Does your business still send paper checks in the mail? It may be time to stop.
Not only are checks inefficient and costly, they’re also more prone to fraud risk. And even though fewer people are using them than in the past, reports of check fraud are on the rise. According to an Association for Accounting Professionals (AFP) survey, 60% of business owners had to investigate at least one fraudulent check last year.
While the best solution may be to avoid paper checks completely––using fast and flexible digital payments instead––that may not always be possible.
Here's what you need to know on how to identify, report, and prevent check fraud to keep you and your customers safe.
What is check fraud?
Check fraud refers to the use or alteration of paper checks in an attempt to steal money from account holders, banks, or businesses. Besides these check fraud victims, those who commit check fraud will even resort to assaulting mail carriers to steal checks carried by the US postal service.
Surprisingly, this type of fraud is on the rise in today's digital economy. Since checks aren't granted the kinds of digital protections as credit and debit cards, they represent one of today's most vulnerable payment methods.
How does check fraud work?
There are many different types of check fraud. However, fraudsters commonly use stolen or counterfeit checks to deceive or manipulate the account holder or financial institution. This may involve stealing blank checks, intercepting already-written checks, or creating fake checks to defraud others.
Businesses that fail to take measures to screen for fraudulent checks may be held liable. However, regardless of liability, fake check scams can result in a loss of revenue or public trust.
Types of check fraud
Scam artists employ several types of check fraud. Some of today's most common check fraud examples include:
Paperhanging
In paperhanging, account holders deliberately write checks from a closed or overdrawn account. They may do this to take advantage of float time––the time between when a check is written and when funds actually move from the account––or to flee to avoid payment altogether. Either way, businesses are stuck with a bad check.
Check-kiting
Check-kiting can take several forms, but the most common involves two checking accounts, both owned by the check writer or another account holder.
The scammer might write a fraudulent check for $1,000 from Bank A and deposit it in Bank B. Then, they withdraw $1,000 from Bank B before the bank discovers the fraudulent check. The cycle can go back and forth until the scammer is caught.
Check alteration (or check-washing)
Check alteration usually occurs in tandem with mail theft. Thieves intercept checks from recipients' mailboxes and alter them to change either the payee or the check amount.
In check-washing fraud, criminals erase the information on the check with nail polish remover. They can then fill it in as they see fit or upload a screenshot of the "washed" check to the dark web, where other scammers can buy, sell, and trade fraudulent checks.
Identity theft
Identity theft can come in many forms. The most common form is when a fraudster steals your identity and uses it to write checks from your account—though this assumes they have access to clean checks.
In other instances, the scam artist may use your name and information to open their own account and then write bad checks in your name. By the time the bank identifies the issue, the original scammer has moved on.
First-party fraud
If identity theft or misrepresentation is coming from the supplier, it’s called first-party fraud. The scammer positions themself as a legitimate vendor but has no intention to fulfill the order of goods or services. A common red flag for first-party fraud is if a check is requested to be sent to a different address than what’s on file.
Check counterfeiting
One of the simplest check fraud examples is the creation of counterfeit checks. Counterfeiters use high-quality printers and supplies to make these fake checks look like genuine articles. They can then use a bogus check to purchase goods or withdraw money from someone else's bank account.
Money order scams
Some forms of fraud rely on money orders. In this setup, the scammer gives the victim a money order. They then ask that the person receiving the money order write them a check in return—sometimes even promising to pay them more. Of course, the money order is fake, and the victim loses all the funds from their check.
Cash-back scams
Cash-back scams are ones to look out for with new customers. Fraudulent customers scam businesses by sending checks for a higher amount than what was due and request a refund for the surplus. The original check will be set up to bounce or be cancelled before it can be deposited leaving you without payment and potentially without inventory if you’ve fulfilled the order.
Stolen checkbooks
If you take your checkbook on the go, there’s the possibility of it being misplaced or stolen. The scammer can then draft up as many fraudulent checks as they have available. Given that it takes time for checks to clear, you may not notice until it’s too late.
Duplicate deposits
It’s possible for someone to deposit a check twice. If the recipient uses digital deposit through a mobile app, they can turn around and deposit the check through an ATM or bank teller, doubling the amount you intended to pay. Banks may catch this, but it’s possible for duplicated deposits to slip through.
How to report check fraud
Has your business been on the receiving end of a fraudulent or fake check? If so, you'll need to report the incident to the relevant authorities.
Contact your bank
If someone has been using bogus checks from your business to steal money from your company, report it to your issuing bank immediately.
Even if you haven't detected the actual occurrence of fraud, it's good to report lost or stolen checks to the bank to prevent fraud from occurring and to receive the benefits of check fraud protection.
Contact the issuing bank
If a person has written a bad check at your business, you can contact the bank that supposedly issued the check. This is usually standard procedure if a customer's check bounces, and you can use this as an opportunity to determine whether these are legitimate checks.
Contact the authorities
If you suspect you've experienced fraud, don't delay. Contact the authorities immediately, starting with the police. Businesses should file a police report with the local law enforcement agency. Ensure you include as many details as possible, such as the dollar amount of the bad checks or the check numbers.
Report counterfeit checks to the Federal Trade Commission (FTC). You can file an online complaint through their website or contact them at 1-877-382-4357.
If you suspect someone else has been intercepting your mail, you can report mail theft to the US Postal Inspection Service (USPIS), a law enforcement entity supporting the postal service.
You may also consider contacting your state's attorney general. If other businesses have fallen victim to the same scam, there may be legal options that can protect you or help you recover any money you may have lost in the process.
Contact any victims
Unfortunately, a check fraud scam won't just affect you. If someone has stolen checks from your customers or suppliers, you should notify them immediately.
After contacting the affected parties directly, you may also wish to send a general notification to all of your customers and stakeholders in the event that the fraud is more widespread than you first thought.
Publicizing the breach can actually help your reputation since it will alert customers to any fraud that may impact them directly.
Maintain clear records
Don't discard a bad check! Keep any bounced checks and correspondence, and document the money lost during the scam. After you file a report with the police department, post office, or FTC, keep any documentation or reference numbers that may be tied to your case.
Fraud isn't considered a business expense, so you can't deduct stolen money from your annual business income taxes. But if you document security measures that you use to protect your business from fraud, you're unlikely to be held liable for any losses.
Is check fraud a felony?
Check fraud can be classified as a misdemeanor or a felony, depending on the amount of money involved in the scam and other factors. Individual states set the exact line between felony and misdemeanor, and that distinction also impacts the penalties associated with these scams.
What is the felony check fraud amount?
What is the official threshold for felony check fraud? Felony charges often apply once the fraud amount exceeds the threshold set by the state, sometimes as low as a few hundred dollars. Here are some examples of state felony thresholds:
- California: $950
- New York: $2,000
- Michigan: $500
- Florida: $150
- Texas: $2,500
According to some states' check fraud laws, possession of check fraud implements (such as the materials used in a check-washing scam) can also be classified as a felony.
How to prevent check fraud
By learning to prevent check fraud, you can save your business money and preserve your reputation among customers and stakeholders. Here are some of the best practices for check fraud prevention.
Prevent check-washing and alteration
Start by ensuring all your accounts are protected from fraud. You can do this by:
- Ordering checks from financial institutions that offer security features to prevent alteration
- Writing checks using a black gel pen
- Mailing checks directly from the post office, not your mailbox
- Checking your mail often
Many banks and credit unions offer watermarks and other security features that make tampering with someone else's check difficult. Some of these features also make it easier to see when checks have been altered, which can deter scam artists from attempting to commit fraud.
Detect fake checks
While taking steps to prevent check fraud is essential, knowing the basics of check fraud detection can also benefit your business. You can learn to spot fake checks by looking for things like:
- Does the check come from a legitimate bank?
- Does the check contain spelling errors or typos?
- Does the check's postmark match the address of the issuing bank?
- Does the amount on the check match what you expected?
- Are there any watermarks or other security features that show it's a check?
Keep in mind that modern scam artists are highly sophisticated. A forged check might look very real. If you need to contact the bank to verify that the check is legitimate, always use the phone number or contact information from the bank's website since the fake check may contain a fictitious phone number or address.
Avoid cashing suspicious checks
Ensure you avoid cashing a suspicious check until you verify it's real. Some business owners may be tempted to cash the check while they investigate its authenticity. However, doing so may be considered an act of negligence.
Instead, do your due diligence. If you can't verify the financial institution that supposedly issued the check, consider reporting it to the proper authorities.
Stay wary of third-party checks
What if someone attempts to pay using a third-party check, such as a payroll or government check? It's possible these checks were stolen. While there's no law against (legitimate) third-party checks, accepting them can place your business at risk. It may be wise to set a clear payment policy that prohibits third-party checks.
Require two forms of ID
In-person businesses might consider updating their payment terms to require two forms of ID when writing a check. Though this strategy isn't foolproof, it can make it harder for scammers to defraud your business. And since many states have security features built into their driver's licenses, you can efficiently train your employees to spot fake IDs.
Take advantage of account monitoring services
Many banks and credit unions offer fraud prevention services, and these services may already be built into your business bank account.
Continuous account monitoring and positive pay are features that monitor your bank accounts and detect threats as they develop.
These services can even "learn" from your past activity and compare checks to the size, source, and type of your "normal" transactions. This data will be used to create a risk profile and detect violations in near real-time.
Reduce check fraud by using BILL
Don't let the rise in check fraud stop you from accepting checks. Instead, stay safe by using BILL. We offer positive pay on all checks, and we also use the Automated Clearing House (ACH) system to protect your identity for payments that are as convenient as they are secure.
Our robust, multi-layered security protocols protect your data and your customer's identities and ensure compliance with financial and healthcare regulations. By handling your payments in-house — rather than through a third-party issuer—you'll have stronger protection and control over your payment process.
Learn more by exploring BILL's security features today, or contact us to discover how our advanced features can enhance your business processes today.
