While check usage is declining, check fraud has become a growing problem in recent years.  

According to a report by the Associated Press, the Financial Crimes Enforcement Network revealed that financial institutions experienced 680,000 check fraud cases last year—a significant jump from 350,000 cases in 2021. This rise in fraudulent activity presents a mounting threat to credit unions.  

But how can credit unions safeguard themselves against this increasing danger? 

As the Senior Member Engagement and Education Specialist at Corporate One, I recently hosted a webinar titled The Alarming Rise in Check Fraud with Marcy Cauthon, EPCOR's Director of Payments and On-demand Education. During the webinar, Cauthon discussed the continuing surge in check fraud since 2022 and warned that this trend is unlikely to slow down anytime soon. Even though fewer checks are being used in the United States, the frequency and value of check fraud continue to rise.  

Consider these alarming statistics: 

• One-third of all small businesses in the U.S. fell victim to fraud in 2023, with 65% of those incidents involving check fraud. More than half of these businesses reported losses exceeding $50,000. 
• Check fraud losses in North America totaled $21 billion in 2023, accounting for nearly 80% of global check fraud losses.
• Payment fraud increased from 65% in 2022 to 80% in 2023, with checks being the most vulnerable payment method. 

“I recently asked a room full of people at a conference why check fraud persists when so many digital payment methods are available,” Cauthon said. “The unanimous response was, ‘It’s easy!’” 

Criminals have multiple avenues to steal checks, including raiding residential and business mailboxes, robbing USPS mail carriers and trucks, and even employees taking checks from corporate mailrooms.  

But what do they do with these stolen checks? 

• Check Washing: Criminals use household chemicals to remove the original ink from a check, allowing them to alter payee names or amounts. 
• Check Cooking: Fraudsters take a digital image of a stolen check and use software to print counterfeit checks on new check stock. 
• Check Forgery: A fraudster either forges the check’s signature or fraudulently endorses the check to cash it. 
• Check Duplication: Criminals deposit a check via mobile remote deposit capture, then physically deposit the same check at another financial institution. 

Cauthon also provided a detailed analysis of liability in check fraud cases, covering the distinctions between altered and counterfeit checks, forged drawer signatures, and forged endorsements. She explained legal considerations, such as a depository institution’s ability to deny breach of warranty claims, the role of check indemnification agreements, and the use of hold harmless requests and letters of indemnity. Given the complexity of these issues, our 60-minute webinar is an excellent resource for a deeper dive into these topics. 

Mitigating Check Fraud: Best Practices for Credit Unions 

To combat the rising threat of check fraud, credit unions can take several proactive measures: 

• Review Image-Enabled ATM Deposits. Credit unions can manually review each deposit made through ATMs, looking for red flags. By working with processors, they can intercept suspicious deposits before they reach the Federal Reserve or The Clearing House. 
• Monitor High-Value Checks. Credit unions can set thresholds to flag checks over a certain dollar amount in their morning inclearing reports from the Federal Reserve. Employees can then inspect the images for signs of fraud. 
• Evaluate Financial Statement Review Periods. Before reducing the account statement review period to less than 30 days, credit unions should assess whether the change is commercially reasonable compared to other financial institutions. Cauthon highly recommended consultation with legal counsel and regulators before making adjustments. 
• Implement Payee Positive Pay. An enhancement to the standard service, Payee Positive Pay, includes verifying the payee’s name against a pre-approved list provided by the account holder. This additional layer of protection helps prevent altered or washed checks from being cashed. 

In the face of rising check fraud, credit unions must implement effective fraud prevention strategies. From reviewing ATM deposits and inclearing checks to utilizing Payee Positive Pay, credit unions can strengthen their defenses against this growing threat. As fraudsters continue to exploit vulnerabilities in the check payment system, proactive measures are more critical than ever.  

By staying informed and adopting best practices, credit unions can protect their members and reduce the risk of falling victim to increasingly sophisticated check fraud schemes. 

(Note: This webinar was the first in our EPCOR Fraud Series. The second webinar in the series, Combatting Digital Payment Fraud, provides a tremendous amount of information on the topic of digital fraud).