Check fraud continues to increase for many of our clients. If you are seeing a significant volume of counterfeit and altered checks, among other fraud problems, in the check-clearing system, you are not alone. On top of that, recovery of checks against very large banks has become a slow, drawn-out process where it used to be relatively straightforward. The following will address several common types of fraud and give more details on solutions some of our bank clients have taken to resolve the issues.
Counterfeit Versus Altered Checks
First, let’s look at counterfeit checks versus altered checks. You want to know the difference between these because the bank that takes the check as a bank first deposit for an altered check is liable for the check. On the other hand, the bank that pays the check for their account holder is typically liable for the counterfeit check.
Altered Checks are where somebody goes to a post office box, lifts a check (maybe a rent check or another recurring check), washes it, and then puts their name on it. They then pass that check through the payment system, get paid, and try to disappear with the money before somebody catches on.
Counterfeit Checks are where someone lifts a check in a similar way. They then print a new check on different stock with nearly the same information but with different payee names. Because some positive pay systems don’t cover the payee name, the check goes through, it’s not flagged nor caught, it’s paid, and the fraudster gets away with the money.
According to S&P Global, SARs for check fraud at depository institutions more than tripled between 2018 and 2022, with 447,525 SAR check fraud reports through October 2023.
Check Fraud Recovery Solutions
Some of our clients have been successful with the following recovery solutions.
- POSITIVE PAY SYSTEMS THAT COVER THE PAYEE NAME – We’ve seen several different stances on this solution, from not very aggressive to very aggressive. Some of our banks will ask customers to use the positive pay system, while others will try to push all of their business customers into the positive pay system. Some banks are going so far as to say to their customer, “If you’re not going to use positive pay, we’re going to require you to sign in an indemnity for certain cases of fraud” to cover the liability that arises for the bank when they pay the check. We encourage using a positive pay system that covers the payee name (and hopefully, your customers are using printed names on their checks) because the positive pay will go through and control for the check number, the check amount, and the payee name. It will then flag the checks that don’t match what the depositor says and shut down some types of fraud we’ve described.
- PAYMENT FROM LARGE BANKS – The second major problem we’re seeing pertains to large banks. We’re seeing a very large volume of check fraud, and so, if you’re a bank and trying to approach US Bank, Bank of America, or JP Morgan Chase to get them to pay an altered check that they took as a bank first deposit, it’s possible that they are either not responding, or they’re taking forever to respond. Here are a few things that we’ve seen help before going to litigation.
- BE PERSISTENT – Recognize that these banks see very large volumes of fraud.
- FIND THE RIGHT PERSON – Find an attorney or someone in the fraud department who handles those checks on a regular basis. Take all the documentation and the package regarding the check and present it in a very clear way. This makes it very clear to the banker or attorney that their bank is liable for the check. Ask for the payment and then make it clear that they’re going to pay it now or they’re going to pay the check and attorney’s fees and additional costs that may arise through the suit. Generally speaking, if a bank of first deposit knows the bank will be paying either a) the check, or b) the check plus collections costs, the bank will pay.
These are just some of the options we’re seeing. We know that pretty much everybody is seeing large volumes of check fraud. Hopefully, you’re not. If not, you are few and far between. If you are, this gives you some ideas on how you might address the issue and hopefully reduce the level of fraud. We don’t believe fraud ever completely goes away, but there are certainly many things you can do to reduce it.
Farley Law specializes in working with both community banks and small businesses. If you are interested in learning more about these or any other income-generating activities for banks, please feel free to contact us at Farley Law, where we help our client financial institutions develop new products and financial services. Have a question or a comment? Send us a note at business@farleylawpllc.com, or set up an introductory call using our bookings service.