How to prevent check fraud

What is check fraud? 

Business check fraud is a financial crime or scam that involves the unauthorized use of checks to illegally acquire or borrow funds from a company's bank account, usually perpetrated by scammers for illegitimate or criminal means. 

This can include when a bad actor/fraudster creates counterfeit checks that resemble real checks with slight alterations, alters legitimate ones, intercepts mailboxes or P.O. boxes where business checks are mailed, or other fraud check fraud schemes. 

Given the documentary nature of checks, check fraud is an attractive lure for fraudsters, and the results can devastate businesses. 

For starters, account losses and debits caused by theft or fraud are not covered by Federal Deposit Insurance Corporation (FDIC) deposit insurance.

Why do businesses use checks?

There are many reasons businesses continue to use paper checks. Some prefer the familiarity of the check process – “if it isn’t broken, don’t fix it” – and they are used to the manual process of writing checks. 

For others, their vendors may prefer to receive payment that way or enjoy the feeling of control over the process by writing out personal checks. 

As 2023 fraud reports confirm, paper checks are particularly susceptible to many types of fraud. While convenient, there are huge risks with business checks continuing to be the common financial instrument used today. 

How does check fraud occur?

Fraudsters are by nature always ever-evolving in their tactics for check fraud. While not an exhaustive list, here are the following common ways check fraud occurs: 

Forgery

This involves unauthorized individuals signing a check in another person's name (i.e., identity theft). 

Fraudulent misrepresentation of an account holder can lead to illegally withdrawing funds from a victim's account. 

Bank tellers often receive frequent training on detecting fraudulent checks from employers and institutions like the American Bankers Association. 

However, you cannot assume that a bank will always catch every bad actor. 

Check alteration

This occurs when fraudsters modify the details on a check—such as the payee's name or the amount—to create a bad check aimed at diverting funds for their benefit.  

Altered check fraud is old-school, which can be as simple as adding extra digits to the check amount (while maintaining the same check number) or as complex as re-engineering the entire document.

Check washing

This technique uses chemicals to erase information from a check, allowing the perpetrator to fill in new details on a blank check. It effectively transforms a legitimate check into a blank canvas for fraud.

Stolen checks

Theft of checks can occur by intercepting them before they reach the intended recipient (mail theft) or stealing them from personal or business checkbooks. 

The stolen documents are then used fraudulently or sold to bad actors (e.g. dark web transactions). 

Counterfeiting

Counterfeiters produce duplicated or fake checks using advanced printing techniques and high-quality paper. 

These fraudulent checks often look indistinguishable from legitimate ones to the untrained eye and can be used to make unauthorized transactions or fraudulent ATM check deposits. 

Closed account fraud

In this scenario, fraudsters take checks written against a victim’s closed account and deposit them at an ATM of a different financial institution, potentially having the ability to withdraw cash immediately due to the float time of bank-to-bank transactions. 

How to prevent check fraud

Businesses can employ the following business practices for fraud prevention: 

Secure your checks 

Store personal checks and financial documents in a secure, locked location, and limit access to authorized personnel only. If you receive checks via post office P.O. box, ensure the location is in a secure facility, only allowing authorized personnel access.

Use first-class mail

Use first-class mailing services that require the digital signature of the intended recipient as a secure payment method. 

Positive pay

Leverage your bank's positive pay service, which matches checks issued by businesses with those presented for payment, flagging any discrepancies and anomalies for review.

Electronic payments

Whenever possible, leverage electronic payments like direct deposits, ACH transfers, or online bill pay to vendors to reduce the use of paper checks. 

Enhanced check features

Use checks with built-in security features, such as watermarks, microprinting, and tamper-evident designs, to deter alteration and duplication of a check.

Frequently check your accounts

Regularly review bank statements and other account documents to stay alert to potential criminal activity by bad actors targeting your business.

How to report check fraud

There are a few critical steps you can take to report check fraud if you suspect you are a victim: 

Contact your bank

Immediately inform your bank about any suspected check fraud to halt transactions and begin the investigation process with their fraud department. 

File a police report

Report the incident to a local law enforcement agency. This report is crucial for insurance claims and any potential recovery of funds. 

Other federal agencies that a business can report check fraud include: 

• The U.S. Department of Justice
• The Federal Trade Commission (FTC.gov)
• The Office of the Comptroller of the Currency
• The U.S. Postal Inspection Service

Notify credit bureaus

If the fraud could affect your business credit, report the incident to the major credit bureau.

How Rho helps prevent check fraud

There are several layers of check fraud detection and protection that Rho customers enjoy, starting with our dedicated internal team that monitors and detects unusual activity around the clock, such as inbound check deposits and when checks are issued for vendor payment. 

In addition, the Rho platform offers several key fraud prevention capabilities as an added layer of fraud prevention. 

Check origination 

One unique Rho feature is that we don’t originate checks from a client’s Rho account. Unlike most bank checks, routing and account numbers listed on a Rho check do not match the account information on any primary or secondary Rho checking accounts. 

This means two things if a bad actor gets a hold of a Rho client check. First, this makes it more difficult for a fraudster to initiate a pull of funds via the ACH network. 

Second, any exposed funds would be limited to the dollar amount on the check, not the full amount in your checking account. 

We designed this capability to limit fraud exposure surface area for clients that process payments via check using Rho. 

Positive pay

Unlike reverse positive pay, which puts the burden of verifying checks on the customer, Rho offers positive pay as an additional security measure. 

Rho matches checks issued by our clients with those presented for payment, thus flagging any discrepancies and anomalies for review. This is an industry standard in mitigating check fraud, similar to security features provided by larger financial institutions.

Zero check cancellation fees

Suppose our business suspects that the check(s) issued is susceptible to fraud or has been intercepted by a third party. 

In that case, our client can initiate a stop payment of that issued check, thereby voiding the check, preventing bad actors from intercepting the funds, and with ease of mind, as Rho does not charge a cancellation fee.

First-class Mail 

Rho-issued checks are sent via first-class mail by default, reducing the likelihood of check fraud. 

Wrap-up: Embrace better business banking with Rho.

Customers who send checks with Rho experience many benefits, including zero fees, visibility of payment status, and the benefits of running all your finances in a single platform. 

Interested in learning how Rho can address your business banking needs? Get in touch today.