How to Combat the Rise in Business Check Fraud
Consumer preferences for digital payments have led to a decline in check writing among Americans. According to the Federal Reserve, there has been an 82% decrease over the past three decades in the number of checks written. So it’s a little ironic that business check fraud is actually on the rise.
This includes mail-theft related check fraud, in which thieves steal mail in bulk from blue postal mailboxes or cluster mailboxes at apartments, remove checks from the mail pieces and create forged identifications to cash or sell them on the black market. Sophisticated criminal gangs use fake IDs and set up fake businesses to streamline check deposits. In 2022, 56 individuals in California were arrested for a mail theft and check washing operation that stole nearly $5 million from hundreds of victims.
Since 2021, there has been a nearly 400% increase in mail-theft related check fraud, according to the U.S. Postal Inspection Service. In 2022, there+ were more than 38,000 reported incidences of high-volume mail theft and nearly 500 mail carriers were robbed of mail while making deliveries.
Checks Still Commonly Used by Businesses
While check usage has dropped drastically among consumers, approximately 40% of B2B payments are still made using paper checks. This makes business-to-business transactions especially vulnerable to fraud.
Why is business check fraud such a problem? Mainly because it’s relatively easy for fraudsters to pull off. Checks don’t offer the same kinds of fraud protection as digital payment systems that are routinely updated with security enhancements like biometrics and two-factor authentication. Also, advanced printer technology makes it simple for criminals to create business checks that look and feel real.
In addition, check float — or the time between when a check is written, cashed and cleared — creates an opportunity for check fraud to go undetected until it’s too late to stop it. There’s typically no float with digital payments, which mostly eliminates this risk.
Types of Business Check Fraud
There are a number of different types of business check fraud. Here are four of the most popular among thieves:
1. Check washing
This is perhaps the most common type of check fraud. After stealing checks, thieves “wash” them using a solvent to remove the ink and then change the payees’ names and the dollar amounts to make fraudulent deposits.
2. Check kiting
This scheme takes advantage of check float. Thieves will open an account at two different banks, write a check from one account to the other and cash it out from the second account before the fraud is discovered. More elaborate check kiting schemes use multiple banks and accounts and a series of revolving checks.
3. Cash-back scams
With this scheme, thieves use a fake check to pay more than the purchase price for a product and request a refund for the overpayment before the check bounces. Victimized businesses lose both their inventory and the amount refunded.
4. Stolen checkbook
This might be the worst type of check fraud because once thieves steal a corporate checkbook, they can write as many fraudulent checks as there are in the book, in any amount they choose. Given the float time, businesses could suffer big losses before the fraud is detected.
Preventing Business Check Fraud
Here are six steps you can take to protect your company from business check fraud:
1. Take outgoing mail containing checks straight to the post office instead of putting it in your mailbox or a blue postal mailbox. Also, retrieve mail from your mailbox promptly every day.
2. Keep your business checkbook secure, preferably under lock and key. Purchase checks directly from your bank and only order as many as you need for the short term to minimize extra check stock on hand.
3. Fill out checks completely by writing out the numeric value, full name of the recipient, date and a descriptive note at the bottom. Draw a line at the end of every space to prevent thieves from writing an extra zero or adding a recipient.
4. Destroy checks once you’ve deposited them. If you use remote deposit services, shred checks once they have posted to your account so thieves can’t retrieve them from your trash and steal sensitive account information.
5. Use check fraud tools from your bank, such as Positive Pay. This service compares a check image file you give the bank to checks presented for payment to ensure a match. Any suspicious items are presented to you for a pay or no-pay decision.
6. Pay vendors using electronic funds transfer (EFT) and the Automated Clearing House (ACH) instead of writing checks in the first place.
Concluding Thoughts
Despite the rise in consumer preferences for digital payments, check fraud is increasing, including mail-theft related check fraud. Checks are still used by many businesses to pay vendors and suppliers, which makes B2B transactions especially vulnerable. A CFO Services professional can help you assess your business check processes and recommend concrete steps you can take to protect your company from check fraud, including using bank tools such as Positive Pay.
Arthur F. Rothberg, Managing Director, CFO Edge, LLC
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