Check Fraud

Check fraud is the use of paper or digital checks to illegally gain money. This is commonly done by forging an account holder’s signature on a stolen check, altering a legitimate check to be for a different payee or amount, or writing a counterfeit check for an unauthorized or non-existent account.

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Is Check Fraud a Federal Crime?

Yes, check fraud is a criminal offense in the US. But depending on the nature and value of the fraud—and sometimes the state in which it happens—check fraud can be classified as a misdemeanor or a felony.

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A low-value check fraud scheme that doesn't target a financial institution or other large organization will typically be charged as a misdemeanor. This usually results in some light criminal fines, restitution for the victim, and around a year’s worth of imprisonment.

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Check fraud for large amounts of money, and/or that directly targets FIs or other large organizations, usually carry much more serious felony charges. These can result in fines up to $1 million, and/or prison sentences of 30 years or more.

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Who is Liable for Check Fraud?

Generally, a financial institution that accepts a fraudulent check is liable for any losses that result from withdrawals against that check. However, check fraud liability can rest with the individuals and businesses that deposit fraudulent checks in some circumstances and jurisdictions.

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The most obvious case is if the FI can prove the client intended to deliberately commit fraud in depositing the check (instead of unknowingly being the one defrauded).

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Another is if the FI can prove that the client’s lack of due diligence was a major factor in the check being forged or altered. An example is writing and signing a blank check, which is then later stolen and modified to change the amount or payee. Then the person or business that wrote the check would likely be held liable for losses because of their carelessness.

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Check Fraud Statistics: The Impact on Businesses

Checks are among the most vulnerable financial instruments to fraud because they contain a lot of sensitive information, but it can be easy to overlook forged or altered ones. In a 2023 survey by the Association for Financial Professionals, over 60% of responding businesses cited having to conduct at least one check fraud investigation the previous year.

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Similarly, a 2018 report from the American Bankers Association found that around 60% of fraud attempts at US financial institutions that year were incidents of check fraud, in total valuing over $15.1 billion. Successful check fraud accounted for nearly $1.3 billion—or 47%—of FI’s losses that year.

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Check fraud works by deceptively making use of paper or digital checks to steal or otherwise illegally gain funds.  This can be done by falsifying or altering legitimate checks—or simply taking advantage of how the check processing system works.

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For example, some check fraud schemes seek to take advantage of “the float”—the time period between when a check is deposited and when it’s cleared. During this gap, money is credited to the payee’s account, but has not yet been deducted from the payer’s account. Fraudsters can exploit this instance of money being in two places at once to their advantage in several ways.

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Types of check fraud typically fall into one of three other categories:

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• Counterfeit checks: A fraudster creates a fake check that looks genuine and may or may not correspond to a legitimate financial account. So they’re basically paying or depositing money unauthorized from someone else’s account, or from an account that doesn’t exist.
• Forged checks: A fraudster steals a genuine check, then fakes the account holder’s signature (and/or other credentials) to make the payment look like it has been properly authorized. They may also alter the payee name or check value amount.
• Altered checks: A fraudster steals a genuine check that has its details filled in and has already been signed, then uses a method to alter the payee name and/or the amount the check is for.

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Next, we’ll look at some specific ways criminals commit check fraud.

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Though we covered some of the main ways check fraud works, there are many sub-variations of how criminals pull it off. Worse, more are appearing all the time as technology and processes change. Here is a non-exhaustive list of some common methods of check fraud.

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Paperhanging

Paperhanging is a check fraud scam that exploits “the float”—the time delay between a check being deposited and cleared. A criminal will open an account at a financial institution, then begin writing checks drawing on that account. Often, they will draw more money than they actually have available in the account.

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The criminal will then spend the checks, or else deposit them in another account they control (and perhaps also withdraw the resulting credit as cash). Then, before the checks clear, they will close the account the checks drew from, leave the country, or utilize some other scheme to avoid accountability for the non-existent money. They may even continue writing checks that draw on the closed account, then cash them out and disappear before an FI realizes the account is inactive.

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Check Kiting

Check kiting, also called check floating, is a variation of paperhanging. The criminal opens a financial account, then begins writing checks that overdraw from that account. But during the float, instead of just disappearing, the criminal deposits money in the drawn-on account to create the illusion that it had the necessary funds to cover the checks. This money is often ill-gotten, and may even be from checks that draw on accounts the criminal is depositing their original fraudulent checks into.

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Check Theft

Sometimes, check fraud simply involves a criminal stealing someone else’s filled-in check and attempting to use it as if it was their own. They may try to spend or deposit it in a way that limits the chance that it will be scrutinized for details. For example, they may try to impersonate the check’s legitimate payee.

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Check Alteration

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”.

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Check Forgery

Check forgery involves a criminal stealing a legitimate check, then forging the payer’s signature or endorsement to make the check look like it was properly authorized. They may even name themselves as the payee or alter the amount the check is for.

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Identity Check Theft

Identity check theft is when a fraudster impersonates someone in order to write checks to use at the victim’s expense. This may involve an account takeover, or it may involve stealing the victim’s identity credentials through another method (such as phishing) and then opening an account under their name.

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Either way, the criminal is now free to acquire or forge checks to either deposit into other accounts or spend like money. Meanwhile, the legitimate person behind the compromised account or identity is the one who ends up bearing the costs.

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Check Counterfeiting

Criminals can sometimes create counterfeit checks that look like genuine checks, but their essential information may or may not correspond to any actual entity, bank, or account. So the information is either for someone else’s account, or an account that doesn’t actually exist.

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Another counterfeiting variation is synthetic checks. Similar to synthetic IDs, this involves creating a fake check using a known legitimate bank code and account number. However, the payor information on the check doesn’t correspond to the rightful account owner. It may not even correspond to a real entity.

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Cashier’s Check Fraud

Criminals can use forged and counterfeit cashier’s checks for several different check fraud scams. A common one is buying something from a marketplace by writing the seller a fake check worth more than the purchase price. The criminal’s goal is to convince the seller there’s a legitimate reason for overpaying (even just “by accident”) and ask the seller to refund them the difference. Later, the seller finds out the check was fake and the criminal has stolen their money.

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A similar counterfeit check scam involves a criminal sending a fake check to trick someone into believing they’ve won a lottery or been selected to receive a donation. The criminal aims to convince the victim that there were taxes, customs, or other fees associated with delivering their funds, and to send a portion of the money to cover these costs. Of course, this is just the criminal stealing money, as the victim eventually finds out the check they received was fake.

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Yet another related widespread fake check scheme involves a criminal contacting a victim and offering them a job. The fraudster sends the victim a fake check, then asks them to use some of the money on it towards testing a business that sells gift cards, wire transfers, money orders, or other hard-to-trace payment assets. When the victim buys through these businesses to send assets back to the criminal, the criminal disappears with the assets. Meanwhile, the victim is left with a worthless fake check and loses the money they paid for the assets.

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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 up new avenues for fraud. For instance, the potential use of editing software on these images makes checks easier than ever to forge or alter.

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Another simple scheme that mobile deposit enables is double presentation. This involves a criminal capturing an image of a check to deposit it, then shortly thereafter depositing the actual physical check at an ATM or financial institution. 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’s the same check they deposited through the mobile app.

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To demonstrate how check fraud can come in many different forms, from petty theft to multi-million dollar scams, here are some notable check fraud cases in recent history.

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George Santos

In 2008, the US congressman used a fake name and a stolen checkbook to buy clothes—including a pair of tennis shoes—from a store near Rio de Janeiro, Brazil. The shoes were later returned to the store by a man claiming they were a gift from his friend “Anthony”, the false identity Santos used.

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Santos later admitted the fraud to both the shopkeeper and the police. He was officially charged with the crime in 2011, but the case went cold after Santos fled the country. In January of 2023, Brazilian prosecutors reopened the case after learning that Santos was living in New York and had been elected to the US government. In May of 2023, Santos agreed to formally confess to check fraud and pay a $5,000 fine in order to avoid criminal prosecution in Brazil.

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Frank Abagnale Jr.

The famous yet enigmatic con man turned anti-fraud adviser, subject of the 2002 movie Catch Me If You Can (and the book of the same name it was based on), committed check fraud in several ways. One was by paperhanging: he would impersonate someone in a well-paying occupation (such as an airline pilot, a lawyer, or a doctor) to get a bank to give his account a high overdraft limit. He would then write checks worth more money than what he had in his account, spend them, and then disappear before the checks cleared and the bank realized he couldn’t cover their costs. He repeated this trick with several banks.

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Another one of his schemes involved creating counterfeit checks with high-tech printing machines that used the same magnetic ink as banks. This would make the bank codes on his checks seem genuine, but they would correspond to a different bank than the one he was drawing from (sometimes even to a bank that didn’t actually exist). He also used this and other tricks to create counterfeit checks that looked like they were from legitimate businesses.

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Synergy Brands, Inc.

The former CEO of the now-defunct food company, Mair Faibish, was convicted in 2014 of being part of a check kiting fraud scheme worth over $1.3 million. Faibish and his co-conspirators wrote checks for more money than they had in accounts at several banks in the US and Canada. They then sent the checks to companies in Canada that Faibish was a beneficial owner of, which then sent checks for even more money either back to Faibish’s accounts or to other companies he owned. This movement of money across international borders made the fraud even more difficult to track.

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Meanwhile, the scam made it look like Synergy was millions of dollars more profitable than it actually was. This eventually led to scrutiny from the Securities and Exchange Commission in mid-2008, causing Synergy to be taken off the stock market later that same year. The company went bankrupt in 2011 when the scheme unraveled, costing at least one financial institution (Signature Bank) over $26 million. In 2016, Faibish was sentenced to over 5 years in prison for his role in the fraud.

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There are several strategies for check fraud prevention that, when used together, increase the chance that a financial institution or other business can detect and stop check fraud. Here are some suggestions.

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• Use checks securely: Source checks that have added security features—such as security paper, watermarks, and reactive ink—from reputable suppliers. Checks should also be locked in a secure location until they are ready to be distributed or used.
• Monitor accounts and analyze behaviors: Know your customers and what their typical financial activity looks like. If they’re suddenly using checks often when they didn’t before, or something else seems off, it could be a sign of fraud.
• Audit accounts regularly: The more often an FI (or other company) scrutinizes its accounts and dealings, the sooner it can find potential discrepancies and investigate them.
• Use positive pay or reverse positive pay systems: These are systems between businesses and financial institutions where they share lists of checks that businesses have officially issued. This helps the FI avoid cashing fraudulent checks that appear to be from legitimate companies.
• Know Your Employees: Hiring processes should include determining if employees—especially those who will be dealing with checks—are representing themselves genuinely and are below acceptable thresholds for misconduct. A business should also ensure that more than one employee is responsible for writing checks and reconciling accounts.
• Train employees properly: FI employees should be trained on the proper procedures regarding opening new accounts and handling checks. This includes looking for signs of fraudulent checks, such as missing or altered MICR, missing or inconsistent information, irregular signatures, and poor check construction or printing.
• Educate the public: Consumers should know how to recognize and avoid falling victim to the common ways criminals commit check fraud. They should also be taught how to report check fraud if they receive a check they believe might be fraudulent.
• Make use of AI: Some machine learning algorithms can spot signs of fraudulent transaction patterns—or counterfeit, forged, or altered checks—that humans may not be able to spot on their own.

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Utilize Unit21’s Tools in the Fight Against Check Fraud

Modern banking has become increasingly digital—meaning less people use checks in their regular life. But checks are still commonly used in the business world, making them a prominent form of bank fraud. Check fraud is most prevalent in this environment, with fraudsters taking advantage of businesses' prominent use of the financial instruments.

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Fortunately, there are ways for organizations to fight back against check fraud, including monitoring transactions for anomalies and suspicious activity patterns.

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‍Unit21’s Transaction Monitoring solution employs expanded data monitoring—it looks at other contextual information surrounding transactions to more accurately identify true positives. It goes beyond check imaging tools to allow teams to not only be reactive—but proactive—about preventing fraud related to checks.

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To get a deeper understanding of how it works, contact us for a demo.

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