Blog Post 7 min read

Check Fraud Detection: Tips for Protecting Your Business

By Eastern Bank’s Treasury Services Team, Mar. 04, 2024
A person writes out a check in a checkbook on top of their desk

Adding check fraud detection and prevention measures into your company's operations and controls can help to keep your company safe.

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With new secure, online payment methods regularly advancing as ways to bank, it's important to note that paper check fraud still impacts many organizations. Research shows around 40% of business-to-business payments still use paper checks, which are the most vulnerable to fraud. Even if your business has never had a problem, adding check fraud detection and prevention measures into your company's operations and controls can help to keep your company safe.

We sat down with Aileen Sheehan, Senior Vice President and Treasury Services Relationship and Implementation Manager at Eastern Bank, to discuss what businesses need to know about check fraud and how they can protect themselves.

She is an Association for Financial Professionals (AFP) Certified Treasury Professional and an Accredited Payment Risk Professional. Additionally, she is a member of the Consumer Bankers Association's Fraud Management Committee and the New England Automated Clearing House Association's (NEACH) Payments and Operations Strategy Committee. Aileen speaks regularly at both regional and national conferences, focusing on digital client experience and risk/fraud topics.

 

Here are the key details she shared.


What Is Check Fraud?

 

Check fraud is a broad category that covers multiple crimes. Simply put, check fraud occurs when a check that a business issued is negotiated by someone other than the intended recipient, or when checks the business didn't issue clear the account and result in the loss of funds. For example, fraudsters may steal a check from the mail, alter it with a forged endorsement and cash it, stealing the money from a business. They could further use that valid check information to create additional checks, compounding the potential loss.


Why Is Check Fraud So Prevalent?

 

Despite technological advancements in banking, 81% of businesses use paper checks at least occasionally. So, check fraud is still very prevalent, with 63% of organizations reporting some check fraud activity in 2022, notes the AFP. Reasons check fraud still occurs include:

Increased Focus on Cybersecurity Instead of Checks
These days, more organizations are concerned about ransomware or malware attacks. Accordingly, their primary focus is likely on online prevention and detection rather than paper-related fraud, potentially causing check fraud prevention to fall to the back burner. In addition, employees may think checks don't warrant much attention since it's a more traditional payment method.

Easy Access for Fraudsters
Checks display critical account information, giving thieves data they can use to perpetuate additional financial scams.


What Check Frauds Are Seen Most Often By Companies?

 

Part of check fraud detection and prevention is understanding the common ways fraudsters attack businesses. Common tactics include:

Mail Fraud
Thieves take checks out of the mail and use the account information, removing the ink from the checks and forging new information.

Internal Fraud
An employee may have access to the company's check stock and take a blank one for their use. Or a check stock is left unsecured and open to the public.

Misappropriated Checks
A fraudster may access a check, change the payee's name, and deposit it into their own account or cash it themselves.

Multiple Deposits
Scammers try to deposit the same check multiple times using different banking apps. While some may be detected, others can get through. Banks need time to track where the fraudulent check was used first, allowing for more time for the fraudster to gain traction.

Faux Check Creation
Once a fraudster has a valid check, they can use high-end printers to create an authentic-looking check. They can then produce an infinite number of new checks, making detection increasingly difficult.


How Can Businesses Prevent Check Fraud?

 

Any organization sending checks is susceptible to check fraud, but it's possible to mitigate risk. Here are a few ways you can bolster your company's practices to avoid fraud:

Assume an Attack Will Happen
Operate under the assumption that it's only a matter of time before a fraudster tries to steal checking information. That can help your business step up its control efforts and be more nimble in preparing for — and responding to — fraud attempts.

Use ACH When Possible
Consider ways to reduce paper checks and move funds electronically through the more secure Automated Clearing House (ACH). With ACH, funds are electronically deposited in banks, and payments are made online. In a rising rate environment, pivoting to electronic payments and collections is more efficient for both you and your customers and vendors. Contact your banker for more information.

Set Up Account Alerts
Work with your bank to set up alerts that monitor and notify for unauthorized account activity so you are better prepared to respond within the first 24 to 48 hours of a potential theft. You can also implement Positive Pay, which automatically detects fraud by comparing checks presented for payment with those issued and flagging discrepancies.

 

 

Positive Pay Services

 

Positive Pay is an industry-wide offering that allows businesses to upload a simple file of check issue information to their bank, allowing the bank to then verify that the check is a legitimate issue and being negotiated to the payee and for the amount that the business intended.

Additionally, many banks offer ACH Positive Pay or ACH debit filter, allowing a company to decide who is allowed to directly collect monies from their business account. Contact your Eastern Bank relationship manager to learn more about these services.

 

Consolidate Checking Accounts
If you have multiple business checking accounts, consider consolidating check activity into one account and keeping it separate from other receivables. For example, use one checking account strictly for issuing checks and another for electronic receivables, payroll or IRS withdrawals.

You can then work with your banking partner to put fraud protection services like Positive Pay on this account to catch red flags early. Additionally, ask your bank to avoid allowing ACH debits on that account, which helps reduce the risk of fraudsters using your checking account for other transactions.

Reconcile Checking Accounts Daily
Reviewing and reconciling checking accounts daily can help prevent fraud and enhance your financial management. This is particularly important with growing demand to receive faster payments. Use available digital tools, such as online banking, to review your accounts. Regular monitoring helps identify potential red flags, including unusual activity between accounts or an uptick in overdraft fees. And if you do discover potential fraud, you can act quickly.

Put Internal Controls in Place
As part of your internal controls process, create guidelines for managing checks. For example, limit the number of employees with check signing authorization, require confirmation on payments over a certain amount, and use multiple channels to validate check requests. Securing your check stock and limiting who has access to it can also help.

Implement Fraud Training
Another critical element to defend against check fraud is workforce education and training. When employees know what to look for, they can identify potential fraud. Create a culture of verification by encouraging everyone to stay vigilant, understand the latest scams and be comfortable escalating issues.

Look outside your organization and leverage relationships with your banker and insurer. Ask your banking provider about educational resources and training they provide on check fraud detection and prevention. Your insurer may also have insights and resources for training around common commercial banking scams.


What Should Companies Do if Check Fraud Occurs?

 

While you can put preventive measures in place, sometimes a sophisticated scam can succeed. If you believe your company may be a victim of check fraud, you may feel an urge to hide the fact and delay reporting it. However, time is of the essence — the sooner you take action to resolve the fraud, the better.

If you think your business has experienced check fraud, contact your bank right away. That's true even if you're unsure. You don't need to wait until funds are missing from your checking account. Your banker can immediately review your account with you, flag specific transactions and stop checks. Acting within the first 24 to 48 hours of a potential fraud is important to quickly reviewing the account (and double-checking the transaction).

Leveraging Your Banking Relationship

When protecting your company's monies, your banking team can be your most valuable relationship. Connect with your relationship manager regularly, and ask questions. These professionals are trained on best practices. They also have access to tools and can share advice about getting your accounts set up to reduce fraud. And if you're a victim of check fraud, your bank's team will be on the front lines, working with you to secure your accounts and get your company's funds back.

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Eastern Bank's Banking Team has the tools, training and resources to help protect your business from check fraud. Contact us to learn more.

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