Check fraud has become so widespread due to brazen criminality and mail theft that many banks are struggling to collect on bad checks from other banks.
Though fraud losses are skyrocketing at all banks, small banks appear to be bearing the brunt of check fraud. Banks typically reimburse their customers when a fraudulent or stolen check gets posted against their account but getting repaid for a bad check has become a long, drawn-out affair.
"There is absolutely no reason why it should ever take months for a bad check claim to be processed," said Abby Jacobs, a bookkeeper at First National Bank of Ottawa, a unit of the $1.2 billion-asset American Commercial Bank & Trust in Ottawa, Illinois.
Jacobs said the bank's bookkeeping team is trying to collect nearly $2 million this year from roughly 250 other banks where bad checks were deposited and returned for fraud.
"Institutions will drag their feet for months on end simply because they can," Jacobs said. "When they do this for no valid reason, it puts hardship on the other institutions involved as well as the customers who have been defrauded."
The number of checks being offered for payment has decreased dramatically over the last ten years, with the Federal Reserve processing 14.5 million checks per day — down from 26.7 million a decade earlier. The average value of a check, however, has been going up — $2,395 in 2021 versus $1,187 in 2011.
Though fewer people are writing checks and check volume is declining overall, banks of all sizes are seeing a massive increase in check fraud since 2020, when stimulus and unemployment checks sent in the mail led criminals to target the U.S. Postal Service. The pandemic also has led to a loss of bank employees with proper training and expertise in inspecting checks and processing fraud claims.
State law and Federal Reserve Board regulations outline banks' responsibilities and liabilities in the check-clearing process.
A bank typically has until midnight of the following business day to start the process of reporting a bad check to the "bank of first deposit," a term used to denote the bank in the best position to know what a bank customer's signature looks like, experts said.
But small banks say they need better protection from larger banks that are not doing enough to prevent check fraud and are bullying smaller banks into accepting the losses.
Some bankers claim a handful of mostly large banks are failing to catch check fraud on the front end through mobile deposits, ATMs and bank tellers. Large banks that have teams of lawyers also are slow-walking the reimbursement process and treating check fraud as a cost of doing business, some bankers say. Banks spend a lot of time and money disputing check fraud among themselves.
"We're trying to protect the payment system," said Steven Gonzalo, president and CEO of American Commercial, a 10-branch bank on the outskirts of Chicago that was founded in 1865. "There are others that do not, cannot or will not and they are jeopardizing not just the industry but the consumer's confidence in the industry."
Several banks can be involved in the settlement of a single check. There also are different rules depending on the type of fraud and whether the check is counterfeit, has a forged signature, a fake endorsement or myriad other issues.
Check fraud can be deemed a misdemeanor or felony with a maximum prison sentence of up to three years in jail depending on the amount of fraud. Fraudsters have little concern about being prosecuted.
"Criminals have no fear that they are ever going to be held accountable," said Jake Emry, a fraud prevention expert at NICE Actimize, a Hoboken, New Jersey, software firm. "It's a huge problem that may not be recognized across the industry because some banks may be relying on out-of-date solutions and are not focused on check fraud until they come under attack."
The American Bankers Association recently created an ad hoc committee on check fraud so members could share common practices to clear the current backlog. One large bank has tripled its staff in the past two months just to address check fraud, the ABA said.
"It is a problem across the industry," said Paul Benda, the ABA's senior vice president of operational risk and cybersecurity. "There is industry effort underway to try to improve this."
Banks may place limits on the total dollar amount of mobile deposits and may restrict how much customers can deposit daily or monthly. Banks also have a patchwork of technology and do not always upgrade their systems.
"Fraudsters are using the latest technology and they're collaborating," said Michael Diamond, head of deposits at Mitek Systems, a San Diego software company and a leader in mobile deposits. "Banks generally are using older technology and their collaboration is spotty at best.
"Check fraudsters will often leverage the mobile channels for their fraud, but it is not exclusive. And there is a growing and very large problem with cash-outs, where they cash a check and walk out of the branch," he said.
Pay to the order of 'Habanos Cigars Lounge'
Gonzalo described one egregious example of a fraudulent $45,000 check that should have quickly been caught by the bank of first deposit, but instead took six months to resolve, highlighting a lack of controls at a large bank.
A longtime bank customer wrote a $45,000 check that was stolen in the mail, Gonzalo said.
The criminal typed the name "Habanos Cigars Lounge" directly above the name that the check was made out to on the "Pay to the order" line.
"The person who did the fraud endorsed the check to Habanos Cigars because they had opened an account called Habanos Cigars and they deposited the check into that account," Gonzalo said.
Banks are required by law to verify the identity of customers that open accounts and are supposed to follow "Know Your Customer" standards to prevent theft, money laundering and other financial crimes.
Gonzalo had to reimburse the longtime customer the $45,000. The bank had to hire a lawyer who ultimately got the money returned from Bank of America, where the fraudulent check had been deposited, he said.
"The only reason we won is because the fraudster improperly endorsed the back of the check," said Gonzalo, adding that if another bank or credit union submitted a fraud claim to his bank "it would be adjudicated that day."
A Bank of America spokeswoman said the bank resolved the case in 2020 and is continuing to work to resolve roughly 25 other returned checks totaling roughly $320,000 that First National Bank of Ottawa is trying to collect from BofA.
"While we aren't able to comment on specific cases, we will continue to work with American Commercial Bank & Trust on their inquiries," said the spokeswoman, Louise Hennessy.
The rash of check fraud is a "canary in the coal mine opportunity" for all banks to recognize the broader existential threat fraud poses to this industry, said Emry, the fraud expert at NICE Actimize.
"The result of these attacks are not just major losses; they have significant customer impact and can cause reputational harm which often goes hand in hand with regulatory attention," Emry said.
Drop in postal police
Frank Albergo, president of the Postal Police Officers Association, said mail theft has risen since 2017 but really took off in 2020 after the Postal Inspection Service, the USPS's enforcement arm, took steps that reduced the ranks of postal police officers. During the pandemic, postal workers have been assaulted and bags of mail and universal mail keys stolen by criminals.
"It's been an all-out attack on postal police officers," Albergo said. "Mail theft is completely out of control, it's contagious now and it's become the fashionable thing to do because it's such an easy crime to commit."
Postal police also have been locked in longtime disputes with USPS management over pay and an arbitration award, he said, that contributed to their ranks being decimated to 450 officers, a 20% drop since 2020.
A major concern is that criminals have robbed letter carriers of universal mailbox keys, known as arrow keys, that postal workers use to access collection boxes and apartment panels.
"Once criminals get the arrow keys it's like having the keys to the city," he said. "They steal tubs of mail and they wash and then cash the checks."
Bank trade groups say the USPS need to make changes to safeguard the mail to ensure checks are not being stolen.
"The banking industry is paying for the Post Office's inability to protect the mail," said Benda, with the ABA.
Dearth of fraud statistics
A major problem in tracking check fraud is a lack of reliable data.
The ABA discontinued a
The Federal Reserve also has
"There are still quite a few differences between banks in how and what they count as check fraud," said Trace Fooshee, strategic advisor at Aite-Novarica Group. "If you get 10 fraud executives in a room and ask them what deposit fraud is you'll likely get eight different answers that overlap a good deal but that have pretty significant differences when it comes to how to classify it and charge it off."
The most recent data comes from 2018, when check fraud accounted for 47%, or $1.3 billion, of bank fraud losses. Debit card fraud made up 44%, or $1.2 billion in losses with the remaining 9%, or $265 million in losses from electronic payments including bill payment, P2P transfers, wire and ACH transactions, according to ABA estimates.
While many banks are looking for technology to help banks combat check fraud, experts note that criminals appear to be several steps ahead of banks.
"It turns out, low and behold, a uniformed police officer really does deter crime," said Albergo, with the Postal Police Officers Association.
