Fraud Schemes - Physical and Virtual Checks
Check fraud is a generic term representing:
- A wide range of fraudulent schemes attributable to paper checks; as well as
- New and emerging vulnerabilities since the advent of check electronification.
The following list is a primer to help understand this multi-faceted crime and how it is evolving.
Forgery
There are two types of forgery, which can occur independently or simultaneously.
Forged Maker Signature is defined as a forged or unauthorized signature.
Forged Endorsement is defined as an unauthorized or improper endorsement.
Either begins with a check or other negotiable instrument being stolen or issued improperly, and presented as an on-us or transit item.
Counterfeiting
Advanced color photocopiers, as well as desktop publishing equipment consisting of a personal computer, scanner, sophisticated software and high-grade laser printer have made counterfeiting a significant factor in check fraud.
These methods are used to duplicate existing checks, or wholly fabricate new ones.
Recent Check 21 legislation and an increase in check imaging will pose new challenges.
Many security features may not be image-survivable or reproduce well. Certain alterations may be undetectable as well.
Alterations
An alteration primarily refers to the use of household chemicals and solvents to remove or modify handwriting and information on a check.
When performed on specific locations of a check such as the payee’s name or amount, it is called-spot alteration.
When an attempt to erase information from the entire check is made, it is called-check washing.
New information is handwritten or added using a typewriter, laser printer or other means in order to change the payee name while also increasing the amount payable.
Other alterations may be less sophisticated. Because many check writers leave spaces and gaps when populating the various fields; dollar amounts, payees and dates can be easily altered using a pen.
Paperhanging
Also known as closed account fraud, paperhanging occurs when checks are purposely written and/or reordered from an account that has already been closed.
Relying upon the time that it takes a transaction to be processed, or Float Time, gives the criminal a window of opportunity to defraud the financial institution.
The Bust-out
Sometimes referred to as Reg. Z fraud, this scheme begins when a bad or fraudulent ‘booster’ check is written to pay off a credit card balance.
Regulation Z and competitive pressures have resulted in an industry practice whereby remittance payments are often posted upon receipt leaving the cardholder’s credit line Open-to-Buy.
This gives criminals an opportunity to inflate their credit line by sending payments via overnight mail or other overnight services to expedite the open-to-buy scenario.
Fencible goods and services are then purchased before the check returns unpaid.
Kiting
Check kiting involves opening accounts at multiple locations, and the movement of fictitious funds between them.
This includes, but is not limited to financial institutions, retail stores, and credit card companies.
In recent years this fraud has become easier to perpetrate especially among financial institutions due to increased competition and Regulation CC requiring faster availability of funds.
Like paperhanging, criminals take advantage of float time in order to create fraudulent balances.
When a check kiter decides to cash out on the scheme before it is detected, that last location incurs the loss.
Otherwise, one or more businesses can end up taking a loss when detecting a kiting scheme.
Account Compromise
Involving a checkbook/account number that is stolen, or identified through a random number generator, criminals take advantage of the inability to verify that an individual is authorized to transact on a particular account.
Anonymity of the telephone and Internet has led to a rapid increase in this type of fraud.
Fictitious Account
A fictitious account can be created with transit items or over-the-counter transactions by combining a legitimate account number with a non-corresponding routing and transit number.
The check ends up being routed to the wrong Fed District thus creating float and allowing the perpetrator to remain undetected.
During faceless transactions, fictitious or manipulated account numbers are sometimes used and combined with a valid routing and transit number.
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