You know what fraudsters and magicians have in common? The element of distraction, a masterful grasp on the sleight of hand and a penchant for trickery. The difference? One simply wants to entertain the masses while the other seeks to deceive for personal gain.
In this age of multiple payment rails, many of which are at least electronic (if not instantaneous), fraudsters are using their deception where it’s less noticeable – in the still applicable, yet certainly more obsolete forms of payment, such as checks. While it’s true that the heyday of checks has come and gone, and the number of checks written each year continues to decline, they are still very much a viable source of payment within the U.S. In fact, according to the Federal Reserve, Americans still write billions of checks per year.
Although, those numbers are nothing compared to the newer payment behemoths like Venmo or ACH, which is why they are so popular with fraudsters. This is where that sleight of hand comes in. You see, we’ve been told time and time again that paper checks were going away, but they haven’t. Instead, the attention they get versus other payment methods make it appear as though they have. And because of that, check fraud has only grown.
The Proof is in the Numbers
Between March 2020 and February 2021, the United States Postal Inspection Service (USPIS) received 299,020 complaints of mail theft, an increase of 161 percent compared to the year before. Then in 2022, the Financial Crimes Enforcement Network (FinCEN) reported SAR activity related to over 680,000 cases of check fraud. That amounts to almost double the number of check fraud cases from the previous year.
So, what do these two numbers show us? Criminals continue to commit fraud via checks because they are easy to access (how many mailboxes are on your street?) and they are far less scrutinized than the more dominant payment rails.
That conclusion is even more apparent in a recent alert FinCEN released in February 2023 (FIN-2023-Alert003) detailing the notable increase in mail-related check fraud. In the alert, they state that business checks, personal checks, government assistance checks (think Social Security and unemployment benefits) and tax refund checks are hot commodities for fraudsters whether they are working individually or with organized groups, such as the Felony Lane Gang.
The Felony Lane Brand of Check Fraud
If you’re unfamiliar, the notorious Felony Lane Gang is a financial crime syndicate that travels the country stealing money from various institutions and unsuspecting individuals. They originally formed in Florida, and their signature style is to have female members using disguises and false identification to cash stolen checks, particularly through the farthest drive-thru lane at a financial institution. Their use of the last lane – aka, the felony lane – while in rented cars and fake license plates, makes for a theoretically easy getaway…hence the name, Felony Lane Gang.
These days, this “Felony Lane” term has grown to be more of an all-encompassing way to describe these types of crimes by law enforcement. Nevertheless, the impact of Felony Lane-type activity and their special brand of check fraud has left its mark on the financial community, and it doesn’t appear to be going away any time soon, regardless of the decline in check payments.
The Fight Against Check Fraud
It’s clear that check fraud is here to stay, which means it’s time to double down on proactively protecting your membership and your credit union from losses. This might seem like an obvious piece of advice, but I often find it to be the most helpful in these types of situations: use common sense. It’s one of the most effective tools you and your staff can use to your advantage in preventing check fraud. With that, here are some “common sense” tactics to deploy:
- Examine your items. Any check that comes through your teller lines, mobile deposit app, etc. should be carefully scrutinized. Do the writing styles and font look consistent with others from this depositor? Are there any suspicious markings on the check that could indicate that it was tampered with? In general, does anything stand out as unusual? These are all good questions to ask.
- Ask questions of your member. Maybe you recognize the member depositing the check or maybe you don’t. Either way, it only takes a moment to get some quick answers to your questions. This is especially important if the check deposit is out of their normal pattern of activity. For example, if a member has a direct deposit payroll every two weeks and suddenly presents a “payroll” check for deposit from a business thousands of miles away, is that suspicious? Find out if they have a genuine understanding of the purpose and validity of the check, and if they’ve done their due diligence with any new endeavors (new job, contests, etc.) to make sure the check is legitimate.
- Assess the situation. Don’t immediately assume that every check or request is valid. Think about it this way: does it seem right that a member wants to purchase an official check for just $5? Maybe so, but maybe not. I’ve seen a large official check fraud case trace back to a single $5 official check that was legitimately purchased, but then sold to a criminal. The criminal then had a real check with an official employee signature that they could copy and alter over and over again in the name of check fraud.
- Look for a check processing system with built-in fraud detection. In this day in age, there are so many wonderful check processing solutions that offer fraud detection features and capabilities – something every credit union should have! It’s certainly helpful to have vigilant eyes on any incoming checks, but humans are, well, only human. Errors can occur…unless you also employ fraud detection services. One such solution to consider might be MY CU Services’ Positive Pay official check processing platform. Within this system, credit unions have the ability to review checks at various stages of the process and make the decision to return them before their account is debited. Essentially, this boils down to the common sense notion that the more checkpoints you have when processing checks, the more likely you are to avoid costly fraud losses.
More Guidance from FinCEN
With the prevalence of stolen checks and check fraud even in today’s world, FinCEN has assembled some “red flag” signs and guidance when it comes to those types of transactions. These are listed in their February 2023 mail-related check fraud alert (FIN-2023-Alert003), which I encourage you to share with your staff to demonstrate just how devastating check fraud can be on your members and your credit union as a whole.
FinCEN, in coordination with USPIS, has identified red flags to help financial institutions detect, prevent and report suspicious activity connected to mail theft-related check fraud, many of which overlap with red flags for check fraud in general.
- Non-characteristic large withdrawals on a customer’s account via check to a new payee.
- Customer complains of a check or checks stolen from the mail and then deposited into an unknown account.
- Customer complains that a check they mailed was never received by the intended recipient.
- Checks used to withdraw funds from a customer’s account appear to be of a noticeably different check stock than check stock used by the issuing bank and check stock used for known, legitimate transactions.
- 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.
- Examination of suspect checks reveals faded handwriting underneath darker handwriting, giving the appearance that the original handwriting has been overwritten.
- Suspect accounts may have indicators of other suspicious activity, such as pandemic-related fraud.
- New customer opens an account that is seemingly used only for the deposit of checks, followed by frequent withdrawals and transfer of funds.
- A non-customer that is attempting to cash a large check or multiple large checks in-person and, when questioned by the financial institution, provides an explanation that is suspicious or potentially indicative of money mule activity.
While the use of checks is continually shrinking, the incidence of check fraud is only growing…and it’s clear to see that it’s not going to magically disappear any time soon. Criminals use their deceptive ways and their powers of distraction to keep dipping into other people’s pockets (so to speak) and causing losses for countless financial institutions. That means we need to be proactive: armor up our credit unions, make staff aware of these “felony lane” schemes and other “red flags” and use simple, common sense tactics in the fight against check fraud.
Cindy Hagan works as the compliance and fraud risk director for Vizo Financial Corporate Credit Union. In this role, she administers and coordinates the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) program within the organization to ensure compliance with federal regulations, the NCUA and the industry standards of the FFIEC’s BSA/AML examination manual. She also provides compliance consulting and training services to credit unions.