In 2022, check fraud increased by 84%, and although at the time of writing, the final numbers haven’t been released for 2023, analysts expect check fraud incidents to be even higher that year. By October 2023, there were nearly 450,000 reports of check fraud. That’s close to 2022’s total, and it doesn’t take into account the last two months of the year.
According to CNBC, banks dealt with about 460,000 cases of check fraud in 2022, compared to 250,000 cases in the previous year. Many different factors have contributed to the increase, and to protect your financial institution and your customers, you need to make sure that you’re being proactive about fighting against all of these elements.
Wondering why check fraud is increasing? Multiple factors are at play including mail theft and social engineering. Perhaps, even more significantly, check fraud doesn’t require a lot of knowledge or technical acumen to commit, making it a low-hanging fruit to aspiring criminals. Beyond that, many financial institutions ignore the risks of check fraud, choosing instead to focus on digital bank fraud, account takeover, and other type of fraud.
Although those risks are very serious, you cannot underestimate the risks of check fraud, but before you can fight it, you need to understand why it’s happening. Here are the main factors that have shaped the increase in check fraud along with strategies that you can utilize to reduce your risks. To get help now, contact us at SQN Banking Systems today.
1. Security gaps in the postal system
A significant amount of check fraud starts with someone , and then, washing the written information off and replacing it with new payees and higher dollar amounts. Thieves steal checks from individual mailboxes. They also hold up postal workers at gunpoint so they can steal their keys and gain access to large boxes of outgoing mail. In some cases, the theft happens internally from postal workers.
Mail-related check fraud increased significantly when the government started sending out paper checks during the COVID-19 pandemic. But long after those checks have stopped hitting mailboxes, the threat continues to increase. In early 2024, the news was filled with incidents, including a story of a mail carrier in Edmonds, Washington being held up at gunpoint for his master key.
To minimize this risk, you must take a multi-pronged approach. First, you need to educate your customers about the threat. Let them know that check-washing scams are increasing. Advise them to avoid mailing paper checks whenever possible. If they have to mail checks, tell them that it’s safer to drop off the checks at the post office rather than send them from home. If feasible, they should try to put the checks in the outgoing mail as close as possible to the pick-up time.
Second, focus on internal efforts to detect fraudulent checks. Make sure that your tellers know the signs of a check alteration. Consider investing in check fraud software that looks for aberrations in your customer’s patterns. Then, if the software detects a potential issue, it can rope in your fraud prevention team for a manual review. In contrast, legacy solutions that only flag checks over a certain value will certainly miss checks altered by savvy criminals who know how to stay under the threshold.
2. The rise of messaging forums
Although check fraud is relatively low-tech, it often takes a great deal of collusion to commit the fraud. Often, one person steals a check or the details of a victim’s checking account. Then, they sell the check or the information to another person. That person may complete the crime by cashing the stolen checks, or if they’re a high-volume criminal, they may bring in another person to open a mule account, cash the check through their own account, or help in other ways.
In the past, criminals had to deal with word-of-mouth connections, or they had to get on the dark web. Now, it happens online every day and often, it occurs on the social media apps that nearly everyone uses. There are online groups designed to help thieves network with each other. The messaging platform Telegram, for example, has at least 30 groups focused on committing check fraud, and some of them have up to 30,000 members.
To reduce this risk, you need to learn about what the thieves are doing. You need to understand the current threat landscape so that you can respond accordingly. The best way to approach this is by working with a fraud detection and prevention partner who collects cyber threat intelligence.
For instance, at SQN, we partner with Q6 Cyber for fraud intelligence services. Their trained analysts monitor the dark web and platforms like Telegram to learn about fraud patterns. This helps reduce risks for our customers.
3. Account takeover
Mail theft and checking washing aren’t the only causes of check fraud. In some cases, check fraud starts with a thief taking over a victim’s account. Then, the thief may change the address on the account and order a book of checks. At that point, they may write the check to a merchant or even cash it over the counter at the bank, but more commonly, they write the check to a person who cashes it at a bank or a check-cashing facility.
Research indicates that nearly a quarter (22%) of U.S. adults were affected by some type of account takeover in 2022. That includes situations where bad actors take over a victim’s bank, social media, vendor, shopping, or other types of accounts. Both businesses and individuals have to deal with account takeovers.
About 1/3 of business account takeovers were directed at financial accounts. The second biggest risk was accounts with online retailers. Over half (51%) of the individuals affected by account takeover had their social media accounts hacked. A third (32%) had their bank accounts taken over. E-commerce, email, and educational accounts were the next highest on the list.
To protect yourself and your customers, you need strategies that help you reduce the risk of account takeover. Consider focusing on customer education. In particular, remind your account holders not to use the same password for their bank account as they do for their other accounts. About 56% of people who experienced account takeover were using the same password for multiple accounts.
Additionally, make sure that you have an internal defense system against check fraud related to account takeover. Invest in anti-fraud solutions that alert you when there is activity on dormant accounts. Also, look for solutions that get to know your customers’ usual patterns and alert you when transactions are outside of the norm.
4. Walkers and brokers
To perpetuate check fraud, brokers recruit walkers to open accounts and cash checks. Then, the brokers sell the walkers’ services to the thieves orchestrating the scams. Generally, when opening an account, the walkers use a so-called Frankenstein identity that uses a combination of real and made-up elements. For instance, they may use a real Social Security Number with a fake ID and a made-up name.
Make sure that you’re aware of the risk of new account fraud. This can be especially challenging if you let new customers open accounts online. Ideally, you need a solution that will help you look for signs of new account fraud, without compromising your ability to offer legitimate customers the opportunity to handle their banking needs online or in other convenient ways. An experienced anti-fraud partner can help you strike the right balance.
Also, educate your tellers about walkers and brokers. Unfortunately, brokers often recruit elder people. Sadly, this part of the population experiences high rates of poverty and loneliness, making them easier to recruit. They also don’t raise many suspicions when they walk into a bank, and while you certainly can’t increase security measures based on age, you should talk with your tellers about other telltale signs of fraud.
In particular, brokers and walkers often come to the bank in pairs, but the broker stays in the background while the walker cashes their check. Walkers often wear earbuds so that they can get instructions from their brokers—keep in mind that hearing aids can connect to a smartphone and work as earbuds. If your tellers notice these types of dynamics, they should use additional caution before cashing the check.
5. Insider collusion
Analysts also note that some of the increase in check fraud is due to bank insiders sharing information with thieves. In particular, bank employees let thieves know about account balances so they can be sure that their bad checks won’t bounce.
To minimize the risk, make sure that you vet all new employees and actively aim to create a culture of trust in your organization. Consider safeguards such as tracking employee access to accounts and restricting access whenever possible.
Get Help Fighting Check Fraud
Check fraud is a major threat to banks, and it’s especially a risk for your valuable commercial clients. To protect yourself and your customers, you need tools that can help you reduce the risk of check fraud. This includes check image analysis, signature verification, and transaction analysis.
We can help. At SQN Banking Systems, we offer a suite of tools and services designed to protect banks from check fraud and other risks. Checks are an easy target for thieves, and as the threat rises, you need to fight back.
Ready to strengthen your bank? Let’s talk — contact us today to learn more. We can provide you with a free risk assessment, and once we’ve identified your vulnerabilities, we can help you find the right solutions for your bank.