Home » Fraud Examination » Don’t Check Out: 5 Ways Businesses Can Prevent and Combat Check Fraud

Don’t Check Out: 5 Ways Businesses Can Prevent and Combat Check Fraud

by | Sep 20, 2023

Even at a time when 9 out of 10 Americans have adopted some form of digital payment, the old-fashioned paper check remains a critical financial tool. In fact, recent surveys show that nearly 40 percent of U.S. businesses still use checks for payments to vendors.

Unfortunately, a growing number of fraudsters are seeing the advantages of paper checks as well. Earlier this year, the Financial Crimes Enforcement Network (FinCEN) issued an alert to financial institutions “to be vigilant in identifying and reporting” check fraud because of “a nationwide surge in check fraud schemes.” Citing data from a 2020 survey, The Wall Street Journal in May noted that check fraud made up 47 percent, or $1.3 billion, of banks’ fraud losses in 2018, up from $789 million in 2016.

Many of the schemes involve stealing checks from mailboxes. But for business owners, check frauds can start even closer to home. Rogue employees routinely see paper checks as an opportunity to cash in by manipulating financial records and directing money to their own accounts. Employees who engage in check fraud use a variety of tactics to direct an organization’s funds for their benefit, such as stealing or impersonating company check stock, altering payee information, forging signatures, using duplicate check numbers, and altering check amounts.

One fraud-minded employee can devastate an organization’s vendor payment process. With that in mind, we look at how a check fraud scheme might unfold and explore ways owners can prevent and respond to check frauds targeting their businesses.

A Check Fraud Case Study

The fraud examination team at Forensic Strategic Solutions is often called upon to investigate financial improprieties and accounting discrepancies. And that’s exactly what happened when stakeholders in a medical practice became concerned about a potential misappropriation scheme targeting their business. 

After conducting several interviews and reviewing the practice’s financial records, FSS discovered that a clerk was making personal credit card payments through transactions masked as legitimate expenses within the medical practice’s check register. A review and reconciliation of the canceled checks on the bank statement would have revealed that the payee listed in the check register did not match the payee on the checks involved in the scheme.

Our fraud examination team was able to gather evidence confirming that the checks were not payments for the benefit of the medical practice. When presented with the compelling evidence in an admission-seeking interview, the clerk confessed to the fraudulent actions. A detailed written statement was procured, outlining the misconduct.

Ultimately, the scope of the investigation revealed a seven-year scheme which amounted to more than $500,000 in losses. Evidence of wrongdoing was presented to local law enforcement and led to the suspect’s indictment. (Read more about the case here.) 

5 Ways to Prevent Check Fraud

Given the growing threat of check fraud, owners should take steps to understand check fraud and their vulnerabilities their businesses may face. To help preempt check fraud, business owners should:

  1. Implement a Positive Pay system. Offered by banks, this service matches and verifies the checks you’ve issued against the checks being presented for payment. This can help prevent unauthorized or altered checks from being cashed.
  2. Use high-security checks. Invest in checks with security features, such as watermarks, holograms, security threads, or heat-sensitive ink. These features make it more difficult for fraudsters to duplicate or alter checks without leaving a noticeable trace.
  3. Limit access to check stock and sensitive financial information. Restrict access to the company’s check stock and sensitive financial information to a few trusted employees. Regularly reconcile bank accounts to identify any discrepancies.
  4. Separate duties. Divide financial responsibilities among multiple employees to prevent unauthorized issuance or modification of checks. For example, designate one employee to handle check writing, another to sign the checks, and a third to reconcile bank statements.
  5. Conduct regular audits. Perform internal and external audits to evaluate internal controls and identify areas of weakness that could be exploited for fraud.

So, You Think You Found Fraud. Now What?

Time is of the essence when protecting your organization’s reputation and financial health. As soon as an act of check fraud (or any financial fraud) is suspected, take immediate action. Although each situation is different, here are a few initial steps you can take to respond to fraud:

  1. Take a moment to breathe. Fraud is a breach of trust. It is normal to experience a wide range of emotions. Remind yourself that handling the situation calmly and professionally is vital to a successful outcome.
  2. Document your observations. Write down details surrounding the situation, such as tip-offs, key dates, suspicious transactions, and conversations. These notes will help focus your investigation. Obtain copies of bank account statements and cancelled checks directly from the bank.
  3. Maintain professionalism. Uncovering deceit like check fraud can cause emotions to run high. Managing your emotions will greatly improve the chances of a successful outcome. Avoid making accusations or discussing the issue with other employees. Even those under suspicion deserve professionalism. Also, rash actions involving an accused employee may complicate evidence gathering and any future investigation. 
  4. Learn from the experience. Once the issue has been resolved, take time to reflect on the experience. Use it as an opportunity to secure your business’s future by taking steps to prevent future attempts at check fraud.

Create Your Plan Today

One of the most effective ways to keep your emotions from clouding your judgment during this crisis is to develop a well-thought-out plan of action. Contact us for a consultation and download our eBook guide for small business owners to learn how you can understand, recognize, and prevent fraudulent activity.

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