported that check fraud was high on the list of frauds that cost consumers over $10 billion in 2023.
The persistent threat of check fraud has far-reaching consequences for the banking industry. Financial institutions face both financial and reputational losses when customers fall victim to fraudulent check activity. Added to the burden of financial institutions’ cost of investigating and resolving check fraud cases, as well as implementing preventive measures, is the erosion of consumer trust in banks.
Criminals are bypassing high-tech modi operandi to exploit inherent weaknesses in a low-tech payment method. Checks stolen from the mail and fraudulently endorsed accounted for 20 percent of the check fraud reported in a recent FinCEN Financial Trend Analysis. The volume of stolen checks from the U.S. mail system, combined with the organization of criminal groups and the convergence of street-level tactics with social media, has flooded banks with bad checks.
On January 27, 2025, the FBI Internet Crime Complaint Center (IC3) released Alert Number: I-012725-PSA Mail Theft-Related Check Fraud is on the Rise. The alert notes that Suspicious Activity Reports (SARs) related to check fraud nearly doubled from 2021 to 2023. It points out that “Fraudsters take advantage of regulations requiring financial institutions to make check funds available within specified timeframes, which is often too short a window for the consumer or financial institutions to identify and stop the fraud. As a result, the compromised checks clear, and the funds are withdrawn by the criminal participants before the fraud is detected.”
Mail theft is a significant driver of check fraud. Fraudsters steal checks from USPS facilities or during delivery to the intended recipient. This can happen through various methods, including robbing postal carriers, breaking into mailboxes, or intercepting mail.
The three most common types of fraudulent checks are counterfeit, altered or “washed,” and checks with forged endorsements. The IC3 alert describes Check Washing and Check Cooking in more detail and provides tips that banks can share with customers on how to protect their mail and safeguard their checks. The altered or counterfeit checks are then deposited, often by collusive account holders recruited by the fraudsters, aka money mules, or sold online to other criminals. Fraudulently endorsed checks frequently slip through the cracks of conventional check fraud detection methods by exploiting a gap in the check clearing process.
To combat check fraud, banks and businesses must adopt a proactive and robust fraud prevention strategy. Here are some effective mitigation measures:
- Check Positive Pay: This automated system helps detect check fraud by comparing a company’s issued checks with checks presented for payment. It can identify counterfeit checks, altered checks, and checks with forged endorsements. Banks should encourage their clients to use Check Positive Pay with Payee Name Verification for enhanced security.
- Regular Account Reconciliation: Businesses should regularly reconcile their accounts, review monthly statements, and implement internal accounting controls to detect discrepancies and prevent errors.
- Enhanced Identity Verification: Financial institutions should leverage innovative identity verification, continuously update their security protocols to stay ahead of evolving threats, and deploy advanced fraud detection technology to identify and block fraudulent activities
- Secure Mailing Practices: To reduce the risk of mail theft-related check fraud, businesses and individuals should use secure mailing practices, such as using tamper-evident envelopes and avoiding sending checks through regular mail.
The Independent Community Bankers of America® (ICBA) recently announced a partnership with the U.S. Postal Inspection Service to combat the threat of check fraud. As part of this initiative, ICBA and the Postal Inspection Service will deliver in-branch educational materials with step-by-step instructions to help banks and consumers combat the escalating rise in check fraud.
The OCC has an informative Check Fraud Fact Sheet that can be downloaded and posted at branches, handed out to customers, or used in staff training sessions.
The rise in mail theft-related check fraud underscores the need for enhanced security measures and vigilance in preventing fraudulent activities. By understanding the methods used by fraudsters, financial institutions and individuals can take proactive steps to protect themselves from this growing threat.
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Upcoming AML/CFT and BSA Training
- AML/CFT Training For Your Retail Staff – March 19, 2025
In this session, we will discuss training strategies for retail and include a sample presentation that you can use to aid in your training program. >>>LEARN MORE
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Join us as we examine the various fields and checkboxes, highlight some pain points and common areas where mistakes are made, and provide examples of when certain check boxes should be used. >>>LEARN MORE
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This class covers the various types of data that can help us understand our customers’ activity and explore some of the specific requirements for high-risk customers. >>> LEARN MORE
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