Check fraud

Check fraud refers to a category of criminal acts that involve making the unlawful use of checks 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 check fraud include check 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.

Types of check fraud

Check kiting

Main article: Check kiting

Check kiting refers to use of the float to take advantage and delay the notice of non-existent funds.

Embezzlement

While some check 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."

Bad check writing

Main article: Non-sufficient funds

A check is written to a merchant or other recipient, hoping the recipient will not suspect that the check will not clear. The buyer will then take possession of the cash, goods, or services purchased with the check, and will hope the recipient will not take action or will do so in vain.

Abandonment

The paper hanger deposits a check 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 check is bad, the paper hanger then withdraws the funds in cash. The offender knows the check 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 check 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.

Forgery

Sometimes, forgery is the method of choice in defrauding a bank. One form of forgery involves the use of a victim's legitimate checks, that have either been altogether stolen and then cashed, or altering a check 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 checks, 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.

Unusual cases

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 check 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 check will be deposited in Bank B's account, where $5100 will be added, but by the time it reaches Bank A for clearance, the check will then read $100, and only $100 will be debited from that account.

Check washing involves the theft of a check 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 check 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 checks 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 check artist" of the 20th century, Frank Abagnale, devised a scheme to put incorrect MICR numbers at the bottom of the check 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]

Combating check fraud

In most jurisdictions, passing a check 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 check 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 check does not clear the bank.

Only when the successful clearance of a check 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 check 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 check 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.

Part of how banks are combating check fraud is to offer their clients fraud protection services. Because it is impossible for banks to know every check that a customer writes and which may or may not be fraudulent, the ownership is on the client to make the bank aware of what check it writes. These systems allow customers to upload their check files to the bank including the check number, the amount of money, and in some cases, the payee name. Now, when a check is presented for payment, the bank scrubs it against the information on file. If one of the variables does not match, then the check would be flagged as a potentially fraudulent item.

These services help with external fraud but they do not help if there is internal fraud. If an employee sends information to the bank with fraudulent items, then the bank would not know to deny payment. A system of dual controls should be put into place in order to not allocate all capabilities to one person.

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 the USA in otherwise-honest individuals who encountered emergencies right before payday.[6]

Circular and abandonment frauds are gradually being eliminated as checks 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 check. Customers who are noted to obtain cash back frequently are also investigated by the corporation to observe patterns.

Some businesses will also use the check 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 check 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.

See also

References

  1. ↑ Charles Bruce. "Check Washing - WHAT IS IT?". Ckfraud.org. Retrieved 2012-09-02.
  2. ↑
  3. ↑ Abagnale Jr., Frank (1980). Catch Me If You Can: The True Story of a Real Fake. New York: Grosset & Dunlap. ISBN 0-448-16538-4.
  4. ↑ Leonardo DiCaprio, Steven Spielberg (director) (2002). Catch Me If You Can (motion picture). USA: DreamWorks.
  5. ↑ "Check Services". Board of Governors of the Federal Reserve System. Retrieved 16 January 2013.
  6. ↑ "Less Travel for Your Checks" (PDF). The Ledger. Winter 2004–2005.

External links