FAQs About Check Fraud

Annually, the banking industry loses about $2 billion in fraud against deposit accounts, and over a third of these losses are related to check fraud. To protect your financial institution, your customers, and yourself from check fraud, you need to understand the essentials.

1. What Constitutes Check Fraud?

Check fraud is when someone uses paper or electronic checks to commit fraud. In all cases of check fraud, the perpetrator is purposefully trying to get cash or goods through deception, but the specific means used can vary.

2. How Does Check Fraud Happen?

Check fraud can take several different forms:

• Stealing check blanks to use for fraud
• Using someone’s account and routing number to create fake check blanks
• Taking a check written out to someone else, using chemicals to erase the ink, and writing it out to yourself
• Altering the amount on a check written out to you and cashing it
• Giving someone a bad check to pay for something and having them give you cash in return
• Signing checks that are not yours
• Endorsing and cashing a check that is not made out to you
• Writing checks from closed accounts
• Purposefully depositing a bad check into an account and withdrawing the funds

3. Is Check Fraud a Felony?

Depending on the situation, check fraud can be a felony or a misdemeanor, but in many cases, check fraud isn’t detected or punished. Generally, the line between misdemeanor and felony depends on the amount of money involved in the fraud. Many states classify check fraud under $500 as a misdemeanor, and they consider fraud over that amount to be a felony.

4. What Are the Penalties for Check Fraud?

Generally, misdemeanor charges for check fraud can lead to criminal fines plus up to a year in jail. With felony charges, the fines can be thousands of dollars, and jail sentences may be over a year or even several years, depending on the extent of the crime and specific state laws.

Civil penalties for check fraud vary from state to state. In some cases, the victim may have the right to claim two or three times the amount of the check plus the victim’s attorney fees. Some states outline a minimum civil penalty of $10 to $100, and others have a maximum penalty of $1,500.

5. How Can Check Fraud Be Prevented?

Educating your customers is a critical part of preventing check fraud. Reach out to your business customers and make sure they understand the importance of using checks with built-in security features that make the checks hard to copy or mimic. When possible, steer these customers toward electronic payments or direct deposit. Keep in mind, however, as you embrace other payment methods, you also must be vigilant about fraud in those areas as well.

Risks of Check Fraud

With individual clients, let them know about the risks of check fraud. Remind them not to put checks in their mailboxes or they might get stolen. Send out newsletters letting them know about popular check frauds and how to avoid them. Advise them not to accept checks from people they don’t know and never to give cash back to a stranger who writes them a check or gives them a money order.

What Happens When a Check Doesn’t Clear

Also, work hard to make sure your customers understand what happens when a check doesn’t clear. In other words, they should understand that if they deposit a fraudulent check, some of the funds may be available right away, but once the check comes back as fraudulent, the credit gets reversed. At that point, the customer may experience returned payments and overdraft fees. To be on the safe side, your customers shouldn’t draw funds on checks unless they are sure the check is not fraudulent.

Reducing Check Fraud

At the same time, you also need procedures and tools to reduce check fraud in your financial institution. Checking customers’ identification and requiring a personal identification number (PIN) before allowing them to cash checks or make withdrawals on their accounts is essential. You may want to hold checks over a certain amount until the check clears. In some cases, this can be challenging because you need to balance customer satisfaction with bank security.

To be competitive with other financial institutions, you may need to credit checks relatively quickly, but you also need to make sure you don’t end up holding a bad check and losing money. To help you strike the right balance, you need tools that can help you detect check fraud quickly and efficiently. Then, you can confidently credit other checks, without worrying about the risk of fraud.

6. How Do You Detect Check Fraud?

To detect check fraud, you need analyze the information, signature, and other details on checks and flag checks with issues that may indicate potential fraud. At that point, your bankers can manually review the check and decide which actions to take.

Additionally, you may want to invest in special software that allows business customers to print a barcode on each of their checks. The barcode contains all the details on the check, including payee and amount. When you accept the check for processing, your system reads the barcode and ensures all the details match. If the barcode is missing or the check has been altered, the system picks that up immediately.

7. Who Pays for Check Fraud?

If a bank customer deposits a check that doesn’t clear due to fraud, insufficient funds, or any other reason, the customer is responsible for any payments that have been drawn against that check and any fees that ensue as a result of those payments. At that point, the customer may try to recoup their losses from the person or business that issued the check.

In some cases, customers may leave an account overdrawn after depositing a fraudulent check, and then, the bank may end up paying for the losses. If someone comes into the bank and uses a check to make a fraudulent withdrawal from an account that is not theirs, the bank is typically liable for the fraud. Similarly, if a bank cashes a check that was created fraudulently, the bank is also responsible for covering those funds.

8. How is Check Fraud Investigated?

Banks and businesses often do their own investigations to figure out the truth behind check fraud. Depending on the extent of the fraud, local law enforcement agencies may handle the investigation, and in large cities, police departments often have their own financial fraud departments. Often, federal agencies such as the FBI, the Financial Crimes Enforcement Network (FinCen), or the financial crimes task force of the United States Secret Service handle fraud investigations.

9. What is Cashier Check Fraud?

Cashier check fraud uses cashier checks to commit fraud. A popular variation of this fraud involves the thief giving the victim a fake cashier’s check and then asking the victim to give some cash in exchange for the cashier’s check. When the victim tries to deposit the cashier’s check, they find out it’s fraudulent. By that time, they can’t recoup their cash because the thief is gone.

You know banking, you know customer satisfaction, but we know fraud. At SQN Banking Systems, we strive to make detecting fraud easy for our clients. To learn more, contact us today.