Mitigating Check Fraud During COVID-19 and Beyond

Check fraud is a perpetual thorn in the side of financial institutions, not just during a pandemic. So, how do financial institutions protect against potential check frauds, while simultaneously making it easier for more clients to use remote channels, like mobile remote deposit capture and ATMs to deposit checks?

While check fraud is not new, it always seems to increase when a crisis occurs. Financial institutions should stay diligent in mitigating this type of fraud whether there is a crisis going on or not. Let’s talk about what your institution should be doing daily to help mitigate this ongoing problem.

Checks Deposited via the ATM

Checks deposited through the ATM have always been a hot spot for fraudsters, and because of social distancing, there has been an uptick in check deposits through ATM.

Institutions that have image-enabled ATMs do not discover issues with check deposits until after the check has been deposited, forwarded on to the Paying Bank (via image cash letter) and funds have been made available to the account holder. Checks deposited in this manner often have issues such as no endorsement, wrong endorsement, check payee or amount was altered, check is counterfeit or the check was deposited into an account not in the name of the Payee.

It’s a best practice for financial institutions to measure the risk and losses that these deposits create and determine if procedures should be in place to catch these errors as soon as possible so that funds can be held, and the Paying Bank notified to return the item back to the Depositary Bank. Review of these items should be completed in a timely manner to ensure that next-day funds availability is not given to the account holder on a questionable item.

Checks Deposited via Remote Deposit Capture

Mobile capture check deposits have also been a common fraud channel for fraudsters. Some common issues include account holders depositing checks multiple times, depositing checks without proper endorsement or depositing to an account which is not in the name of the Payee.

There are some institutions that look at every deposit that comes through mobile capture but, let’s face it – not all institutions can do that. A way to mitigate losses through this channel would be to have a unified cash letter if your institution technology infrastructure allows. This means you organization would have deposits coming in from various areas (RDC, ATM, branch) put into one cash letter instead of having a separate cash letter for each. Then have a duplicate detection product to scan the one cash letter for duplicates before sending the cash letter off for processing. Having duplicate detection on all incoming cash letters would also be a great way to detect items that have already posted to accounts that are coming in to clear again, allowing your institution to detect duplicates before your accountholders notify you of a problem.

If your institution requires a specific endorsement be placed on each mobile capture deposit, your institution should have something in place to verify that it is done. Some institutions have an automated way to verify endorsements but then there are others that manually check each check for proper endorsement or look at a percentage of checks processed through mobile capture to verify the requirement is met.

Remember, remote deposit capture is a service you offer your account holders, it is not a right. Your institution can be selective in who is offered the service. Make sure you have a policy in place and that it is followed when onboarding a new user. Ensure that your institution is protected within your remote deposit capture agreements or terms and conditions that each user signs or agrees to. For instance, address what endorsements are required, how duplicates will be handled, funds availability, and the institutions right to terminate the service.

Catching Counterfeit Checks in a Digital Environment

Counterfeit checks are one of the most difficult to catch in an image environment. Typically, counterfeit checks deposited through an ATM or remote deposit capture service are rarely, if ever, caught. Since the Paying Bank holds the warranty for these items, they should be diligent in reviewing checks coming in each morning.

Catching this fraud in a timely manner is important for the Paying Bank, as they could be the one taking the loss and stuck taking legal action against the fraudster. As a preventative measure, some institutions will opt to receive a system report each morning of checks over a certain threshold to review. Then, they will view the check clearing against other checks that have cleared the same account to verify if the check is within the normal check digit range of other items posting. Signatures on these checks are also verified against the account signature card. Reviewing items each morning can help a Paying Bank catch the counterfeit check within the 24-hour return timeframe.

Be Proactive

Check fraud will continue and evolve over time, so taking proactive steps could help your institution from frequently being in reactive mode. Positive pay products have helped businesses with check fraud mitigation, but consumers look to their financial institution to help them detect checks that are fraudulent. Look at your institution’s policies and procedures on cashing and reviewing checks coming in from various processing channels. Determine if changes should be made or if your institution is doing everything it can to help mitigate check fraud.