Beyond Signatures: How Banks Are Securing Checks in the Age of AI
Introduction
Check fraud continues to pose a significant risk for the banking sector despite the decline in check usage. In 2023, global check fraud losses reached approximately $26.6 billion, with around 80% of these losses occurring in the Americas, particularly the United States. U.S. institutions have observed rising instances of check fraud linked to mail theft, which reportedly led to over $688 million in suspicious activity during a six-month period in 2023, as reported by FinCEN. This trend has pressured banks to adopt more sophisticated fraud detection measures to manage the associated risks effectively.
Check fraud losses reveal striking regional differences, shaped by distinct check usage patterns, fraud tactics, and regulatory responses. In the U.S., check fraud continues to be prevalent, primarily due to high check usage and vulnerabilities such as mail theft and check washing. Recent estimates suggest U.S. financial institutions lost approximately $21 billion to check fraud in 2023. Mail theft-driven check fraud surged as well, resulting in $688 million in suspicious activity in just a six-month period, underscoring the need for advanced fraud detection measures.
?In contrast, the U.K. has largely mitigated check fraud through a shift to digital payments, reporting just ￡12.3 million in losses in 2022. Australia also experiences minimal check fraud due to lower check usage, with most cases involving counterfeit checks targeting businesses. Both countries have introduced regulatory measures that limit check fraud by emphasizing rapid clearing and secure digital payments, while U.S. banks continue to address both traditional and emerging fraud risks. These regional differences illustrate how tailored fraud prevention strategies evolve in response to varying transaction habits and threats.
Efforts to curb check fraud are hindered by the unique nature of checks, which can be vulnerable to tampering and theft, making traditional fraud detection methods less effective. The Federal Reserve and other financial industry leaders continue to advocate for enhanced risk management strategies to address this persistent form of fraud. For banks, leveraging consortium data and AI-driven analytics has become crucial for combating check fraud more effectively and reducing false positives in detection systems.
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Common Modus Operandi in Check Fraud
Fraudsters use several common Modus Operandi (MOs) for committing check fraud, which often target vulnerabilities in traditional banking processes. Here are some of the most prevalent MOs:
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1. Check Alteration: Fraudsters often engage in "check washing," where they use chemicals to erase key details on a check, such as the payee's name or the check amount. This allows them to rewrite the check to a new payee or a larger amount, which they can then deposit or cash. This method exploits the relatively unprotected physical nature of checks and is especially common when checks are stolen from the mail.
2. Counterfeit Checks: Using advanced printing techniques and equipment, fraudsters create counterfeit checks that closely resemble legitimate ones. These counterfeit checks are frequently used in "overpayment" scams, where the fraudster sends a fake check for an amount higher than the agreed payment, instructing the recipient to cash it and return the overpayment. When the check ultimately bounces, the victim is left responsible for the funds they sent to the fraudster.
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3. Forged Endorsements: In this method, a fraudster forges the payee's signature to cash or deposit a stolen check. They may steal checks directly from mailboxes, forge the intended recipient’s signature, and quickly cash the check before the legitimate payee notices it’s missing. This type of fraud targets any vulnerabilities in the verification of signatures at the point of cashing.
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4. Remote Deposit Capture (RDC) Fraud: With RDC, account holders can deposit checks electronically by uploading images through a bank’s mobile app. Fraudsters exploit this by depositing the same check digitally and then attempting to cash the original physical check at another bank, leading to duplicate deposits. RDC fraud underscores the need for banks to implement safeguards that detect duplicate check images across systems.
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5. Business Email Compromise (BEC): In BEC schemes, fraudsters pose as company executives or vendors to trick employees into issuing checks or payments. Using phishing emails, they gain access to a company’s internal communication and may issue unauthorized checks that appear legitimate. This form of fraud primarily targets businesses and leverages social engineering to manipulate employees into carrying out fraudulent transactions.
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6. Kiting Schemes: Check kiting exploits the "float time" — the period between when a check is deposited and when it clears. A fraudster writes a check from an account with insufficient funds, deposits it in another account, and withdraws funds before the check clears. By cycling multiple checks across various banks, they sustain the appearance of a positive balance temporarily, effectively creating fraudulent funds.
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7. Account Takeover Fraud: In these cases, fraudsters gain unauthorized access to a victim's account and issue checks to themselves or other parties. If the fraudster has access to high-value accounts, they can issue authorized checks, bypassing standard verification measures and avoiding immediate detection. This form of fraud is particularly dangerous due to the high-value transactions and the potential to exploit authorized checks without triggering fraud alerts.
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Strategies for Combating Check Fraud
?To combat check fraud losses, banks use a combination of traditional security and advanced technologies, leveraging solutions such as Positive Pay, OCR, AI-driven anomaly detection, and digital verification. Here are some of the primary strategies:
Positive Pay and Reverse Positive Pay
Positive Pay services allow banks to verify that checks presented for payment align with the issuer’s records, helping to ensure only authorized payments clear. Positive Pay involves matching checks against an authorized list provided by the account holder, while Reverse Positive Pay sends check details to customers for approval. Automated solutions are available for these services that allow for seamless verification and high accuracy to prevent fraud.
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Image Analysis and Optical Character Recognition (OCR)
OCR and advanced image analysis systems enhance the detection of suspicious changes, such as altered amounts or forged signatures, by scanning check details for inconsistencies. OCR technology can improve efficiency and accuracy in reviewing checks, reducing the reliance on manual inspection and catching subtle alterations more effectively e.g.Kofax FraudOne uses optical character recognition (OCR) to help financial institutions detect counterfeit check.
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AI and Machine Learning for Anomaly Detection
AI-driven systems analyze transaction patterns and detect unusual behavior, learning over time to adapt to new fraud methods. These systems monitor vast amounts of data and flag potential fraud in real-time, minimizing false positives. Featurespace provide machine learning models tailored to identify check fraud, enabling financial institutions to respond proactively to emerging fraud patterns.
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Multi-Factor Authentication (MFA) and Digital Verification
MFA adds an extra layer of security, requiring users to verify their identity with more than one method, such as a code sent to a phone or biometric verification. This is especially critical for remote deposits, where verifying identity can prevent unauthorized access. There are many third-party providers that support robust MFA and digital identity verification to secure mobile and online check deposits.
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Real-Time Alerts and Notifications
Real-time alerts provide customers with instant updates about check-related activities, enabling them to respond quickly to any unauthorized transactions. Real-time monitoring systems can notify customers of suspicious transactions, allowing for swift reporting and responses to potential check fraud incidents.
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Consortium-Based Data Sharing and Intelligence
Data-sharing platforms help banks pool insights and detect fraud trends across institutions, improving collective defenses against fraud. This collaborative approach enhances the early detection of widespread fraud schemes and builds robust industry-wide intelligence. E.g., Early Warning Services is a well-known consortium formed by several major US banks and its database offers insights into suspicious transactions and known fraudsters, making it easier for banks to prevent check fraud before it occurs.
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Blockchain for Digital Check Authentication
Blockchain technology offers a secure and immutable record of transactions, providing a tamper-resistant way to authenticate digital checks. By utilizing blockchain, banks can prevent check tampering and ensure the integrity of transactions. Blockchain frameworks for check validation add a layer of security that is highly resistant to tampering, helping to mitigate fraud.
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These streamlined solutions allow banks to establish a multi-layered approach to check fraud, increasing both preventative and responsive capabilities in the face of evolving threats.
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Conclusion
In conclusion, while digital transformation is reducing check usage worldwide, check fraud remains a formidable issue, especially in regions with higher check volumes and prevalent mail-based crimes like the U.S. To counter increasingly sophisticated fraud tactics, banks are adopting a comprehensive approach that combines AI-driven anomaly detection, blockchain, and consortium-based intelligence sharing. These solutions, when integrated with traditional methods like Positive Pay, enable a proactive, multi-layered defense that adapts to evolving threats.
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Disclaimer:?The postings on this site are the authors’ personal opinions. This content is not read or approved by their current or former employer before it is posted and does not necessarily represent their positions, strategies or opinions
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Insightful ! Thanks Puneet Wadhwa for sharing your perspectives.
Assistant Vice President in Fraud & Dispute Operations | Transforming Businesses through Innovative Solutions & Process Excellence
2 周Great article! This is such an important and insightful read, especially in a time when many assume, checks are a thing of the past. Check fraud remains a significant threat in the fraud landscape.