Anti-money laundering (AML) professionals are tasked with staying on top of their financial institution’s AML program, which includes preventing potential fraud and hard dollar losses. Check fraud is one type of fraud that continues to trend upward in financial institutions, making detection a critical component of AML programs.
Check fraud detection tips for AML professionals
Why check fraud detection is critical and what to look for
Learn about the types of check fraud AML professionals are seeing and what to do to identify and stop this widespread problem.
You might also like this on-demand webinar explaining how fraudsters use checks to their advantage.
Check fraud detection
Check fraud detection tips for AML professionals
The need for check fraud detection
Fraud affects millions yearly and doesn’t discriminate based on age, gender, or race. In addition, fraud has significant resource implications for financial institutions. Check fraud, in particular, threatens consumers and financial institutions at an alarming rate, even with declining consumer check usage. Checks are frequently used in several of the latest fraud trends, including business email compromise, money mules, spoofing and phishing,
Checks, or written instructions ordering payment from an account, have been around since the 11th century, and this type of fraud has also been around since medieval times. And despite the rise in technologies or the innovation of new payment systems, check fraud continues to rank in the top three types of financial fraud. According to the Federal Bureau of Investigations (FBI), losses from check fraud total $18 billion annually. That staggering statistic represents approximately 500 million checks, more than a million daily.
With the inclusion of fraud as one of the eight Financial Crimes Enforcement Network (FinCEN) national priorities, AML professionals must be fully aware of the latest fraud trends involving checks and red flags associated with suspicious activity. The fraud detection role of AML professionals is vital to protecting individuals and financial institutions from losses.
According to the Federal Reserve Bank, depository institutions nationwide filed 459,891 suspicious activity reports (SARs) in 2022 for check fraud, an increase from 249,812 filings in 2021.
4 Prominent trends
Types of check fraud
AML professionals must constantly monitor for the top fraud trends that could affect their customers or members.
Four prominent check fraud trends are:
- Check forgery
- Altered check schemes
- Counterfeit checks
- Check kiting
The landscape of check fraud is subject to dynamic shifts based on diverse elements like seasonal changes, holidays, economic conditions, unemployment rates, and periods of crisis such as the COVID-19 pandemic. The changing nature of fraud is why a good fraud detection software and ongoing fraud prevention training and education are at the heart of AML compliance and fraud detection programs in financial institutions.
First-party vs. third-party check fraud
As mentioned earlier, a critical concern for financial institutions lies in safeguarding against these threats. Distinguishing between first-party and third-party fraud is essential to understand the types of bad actors involved to ensure proper mitigation and detection methods are in place.
First-party fraud occurs when an account holder deliberately writes a check for an amount that surpasses their existing account balance, thus leading to an intentional overdraft to extract unauthorized funds. First-party fraud also includes an account holder depositing a forged, altered, or counterfeit check, and often escalates into “kiting," which involves a customer intentionally inflating their account balance by exploiting the time it takes for checks to clear. First-party fraud burdens the bank to scrutinize client onboarding and monitor and meticulously detect abnormal transaction patterns. Unfortunately, the pandemic, related relief payments, and other conditions in recent years have meant ample temptation for first-party fraud by individuals, employees, and businesses.
Third-party fraud encompasses the illicit activities of external fraudsters who steal, manipulate, or counterfeit checks, preying on unsuspecting victims and introducing fraudulent instruments into the banking system.
Financial institutions must remain vigilant in employing robust authentication measures, advanced fraud detection technologies, and comprehensive customer education initiatives to effectively combat both first-party and third-party check fraud.
What to look for with check fraud
While financial institutions focus on digitization, fraudsters prefer traditional paper checks to assist with illegal schemes. To help identify and stop check fraud, provide training to staff on the basic handling of checks. Tellers should closely examine the physical check when accepting it, paying close attention to the check numbers. Most scammers use low numbers on personal checks (101-400) and higher numbers on checks for business accounts (1001-1500). Before accepting the check, verify the customer or member’s address, look for signs of discoloration or stains from erasures or attempts at altering printed information. Mobile deposits offer unique challenges, and financial institutions should have mobile deposit policies in place that align with the overall risk appetite of the bank or credit union.
Additionally, your transaction monitoring system should be able to pick up on potential red flags based on a customer or member’s usual spending and deposit and withdrawal patterns. Check fraud investigation systems able to catch kiting will look out for a high number of check deposits in a day and more cash being taken out than put in. If a customer or member uses a check to cover overdraft fees, that is another sign of check kiting.
Pay attention to transactions that involve check deposits, especially those between two institutions where the same account holder has accounts. If you can stop funds related to check fraud from leaving the institution, you will save yourself and your customer or member a great deal.
A check fraud solution uses scenarios to scan for sudden check activity on dormant accounts, duplicate serial numbers, check amount thresholds, and other situations to alert AML staff of possible fraud. Combining the ability to recognize suspicious patterns and identify deviations from risk thresholds helps financial institutions better detect and manage suspicious activity to avoid fraudulent checks and prevent fraud.