Check Fraud: A Comprehensive Guide

Over the past two decades, check use has declined in the U.S. and many other countries. Alternative digital payments, such as credit and debit cards, direct deposits, autopay, and digital wire transfers, are more common than ever for managing day-to-day financial needs.   

But even while check use is waning, check fraud is on the rise. According to data released earlier this year from the Financial Crimes Enforcement Network (FinCEN), reports of check fraud have nearly doubled over the past three years, rising from 350,000 cases in 2021 to 680,000 in 2022.

While check fraud is usually a low-tech operation, the key to a strong defense often lies in high-tech solutions. In this guide, we’ll review how check fraud has evolved in recent years and the steps individuals and organizations can take to combat this growing form of fraud.

What Is Check Fraud?

Check fraud is any fraud case wherein a fraudster uses a check (physical or digital) to steal money from a person or business. Check fraud can take many forms, including intentionally writing bad checks (when the check amount exceeds that of the account balance), as well as the use of counterfeit checks, stolen checks, altered checks, or forged checks.

Given the rise in digital crimes, such as identity theft and account compromise, the risk of check fraud is often overlooked by both banks and individuals. However, data shows that criminals are reverting to this tried-and-true technique — perhaps because so much attention and resources have been focused on preventing and detecting more modern forms of fraud, making it more difficult for fraudsters to circumvent those defenses.

It is important for both individuals and banks to understand that advances in digital technologies and access to online communities have made it easier than ever for fraudsters to successfully carry out check fraud. With this in mind, they must take steps to minimize its risk, just as with any other type of fraud.

Types of Check Fraud

There are many types of check fraud, which is why it can be difficult for banks and individuals to fully protect themselves through simple monitoring techniques and responsible check use. Below we explore some of the most common check fraud techniques.

1. Check Forgery

Check forgery typically involves doctoring the check issuer and signature, the check amount, or both. For example, a person may steal a blank check and forge the account holder’s signature. They may also take a legitimate check and add a zero to the check amount, thus increasing the value of the check.

2. Counterfeit Checks

With advances in technology, including the boom in generative AI, counterfeit checks are on the rise. Fraudsters can create digital or physical copies of legitimate checks or even create completely fake checks that are not tied to a real account. These checks are then used to purchase goods or withdraw money from a checking account, just as a “real” check would be.

These falsified materials can be very convincing. Through internet forums and the dark web, counterfeiters can share tips for how to pass manual reviews, as well as how to access high-quality printers, magnetic ink, and special paper to create fake checks that are nearly indistinguishable from genuine checks to the naked eye.

3. Check Kiting

In simple terms, check-kiting is when someone writes a bad check from one account to another. Then, before the check clears, the person will withdraw the funds or write a second check, passing the funds on to yet another account. Check-kiting is typically used by individuals to access cash. For businesses, the goal is often to create a string of fictitious transactions to inflate revenues or cover financial losses.

Another form of check kiting is when a customer writes a check in an amount that exceeds the cost of the product or service. Before the check clears, they will then request the business to refund the difference. The penalties for engaging in check kiting can be significant, with punishments ranging from up to 30 years in prison to fines and restitution in the millions. 

4. Check Washing

Check washing is what it sounds like: A fraudster literally washes a check with common chemicals and solutions, such as nail polish remover or paint thinner, to erase and replace select check details. 

One common scenario for this technique is when someone steals a legitimate check, erases the payee's name, replaces it with their own (or that of an accomplice or a fake identity) and then cashes it. Alternatively, they could erase the amount on the check and change it to a higher value.

In the digital age, check cooking is the online version of check washing. In these scams, fraudsters use software to scan a legitimate check and alter its details.

Warning Signs of Check Fraud

Given the highly sophisticated digital tools fraudsters have access to, it has become extremely difficult to detect check fraud with the naked eye. As such, the most effective methods for proactively detecting check fraud involve advanced technologies, such as AI and computer vision, to identify such cases early in the fraud lifecycle. 

That said, there are some traditional warning signs and methods that individuals and banks alike can keep in mind to reduce the risk of this form of fraud. However, it should be noted that most of these techniques are reactive—meaning that they only detect fraud once it occurs. This makes the recovery process more difficult or even impossible.

Unusual Bank Activity

One of the most important signs of check fraud is a deviation from normal banking patterns. This may indicate that an account has been compromised.
Some examples of suspicious activity to be on the lookout for include:

• Transactions that are out of the ordinary, like large withdrawals or checks made out to unusual accounts
• Several deposits followed by rapid withdrawals of the exact amount, down to the cent
• An atypical number of deposits, followed up by several fast withdrawals several times in a week

Unexpected Overdrafts

For individuals, an unexpected account overdraft may also be a sign of fraud. In such a case, it is important to immediately contact your bank. They will freeze the account to prevent any additional withdrawals and work with you to investigate the issue. During this process, your financial institution will likely change your account number and provide you with new checks. It is also a good idea to file a police report.

Preventing Check Fraud

For individuals, the best way to avoid becoming a victim of check fraud is to practice secure procedures for both writing and receiving checks, watch account activity closely, and learn about common scams so it is easier to avoid high-risk scenarios.

For businesses, preventing check fraud requires a mixture of traditional security procedures similar to those used by individuals, as well as advanced technological solutions that can quickly and accurately identify checks that have been altered, forged, counterfeited, or otherwise manipulated. 

Here we share our best practices to minimize the risk of check fraud:

Secure Storage

Individuals and businesses should take steps to securely store checks and all sensitive financial documents. This includes:

• Restricting access to checks
• Regularly reviewing your bank statements to look for unfamiliar activity
• Setting up alerts and notifications for all bank transactions
• Investing in a safe that is hidden or impossible to move
• Shredding old checks before throwing them away

Check Writing Safeguards

Now that you've secured your checks and financial documents, follow these tips for writing checks securely to prevent alterations and forgery:

• Avoid electronic banking on public Wi-Fi networks
• Password protect all digital financial documents using strong passwords and implement two-factor authentication whenever possible
• Change all banking passwords regularly and don’t reuse passwords across multiple accounts
• Draw a line on unused spaces on checks and always write out the dollar amount in full, so that it is more difficult to alter the check amount

Implementing AI-powered document fraud detection

If fraudulent checks are nearly imperceptible to the naked, yet trained, eye, enlisting the use of AI-powered technology and computer vision is the only practical way to enhance security for banks, financial institutions, and any organization that regularly handles check payments.
What the human misses, AI can detect. Here are a few ways AI-powered solutions can reduce the risk of check fraud:

• Using algorithms to analyze historical check transactions and seek out any anomalies
• Matching signatures and detecting inconsistencies across past checks
• Recognizing patterns, such as an irregular number of checks, increased dollar amounts, and unusual names being used
  Once the solution detects one of the above fraud signals or any other high-risk activity, it can trigger alerts for continued investigation by a human controller.
  

The benefits of using AI-powered check fraud detection services are in the numbers. Inscribe data shows that 90% of check and document fraud is invisible to the human eye, which means that 90% goes undetected unless AI-powered solutions are employed. Inscribe's advanced Fraud Intelligence technology has a 99% precision rate in catching fraud and credit abuse — enabling businesses to “detect the undetectable.”

Final Thoughts on Check Fraud

Check fraud remains an unrelenting threat from which no one is exempt. With various forms of forgery and sophisticated techniques like check washing and kiting, scam artists draft billions of dollars through check fraud annually.‍

Key takeaways:

1. Diverse threats: Check fraud takes many forms, requiring a multipronged prevention and detection strategy.  
2. Sophisticated techniques: Scam artists use state-of-the-art methods to carry out check fraud, creating the need for high-tech, advanced solutions for banks and financial institutions, as well as organizations that regularly accept check payments.
3. Preventive measures: Secure storage, vigilant monitoring, and AI-powered solutions are crucial for preventing check fraud early in the fraud lifecycle. 

Staying a step ahead of fraudsters is the key to preventing check fraud. AI-powered solutions like Inscribe, which have the ability to analyze patterns, detect anomalies, and provide real-time alerts, have become indispensable in the fight against check fraud.

To learn more about how your organization can quickly and accurately detect check fraud using Inscribe’s AI-powered Risk Intelligence platform, please contact us to set up a personalized demo with one of our experts today.