How Check Fraud Works
Check fraud is a serious issue that affects everyone, but it particularly hurts small community banks. In 2023, there were nearly 700,000 reported cases of possible check fraud, resulting in billions of dollars in losses according to the U.S. Treasury Department. Thieves engage in various methods to steal money through check fraud, such as stealing checks from mailboxes. They target different types of checks, including personal checks, business checks, and government program checks like Social Security checks. Business checks are especially vulnerable due to their larger amounts. Thieves employ different techniques, such as washing checks with chemicals to erase the amount and payee while retaining the original signature. They may also endorse checks with the victim’s name, even if the signature doesn’t resemble the victim’s usual signature. These altered checks are then deposited electronically, bypassing the oversight of banks or credit unions.
Community Banks vs. Big Banks in Check Fraud
The prevalence of check fraud poses a significant challenge for community banks, which are now pressing the Office of the Comptroller of the Currency (OCC) to take action against large banks. Community banks argue that large banks have failed to enforce rules designed to prevent criminals from opening bank accounts. Institutions like Wells Fargo, Bank of America, and JP Morgan Chase are among the banks accused of not properly monitoring new account openings. Thieves intercept checks through the mail, alter them, and deposit them into “mule” accounts before emptying them. As a result, small community banks are left repaying customers who have fallen victim to check fraud. According to the Uniform Commercial Code (UCC) rules, larger banks are supposed to reimburse these smaller banks, but this process can sometimes take months.
The Importance of Timing for Criminals
Timing is crucial for criminals involved in check fraud. They aim to withdraw funds after they appear in their accounts but before any potential bounce or detection as fraudulent activity. To accomplish this, criminals utilize person-to-person payment apps like Venmo, which allow them to move thousands of dollars within seconds. They often transfer the funds from the altered checks to external accounts such as bank accounts or cryptocurrency wallets, making recovery difficult. ATM cash withdrawals and outgoing wire transfers sent internationally are other common methods employed by fraudsters to drain money from these fraudulent accounts.
The Role of the US Postal Service
Apart from large banks’ failure to conduct due diligence, the US Postal Service has also contributed to the check fraud problem. Frank Albergo, president of the Postal Police Officers Association, attributes the rise in check fraud to the significant reduction in the number of postal police officers. He notes a 22 percent decrease in postal police officers in 2023, leaving the post office operating at just 60 percent capacity. This lack of resources and enforcement has allowed check fraud to escalate.
Effects on Consumers and Small Businesses
Check fraud not only impacts individuals financially but also exposes them to other forms of identity theft and fraud. Personal identification information stolen through check fraud can be used for account takeovers, credit card fraud, and money laundering. Criminals can leverage technologies like artificial intelligence (AI) to create new synthetic identities, prolonging their exploitation of both consumers and financial institutions. The costs associated with combating check fraud ultimately burden banking customers as financial institutions struggle to address the issue. Small businesses are particularly vulnerable, with 63 percent falling victim to check fraud in 2022. These businesses often lack the resources necessary to protect themselves effectively, resulting in a median loss of $150,000 per business.
Preventing Check Fraud
While victims of check fraud can file claims with their banks, the process can be lengthy and financially stressful. Taking proactive measures can help reduce the risk of falling victim to check fraud. Depositing checks at the post office or near collection times outside the post office can minimize the chances of theft. Using pens with permanent ink can also deter criminals from washing checks. Regularly monitoring account balances for any anomalies and reporting them immediately is crucial. Utilizing services like “Informed Delivery” from the US Postal Service, which sends a picture of mail before delivery, can help identify missing items once they arrive. Additionally, embracing secure electronic payments instead of checks for bill payments is recommended. Many banks and vendors offer this service, providing a safer alternative to traditional checks.
Vigilance in the Fight Against Check Fraud
Remaining vigilant is essential in combating check fraud. Individuals should pay attention to who receives their checks and where they are being sent. Avoiding the use of checks altogether can minimize the risk of falling victim to this type of fraud. It is crucial to recognize that these criminals not only harm small community banks but also directly impact consumers and businesses. By taking proactive measures and staying informed, individuals can play an active role in reducing check fraud and protecting their financial well-being.
