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Financial institutions are suffering increased check fraud losses due to remote deposit exploits, heightened scam attempts and a spike in counterfeiting, alteration and mail theft.

The use of checks continues to decrease, but checks are not going away any time soon. In fact, according to the 2024 AFP Payments Fraud and Control Survey Report, 70% of respondents indicated they had no plans to eliminate check usage by 2026. Although check usage is declining, check fraud continues to rise and remains the payment method most susceptible to fraud.

Checks are low-tech in comparison to wires or ACH. The lack of digital information means that financial institutions must take a paper check and turn it into something digital which makes it difficult for financial institutions to write custom rules and logic to detect fraudulent checks. The lack of digital information, along with multiple deposit methods, crime through social media channels and increased mail theft, makes check fraud a desirable avenue for fraudsters.

Altered Checks

Some fraudsters will try to erase the information on a stolen check and then write in new information to make someone else the payee or change the amount the check is worth. Sometimes they will use special chemicals to do so, which is why this is sometimes called “check washing”. Just know that the alteration must occur to the original paper check that was issued by the Drawer.

Mobile Check Fraud

The modern capability of mobile device applications to deposit checks by capturing images of them is undoubtedly convenient. However, it has also opened new avenues for fraud. For instance, the potential use of editing software on these images makes checks easier than ever to forge or alter. Duplicates through a Remote Deposit Capture channel is a simple scheme that fraudsters utilize. This involves a criminal capturing an image of a check to deposit it, then shortly thereafter deposits the original physical check at an ATM, financial institution or check cashing facility. This takes advantage of the float to deposit the check twice before the original deposit clears. The criminal may even alter the check before physically depositing it to make it more difficult to tell that it is the same check they deposited through a mobile app.

In addition to the rise of check fraud and the complexities associated with its detection, financial institutions face the challenge of determining liability for losses. Check law is some of the oldest in the payments industry and with newer staff entering the check operations space, they find themselves confused on what can be done to mitigate check fraud losses and what actions they should be taking once the fraud has occurred. 

I conduct the National Check Professional (NCP) training for EPCOR and often hear comments about the benefits of having an NCP on staff at a financial institution. Many institutions tell me that they now have someone on their team that understands check law, what actions can be taken with a fraudulent item and whether you’re within the return timeframe or not. These institutions have learned what each entity warrants, depending on which side of the check they’re on (Depositary Institution vs. Paying Institution), and how to properly file a Breach of Warranty to recover fraudulent funds. Institutions have commented that they have also learned ways to mitigate check fraud (i.e. positive pay products), therefore; reducing the amount of fraud losses they are taking.

EPCOR’s NCP Prep Program kicks off in January 2025. Register today!

Source: Unit 21: The Rising Tide of Check Fraud