How Check Fraud Affects Small Banks and Consumers

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In 2023, nearly 700,000 cases of possible check fraud were reported, which, according to the U.S. Treasury Department, equaled billions of dollars in losses.

Check fraud affects everyone, but it’s also really hurting small community banks. But how does check fraud work, and how can we stop it?

How Check Fraud Works

Thieves go through mailboxes and steal checks. They can be any type of check like:

• personal checks
• business checks
• government program checks (like Social Security)

Business checks are the most vulnerable since they have bigger pockets than personal checks.

Thieves use several ways to steal your money. For example, they wash the check with chemicals to erase the amount and payee, but keep the original signature.

Sometimes, they just endorse the check with your name even though it doesn’t look like your signature. The check is then deposited electronically, circumventing the bank or credit union’s oversight.

Community Banks vs. Big Banks in Check Fraud

Check fraud is hurting community banks, which are asking the Office of the Comptroller of the Currency (OCC) to crack down on large banks. These large banks have failed to comply with rules meant to keep criminals from opening bank accounts.

Community banks say that large banks don’t police new account openings. These banks include:

• Wells Fargo
• Bank of America
• JP Morgan Chase

Checks are intercepted through mail, altered, and deposited in so-called “mule” accounts. The accounts are later emptied.

The small banks end up re-paying customers who had stolen checks. But according to the Uniform Commercial Code (UCC) rules, the larger banks are supposed to reimburse the small banks. But this can sometimes take months.

The UCC governs how checks are to be processed, presented, and cleared.

According to David G. Schroeder, senior vice president at the Community Bankers Association of Illinois, the problem is the large banks’ allowing fraudulent accounts to be opened. Criminals open accounts with mobile devices or online, depositing fraudulent checks into them.

“Checks that clear back to community banks are funding thriving criminal enterprises,” said Mr. Schroeder.

The check fraud crisis is a serious issue. The OCC said it may expose banks to increased Bank Secrecy Act. And it could be related to anti-money-laundering laws.

Timing Is Critical to Criminals

Timing a withdrawal is everything for a criminal. These fraudsters withdraw funds after they appear in their accounts, but they must do it before the withdrawal bounces or gets flagged as fraudulent.

To do this, they use person-to-person payment apps like Venmo. They can move thousands of dollars in seconds.

They often shift money from the checks to another external account, such as a bank account or cryptocurrency wallet (which is difficult to recover).

ATM cash withdrawals are another way to siphon money from these fraudulent accounts.

Finally, outgoing wire transfers are sent internationally. This makes recovery challenging.

US Post Office Not Policing

Besides the large banks failing to practice minimum due diligence, the U.S. Postal Service has also failed when it comes to check fraud.

Frank Albergo, president of the Postal Police Officers Association, blames increased check fraud on drastic cuts in the number of postal police officers. Mr. Albergo also claimed the U.S. Postal Inspection Service, the law enforcement arm of the post office, shifted its strategy.

He cited a 22 percent drop in postal police officers in 2023. The post office has a budget for 700 officers and is operating at 60 percent capacity.

How Check Fraud Effects Consumers

Check fraud doesn’t stop with cashing your washed check. Criminals leverage stolen information in many ways.

Your personal identification information can be stolen and used for:

• account takeover
• credit card fraud
• money laundering

Technologies like artificial intelligence (AI) make it easier for criminals to create new synthetic identities to cash in. These fraudsters can exploit the consumer and the financial institution longer.

Besides severe personal losses, banking costs rise as financial institutions struggle.

Small Businesses as Victims

In 2022, 63 percent of businesses were victims of check fraud. Small businesses were the most frequently targeted. This is because they have fewer resources for protecting themselves.

According to the Association of Fraud Examiners, the median loss per business was $150,000.

Prevent Check Fraud

If you’re a victim of check fraud, you can file a claim with your bank. However, this process could be long and cause significant stress to your personal finances.

You can take some steps to ensure your checks aren’t stolen.

Take the time to deposit checks at the post office or near collection times outside the post office.

You’ll also want to use pens that have permanent ink. This will deter your check being washed. Always monitor your balances to discover if there’s an anomaly. The report it immediately.

“Informed Deliver” is a free option from the U.S. Postal Service. This service sends you a picture of your mail before delivery. You’ll be able to determine if anything is missing after it arrives.

Finally, avoid using checks. Instead, use secure electronic payments for your bills. You can do this through your bank, and many vendors offer this service as well.

Vigilance Will Help With Check Fraud

Pay attention to the who and where your checks go. Remember they can be stolen at any time so avoid using them.

These criminals hurt the small community bank and ultimately the consumer.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.