How community banks can combat the rise of check fraud

June 12, 2023

In recent years, community banks across the nation have seen a drastic rise in check fraud. To compound the issue, many community banks are faced with challenges getting funds reimbursed from the banks of first deposit and are left to reimburse affected customers even when the community banks aren’t liable for the fraud.

The following post will discuss why this sudden rise is occurring, what ICBA is doing to help community banks combat this troubling trend, and what community banks can do to protect their customers.

Scope of the Problem

According to the Financial Crimes Enforcement Network, there has been a nearly 100% increase in check fraud from 2021 to 2022. Check fraud began to increase during the pandemic, when tens of thousands of additional checks were sent via mail, in part due to COVID-19 relief payments and unemployment insurance.

Criminals found the system relatively unsecure. Keys for mail drop boxes are readily available for purchase by criminals, and in many cases law enforcement did not have the bandwidth or resources to properly combat these criminals.

Social media has also played a major role in the rise in check fraud. Messaging platforms such as Telegram have facilitated the exchange of information detailing how to commit check fraud and sell washed checks. For criminals, this means they can profit from mail theft without getting involved in the financial system.

Another contributing factor is the retirement of much of the financial industry’s institutional check knowledge. For many years, the number of checks in circulation has dropped as peer-to-peer payments, ACH, and other electronic means to transfer money have emerged. This has led to a decline in training and knowledge to detect fraudulent checks.

What ICBA is doing

ICBA has been actively monitoring the surge in fraud since the onset of the pandemic. Since 2020, ICBA has convened a group of industry participants, including other trade associations, regulators, law enforcement, and government agencies, to combat the increase in unemployment insurance fraud. This group continues to meet regularly and expanded the purpose of the meetings to include other forms of check fraud, allowing ICBA to share community banker concerns directly with decision makers at these organizations.

ICBA is also leveraging its relationships with regulators and members of Congress to elevate community banker concerns to the highest levels of government, including via productive meetings with senior staff of key congressional committees, FDIC, Federal Reserve, and FinCEN.

ICBA’s ask is simple: Policymakers should provide law enforcement and the U.S. Postal Inspection Service (USPIS) with the resources and incentives necessary to fight this issue at the source and help community banks work with the bank of first deposit to ensure that all participants of the check process are abiding by the proper laws and regulations to ensure funds are appropriately reimbursed.

What can community banks do?

Earlier this year, FinCEN and the USPIS collaborated on an important alert highlighting some of the red flags to look for to combat check fraud. Some key red flags include:

  • Atypical large withdrawals on a customer’s account via check to a new payee.

  • An existing customer with no history of check deposits has new sudden check deposits and withdrawal or transfer of funds.

  • Non-characteristic, sudden, abnormal deposit of checks, often electronically, followed by rapid withdrawal or transfer of funds.

  • A new customer opens an account that is seemingly used only for the deposit of checks, followed by frequent withdrawals and transfer of funds.

Additionally, ICBA recommends community banks do the following:

  • Train all front-line staff to spot forged and altered checks and other check scams. Stop the fraud as the bank of first deposit.

  • Encourage customers to deliver checks in person when possible, and educate consumers about ACH options and other, more secure payment options.

  • Check with customers to confirm checks.

  • Review internal procedures for when the bank is the drawee and consider how to automate the process.

Section 314(b) Information Sharing

ICBA also encourages community bankers to consider registering with the Financial Crimes Enforcement Network under USA PATRIOT Act Section 314(b) to help reach the right person at the bank of first deposit.

FinCEN updated its 314(b) Fact Sheet in December 2020 to reflect that banks may use the Section 314(b) information reporting safe harbor even if they don’t have specific information indicating that suspicious activity directly relates to proceeds of a specified unlawful activity or to transactions involving the proceeds of money laundering.

Instead, what is required is “a reasonable basis to believe that the information shared relates to activities that may involve money laundering or terrorist activity” and that the information sharing is “for an appropriate purpose under Section 314(b) and its implementing regulations.”

ICBA also recommends community banks work with their regulators to ensure they are aligned with FinCEN’s expanded scope of 314(b).

Additional Resources

Meanwhile, ICBA’s Cyber and Data Security resource center offers additional tools to help community banks protect their institutions and customers.

Addressing check fraud requires a collective effort from the entire industry, rather than any single bank or entity. This approach requires all parties involved in the check process to cooperate with one another and equip themselves with resources and knowledge to curb this issue at the outset.