Welcome back to the fourth installment of our “Scam Likely” series. Today, we turn to an old-school scam that has made a huge comeback: mail theft and check fraud.
The Set Up
You have a business client that is still using paper checks. When the time comes to pay an invoice, the client writes a check and pops it in the mail. In fact, the client even raises the cute little red flag on their mailbox to let the world know they have outgoing mail – how very thoughtful!
Weeks later, the client is very confused, so they call your bank. You learn that the client’s vendor never got paid. Your client is 100% positive that their check cleared – they even confirmed it on their online bank statement. Your team does a bit of investigating and learns that the check was indeed deposited at a nearby bank. So, the question is: If the check cleared and your client’s account was debited, but the vendor never got paid, then whodunnit?
The Actors
A mail thief stole your client’s check. There are too many ways a thief can get their grubby little mitts on a check. The obvious way is to steal the envelope right out of the client’s mailbox. More sophisticated thieves are able to gain access to the big, blue USPS mailbox on your street corner to steal hundreds and hundreds of envelopes. And in some cases, a thief might even have a devious friend that works for the mail carrier who provides them with access to mail. Mailing a paper check nowadays is risky business.
The Grift
Hold up a minute: If a check is made payable to a specific vendor, then why on earth would the nearby bank allow this random person to deposit the check into their personal bank account?
Alterations and counterfeits – that’s why.
Hollywood movies glamorize clever check fraud tactics, including things like “check washing,” forging someone’s signature, and using computer software to design and print a fake check. However, there is something the movies do not tell you: the specific type of fraud used (e.g., check washing, forgery, etc.) can be a deciding factor in determining who is on the hook for the loss. Banks need to understand the difference between altered and counterfeit checks:
- What’s an Altered Check? An altered check involves the original check. The thief takes the original check and modifies it to their benefit – for instance, the thief changes the name of the payee or the dollar amount on the check. Nowadays, most thieves are more sophisticated than attempting to cross out words or numbers on a check. Rather, “check washing” is a very common way to create an altered check. Like its name suggests, the thief uses chemical solvents to remove (or “wash”) the pen ink from the original check. Once they have their washed check, the thief simply writes in their (or an accomplice’s) name and the desired dollar amount. The thief then either leaves the client’s real signature “unwashed” or simply forges the client’s signature on the clean check.
- What’s a Counterfeit Check? A counterfeit check involves an entirely new check. (Contrast that with an altered check, which, as mentioned above, involves the original check.) The thief takes the information from the original check (e.g., account number, routing number, etc.) and prints an entirely new, fake check. In some cases, the thief will use software to generate a similar looking check, and then print it on paper check stock, which is widely available online. Although the fake check is missing your client’s real signature, the thief simply forges a signature that looks “good enough.”
The Pain
The next step for the thief is to get paid. The thief has a variety of options to deposit or cash the check, such as mobile deposit, at an ATM, in-person at a branch, at a check cashing business, etc. When the check hits the system, the damage is immediate. The client’s account balance drops, and the thief is typically long gone with the money. For the client, the pain is personal – lost funds, potential overdrafts, feeling violated, and the need to change account information, debit cards, recurring payment instructions, etc. For the bank, the pain comes in the form of potential liability.
The Reality
So, who is on the hook for the loss? As every wishy-washy lawyer knows, it depends:
- The Thief. Put frankly, good luck recovering from (or even finding) the thief.
- The Client. First off, clients are expected to exercise ordinary care in protecting their checks – so, that generally means no leaving blank checks at the office (or other negligent behavior). Clients are also expected to carefully review their account statements. If they identify something fishy on their statement, many banks require the client to notify the bank within a certain number of days (e.g., 30 days from the statement date). If the client fails to exercise ordinary care, or fails to timely notify the bank, the client is likely going to bear some (if not all) of the loss.
- The Banks. Here is where the difference between an altered check and a counterfeit check is a gamechanger. In our example above, if the check is altered, the loss will likely fall on the nearby bank (i.e., where the check was deposited). On the flip side, if the check is counterfeit, the loss will likely fall on our bank. The law places the loss on the bank best positioned to catch the fraud. For instance, if a check is clearly altered and marked up with scribbly pen, the nearby bank is in the best position to catch the fraud, since they should notice that at the time of deposit (so they take the loss). On the other hand, if a check is counterfeit and contains our client’s forged signature (or is printed on non-bank check stock), we are in the best position to catch the fraud, since we are expected to know what our client’s signature (and our check stock) looks like (so we take the loss).
Why would anyone still be using paper checks? Surprisingly, a recent survey (from the Association for Financial Professionals) found that checks account for nearly 26% of business-to-business payments. In other words, there are still a lot of paper checks in circulation and ripe for the picking. Clients need to be vigilant in protecting their checks, using secure methods of delivery, and carefully reviewing their account statements. Banks also need to step up their game. At a minimum, Banks should be encouraging their clients to use fraud detection tools, such as positive pay, enhanced signature verification, anomaly alerts, etc. And thanks to artificial intelligence, these tools are on steroids and can sniff out fraud like never before.
Fraudsters are always one step ahead, even when they use old-school tricks. Stay educated.
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This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
