Cheque fraud/check fraud refers to a category of criminal acts that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. Most methods involve taking advantage of the float (the time between the negotiation of the cheque and its clearance at the cheque-writer's bank) to draw out these funds. Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period to cover the fraud, and paper hanging, where the float offers the opportunity to write fraudulent checks but the account is never replenished.
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Check kiting refers to use of the float to take advantage and delay the notice of non-existent funds.
While some cheque kiters fully intend to bring their accounts into good standing, others, often known as paper hangers, have pure fraud in mind, attempting to "take the money and run."
A cheque is written to a merchant or other recipient, hoping the recipient will not suspect that the cheque will not clear. The buyer will then take possession of the cash, goods, or services purchased with the cheque, and will hope the recipient will not take action or will do so in vain.
The paper hanger deposits a cheque one time that s/he knows is bad or fictitious into his/her account. When the bank considers the funds available (usually on the next business day), but before the bank is informed the cheque is bad, the paper hanger then withdraws the funds in cash. The offender knows the cheque will bounce, and the resulting account will be in debt, but the offender will abandon the account and take the cash.
Such crimes are often used by petty criminals to obtain funds through a quick embezzlement, and are frequently conducted using a fictitious or stolen identity in order to hide that of the real offender.
This form of fraud is the basis for the Nigerian cheque scam and other similar schemes; however, in these cases, the victim will be the one accused of committing such crimes, and will be left to prove his/her innocence.
Sometimes, forgery is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's legitimate cheques, that have either been altogether stolen and then cashed, or altering a cheque that has been legitimately written to the perpetrator, by adding words and/or digits in order to inflate the amount.
Other cases involved the use of completely fake cheques, as in the case of Frank Abagnale. The perpetrator passes or attempts to pass a cheque that has been manufactured by him/herself, but that represents a non-existent account.
For example, disappearing ink has been used to commit a rare form of fraud. In such cases, the perpetrator chemically alters the substance so that it disappears in several hours or days rather than a few minutes. The individual then writes a cheque to him/herself (or a partner in the scheme) using Bank A's account for a specified amount, say, $5100. In this amount, the digit 5 is written with the disappearing ink, and the remainder of the amount in regular ink. The cheque will be deposited in Bank B's account, where $5100 will be added, but by the time it reaches Bank A for clearance, the cheque will then read $100, and only $100 will be debited from that account.
"Cheque washing" involves the theft of a cheque in transit between the writer and recipient, followed by the use of chemicals to remove the ink representing all parts other than the signature.[1] The perpetrator then fills in the blanks to his or her advantage.
Sometimes the cheque fraud comes from an employee of the bank itself, as was the case with Suzette A. Brock, who was convicted of theft for writing five corporate cheques to her own birth name from her desk as a loan servicing agent for Banner Bank of Walla Walla, WA.[2]
The most notorious "bad cheque artist" of the 20th century, Frank Abagnale, devised a scheme to put incorrect MICR numbers at the bottom of the cheque he wrote, so that they would be routed to the incorrect Federal Reserve Bank for clearing. This allowed him to work longer in one area before his criminal activity was detected.[3][4]
In most jurisdictions, passing a cheque for an amount of money the writer knows is not in the account at the time of negotiation (or available for overdraft protection) is usually considered a violation of criminal law. However, the general practice followed by banks has been to refrain from prosecuting cheque writers if the cheque reaches the bank after sufficient funds have been deposited, thereby allowing it to clear. But the account holder is normally held fully liable for all bank penalties, civil penalties, and criminal charges allowable by law in the event the cheque does not clear the bank.
Only when the successful clearance of a cheque is due to a kiting scheme does the bank traditionally take action. Banks have always had various methods of detecting kiting schemes and stopping them in the act. Computer systems in place will alert bank officials when a customer engages in various suspicious activities, including frequently depositing cheques bearing the same, large monthly total deposits accompanied by near-zero average daily balances, or avoidance of tellers by frequent use of ATMs for deposits.
New technology in place today may make most forms of cheque kiting and paper hanging a thing of the past. As new software rapidly catches illegal activity at the teller/branch level instead of waiting for the nightly runs to the back office, schemes are not only easier to detect, but may be prevented by tellers who deny customers illegal transactions before they are even started.
Before the passage of the Check Clearing for the 21st Century Act,[5] when cheques could take 3 or more days to clear, playing the float was fairly common practice in otherwise-honest individuals who encountered emergencies right before payday.[6]
Circular and abandonment frauds are gradually being eliminated as cheques will clear in Bank B the same day they are deposited into Bank A, giving no time at all for non-existent funds to become available for withdrawal. With image-sharing technology, the funds that temporarily become available in Bank A's account are wiped out the same day.
While there may still be some room for retail kiting, security measures taken by retail chains are helping reduce such incidents. Increasingly, more chains are limiting the amount of cash back received, the number of times cash back can be offered in a week or a given period of time, and obtaining transactional account balances before offering cash back, thereby denying it to those with low balances. For example, Wal-Mart's policy is to determine account balances of those obtaining cash back, and some Safeway locations will not offer cash back on any accounts with balances under $250, even when funds are sufficient to cover the amount on the cheque. Customers who are noted to obtain cash back frequently are also investigated by the corporation to observe patterns.
Some businesses will also use the cheque strictly as an informational device to automatically debit funds from the account, and will return the item to the customer thereafter. However, in the United States this is done through the Automated Clearing House (ACH); though faster than traditional cheque clearing, contrary to popular belief the ACH is not instantaneous. Though this practice reduces the room for kiting (by reducing float), it does not always eliminate it.
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