Despite the rapid growth of digital payment methods, paper checks are still widely used. The Federal Reserve processed nearly 3 billion commercial checks and 36 million government checks in 2024. So, it’s no surprise that check fraud continues to pose a significant threat to banks, businesses and consumers. Indeed, incidents of check fraud have surged in recent years. The U.S. Department of the Treasury reported in early 2024 that check fraud had increased nationwide by 385% since the beginning of the pandemic. 

To combat check fraud, banks need to familiarize themselves with the most common schemes, learn to spot red flags, and take steps to protect their customers and themselves. 

What are some common check fraud schemes? 

Check fraud typically falls into one of two categories: 

1. Counterfeit instrument schemes. In a counterfeit instrument scheme, a criminal with access to routing and account numbers may create a fake check that looks like the real thing and attempt to deposit or cash it. Some counterfeiting schemes take advantage of misconceptions regarding “guaranteed” forms of payment, such as cashier’s checks or money orders. Contrary to popular belief, deposits of these payments can be reversed, even after the funds have been made available to the depositor.  

For example, suppose Sara accepts a job offer via LinkedIn. The “employer” sends her a cashier’s check for $5,000 to purchase a computer, printer, and other equipment and supplies from an “approved vendor.” She deposits the check, and the funds become available the next business day, so she wires the money to the vendor as instructed. The computer and other items never arrive, and a few days later, the payor bank, flagging the check as counterfeit, returns it unpaid. Sara’s bank reverses the deposit, so the wire transfer comes out of her own funds. 

2. Mail theft-related check fraud. As the name suggests, this involves criminals who steal checks from U.S. Postal Service (USPS) collection boxes or residential mailboxes and use them to commit fraud. Once checks are stolen, they can be misused in several ways, including: 

• Check washing, where a criminal uses a solvent to remove ink from a check and enter a new amount and payee, 

• Using the bank routing number and account number to create counterfeit checks, 

• Fraudulently endorsing and depositing checks, 

• Forging signatures on blank checks, and 

• Selling them on the “dark web.” 

This type of fraud is widespread. The Financial Crimes Enforcement Network (FinCEN) recently reported that in the six months after issuing an alert on this topic in February 2023, it received more than 15,000 Bank Secrecy Act (BSA) reports from more than 800 financial institutions on mail theft-related check fraud. This represented nearly $700 million in reported suspicious activity. Further analysis revealed three primary uses of stolen checks: 1) 44% were altered and then deposited, 2) 26% were used as templates to create counterfeit checks, and 3) 20% were fraudulently signed and deposited. 

What can banks do? 

There are several steps banks can take to combat check fraud. These include: 

Using secure check stock. This may incorporate watermarks, microprinting, holograms or chemicals to make counterfeiting harder. 

Offering positive pay to customers. With a positive pay program, a business customer sends the bank a list of checks it has issued. When checks are presented for payment, the bank cross-checks them against the list and, if the details don’t match, sends them to the business to approve or reject them. 

Educating customers and bank employees. Both customers and employees need to be aware of common check fraud schemes and the red flags of suspicious transactions. (See “Check fraud red flags” on page X.)  

Establishing a policy for exception holds. Current regulations require banks to make funds available quickly. However, banks can extend hold periods when there’s reason to believe a check is counterfeit or has been altered. 

Encouraging customers who mail paper checks to protect themselves. This may include not letting mail sit in their mailboxes, depositing mail inside the post office, and signing up for the USPS’s Informed Delivery service, which allows them to preview mail that’s scheduled to arrive soon. 

Of course, the most effective deterrent against mail theft-related fraud is to encourage customers to use electronic payment methods rather than paper checks whenever possible. 

How can you protect your bank? 

Despite advances in digital payments, check fraud remains a costly threat. Banks can take proactive steps to deter and detect these schemes, thereby reducing their exposure. This includes educating employees on how to spot fraud and educating customers on how to protect themselves. 

Sidebar: Check fraud red flags 

The Financial Crimes Enforcement Network (FinCEN), working with the U.S. Postal Service, has identified several red flags of check fraud for banks to monitor. For example, take note if a customer: 

• Writes an unusually large check to a new payee, 

• Complains that checks were stolen from the mail and deposited in an unknown account, 

• Claims that the intended recipient never received a check, 

• Uses check stock that’s noticeably different than that used by the issuing bank for known, legitimate transactions, 

• Makes a sudden, unusual check deposit (often electronically) followed by a rapid withdrawal or transfer of funds, 

• Produces a check that shows faded handwriting underneath darker handwriting, or 

• Opens an account that’s used only to deposit checks, followed by frequent withdrawals and fund transfers. 

These red flags aren’t conclusive indicators of fraud. But they may warrant further investigation.