How to prevent check fraud
An overview of the different types of check fraud and how to prevent them.
Updated:
February 21, 2024
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February 21, 2024
Despite the rise of digital payments, sending paper checks is still a popular method businesses use to pay vendors, process payables, and transfer funds.
Like credit card fraud, the number of businesses impacted by check fraud has increased annually, even though check usage is dwindling. In fact, by October, suspicious activity reports (‘SAR’) filed with FinCEN eclipsed all of 2022.
This guide aims to provide a comprehensive overview of check fraud, how it occurs, and preventative steps businesses can take to prevent it from impacting them.
Eliminate annoying banking fees, earn yield on your cash, and operate more efficiently with Rho.
Business check fraud is a financial crime or scam that involves the unauthorized use of checks to illegally acquire or borrow funds from a company's bank account, usually perpetrated by scammers for illegitimate or criminal means.
This can include when a bad actor/fraudster creates counterfeit checks that resemble real checks with slight alterations, alters legitimate ones, intercepts mailboxes or P.O. boxes where business checks are mailed, or other fraud check fraud schemes.
Given the documentary nature of checks, check fraud is an attractive lure for fraudsters, and the results can devastate businesses.
For starters, account losses and debits caused by theft or fraud are not covered by Federal Deposit Insurance Corporation (FDIC) deposit insurance.
There are many reasons businesses continue to use paper checks. Some prefer the familiarity of the check process – “if it isn’t broken, don’t fix it” – and they are used to the manual process of writing checks.
For others, their vendors may prefer to receive payment that way or enjoy the feeling of control over the process by writing out personal checks.
As 2023 fraud reports confirm, paper checks are particularly susceptible to many types of fraud. While convenient, there are huge risks with business checks continuing to be the common financial instrument used today.
Fraudsters are by nature always ever-evolving in their tactics for check fraud. While not an exhaustive list, here are the following common ways check fraud occurs:
This involves unauthorized individuals signing a check in another person's name (i.e., identity theft).
Fraudulent misrepresentation of an account holder can lead to illegally withdrawing funds from a victim's account.
Bank tellers often receive frequent training on detecting fraudulent checks from employers and institutions like the American Bankers Association.
However, you cannot assume that a bank will always catch every bad actor.
This occurs when fraudsters modify the details on a check—such as the payee's name or the amount—to create a bad check aimed at diverting funds for their benefit.
Altered check fraud is old-school, which can be as simple as adding extra digits to the check amount (while maintaining the same check number) or as complex as re-engineering the entire document.
This technique uses chemicals to erase information from a check, allowing the perpetrator to fill in new details on a blank check. It effectively transforms a legitimate check into a blank canvas for fraud.
Theft of checks can occur by intercepting them before they reach the intended recipient (mail theft) or stealing them from personal or business checkbooks.
The stolen documents are then used fraudulently or sold to bad actors (e.g. dark web transactions).
Counterfeiters produce duplicated or fake checks using advanced printing techniques and high-quality paper.
These fraudulent checks often look indistinguishable from legitimate ones to the untrained eye and can be used to make unauthorized transactions or fraudulent ATM check deposits.
In this scenario, fraudsters take checks written against a victim’s closed account and deposit them at an ATM of a different financial institution, potentially having the ability to withdraw cash immediately due to the float time of bank-to-bank transactions.
Businesses can employ the following business practices for fraud prevention:
Store personal checks and financial documents in a secure, locked location, and limit access to authorized personnel only. If you receive checks via post office P.O. box, ensure the location is in a secure facility, only allowing authorized personnel access.
Use first-class mailing services that require the digital signature of the intended recipient as a secure payment method.
Leverage your bank's positive pay service, which matches checks issued by businesses with those presented for payment, flagging any discrepancies and anomalies for review.
Whenever possible, leverage electronic payments like direct deposits, ACH transfers, or online bill pay to vendors to reduce the use of paper checks.
Use checks with built-in security features, such as watermarks, microprinting, and tamper-evident designs, to deter alteration and duplication of a check.
Regularly review bank statements and other account documents to stay alert to potential criminal activity by bad actors targeting your business.
There are a few critical steps you can take to report check fraud if you suspect you are a victim:
Immediately inform your bank about any suspected check fraud to halt transactions and begin the investigation process with their fraud department.
Report the incident to a local law enforcement agency. This report is crucial for insurance claims and any potential recovery of funds.
Other federal agencies that a business can report check fraud include:
If the fraud could affect your business credit, report the incident to the major credit bureau.
There are several layers of check fraud detection and protection that Rho customers enjoy, starting with our dedicated internal team that monitors and detects unusual activity around the clock, such as inbound check deposits and when checks are issued for vendor payment.
In addition, the Rho platform offers several key fraud prevention capabilities as an added layer of fraud prevention.
One unique Rho feature is that we don’t originate checks from a client’s Rho account. Unlike most bank checks, routing and account numbers listed on a Rho check do not match the account information on any primary or secondary Rho checking accounts.
This means two things if a bad actor gets a hold of a Rho client check. First, this makes it more difficult for a fraudster to initiate a pull of funds via the ACH network.
Second, any exposed funds would be limited to the dollar amount on the check, not the full amount in your checking account.
We designed this capability to limit fraud exposure surface area for clients that process payments via check using Rho.
Unlike reverse positive pay, which puts the burden of verifying checks on the customer, Rho offers positive pay as an additional security measure.
Rho matches checks issued by our clients with those presented for payment, thus flagging any discrepancies and anomalies for review. This is an industry standard in mitigating check fraud, similar to security features provided by larger financial institutions.
Suppose our business suspects that the check(s) issued is susceptible to fraud or has been intercepted by a third party.
In that case, our client can initiate a stop payment of that issued check, thereby voiding the check, preventing bad actors from intercepting the funds, and with ease of mind, as Rho does not charge a cancellation fee.
Rho-issued checks are sent via first-class mail by default, reducing the likelihood of check fraud.
Customers who send checks with Rho experience many benefits, including zero fees, visibility of payment status, and the benefits of running all your finances in a single platform.
Interested in learning how Rho can address your business banking needs? Get in touch today.