The American Bankers Association reports that the US Postal Service recovers more than $1 billion in fraudulent checks and money orders each year. The most significant threat right now is the rise of mail theft coupled with the low-tech scam check washing. To protect your financial institution from losses, you must be aware of the risks and ready to detect minute alterations in checks, but you also must educate your customers about the risks.
What is Check Washing?
Check washing is when criminals steal a check, wash it in chemicals to remove written content, and then rewrite the check to themselves or another party for a higher amount. Check washers generally change the payee name, amount, and possibly the date, but they leave the signature intact. In other cases, they only change the amount of the check, and then, they create a fake ID with the payee’s name so they can cash the check.
Like many types of bank fraud, check washing takes a variety of forms and has many different perpetrators. Some criminals carry out the full fraud themselves including stealing, washing, and cashing the checks. Others only play a single role – for example, someone may steal checks out of the mail and then sell them online. Someone else may exclusively buy checks online to cash. Often, criminals recruit mules to help them cash fraudulent checks or they trick victims into accepting the checks in exchange for cash. Some criminals convince mules to use their real name and account to cash washed checks.
How Do Criminals Wash Checks?
The exact techniques vary, but typically, criminals place low-adhesive tape over the signature. Then, they soak the check in acetone, benzene, bleach, carbon tetrachloride, clear correction fluids, or a high-performance eraser. Thieves don’t even need to buy special chemicals or worry about using bleach – they often just use nail polish remover because it’s effective and easy to get. Sometimes, they just soak checks in water until the ink gets blurry and disappears.
Once the written content has been removed, the thief can sell the blank check. Alternatively, they can write the check to themselves, to a name on a fake ID, to a retailer, or to a mule. Then, they enter their desired amount and use the check. At this point, they may use the check at a store, or they may cash it at a check cashing facility or the bank counter.
Sometimes, thieves scam someone else into accepting the check and giving them cash for some or all of its face value. Although this tactic is more common with cashier check or money order scams, it also occurs in the check-washing realm as well. Finally, thieves may open fake new accounts and use them to cash their checks. Check washing is particularly effective with new account fraud because once the thief successfully opens the account, they can bypass the teller line and easily deposit the check through an app or ATM.
What Happens If a Bank Accepts a Washed Check?
If a bank unknowingly accepts a washed check, the funds are removed from the victims’ account. Then, depending on the nature of the fraud, the bank either gives cash to the perpetrator or credits their account for the value of the check. At this point, savvy criminals remove all of the funds that have been credited to their account. Thus, by the time, the bank realizes the problem and reverses the deposit, the funds are long gone, and the bank is left to contend with the losses.
The bank may also be liable for the losses suffered by the victim. Ultimately, liability depends on state laws and how long the victim takes to report the losses. If the victim doesn’t realize they had a check stolen and they don’t keep close tabs on their account, they may not notice until after the bank’s liability period has ended. However, even if the bank is not legally liable, it stands to suffer reputational losses. Consumers almost always blame their banks for fraud, even if they were the weak link.
To minimize losses, banks need to be aware of the risks of washed checks, and they need processes in place to help them reduce the risks and spot altered checks.
How Can Banks Spot Washed Checks?
Banks should use a multi-pronged approach to reduce the risk of check washing and other scams. Positive pay, check stock validation, automated signature verification, and managed fraud services can all help financial institutions minimize their risks.
Positive pay is primarily used for business accounts, and it prevents checks from being cashed if they are not on a verified list presented by the account holder. Check stock validation and automated signature verification tools scan checks to see if security features have been removed or signatures have been forged. These types of tools spot minute issues that cannot be detected by the human eye, and they flag the check for manual review by your team.
A managed fraud team can step in to manually examine the check if you don’t have the staff to handle it or need backup on the evenings or weekends. Additionally, you should also consider working with a fraud detection partner that collects cyber threat intelligence and uses knowledge about new/emerging scams to improve its approach to fraud detection.
Also, have safeguards in place that look for scams associated with or leading up to check-washing scams. As indicated above, that includes new account fraud and account takeover. Remember, the check theft and washing are only a part of the scam — thieves need an account to cash the washed check.
Additionally, your employees need to understand the risks. Tellers must be trained to spot altered checks, and they should also be aware of the social signs associated with a scammer cashing a check. For example, a scammer may try to distract the cashier by talking a lot, and they’re often someone who doesn’t come to that branch. When mules are involved, they often seem nervous and may have earbuds in to get messages from someone else who’s watching from the lobby or parking lot. Unfortunately, in some cases, bank employees are involved in scams, and they help the thieves cash fraudulent checks.
Additional Tactics for Reducing the Risks of Washed Checks
Financial institutions must make strong efforts to prevent themselves from all types of check fraud. Even as check use declines, check fraud continues to increase, and banks that are not proactive stand to lose significant sums of money plus reputational damage. In addition to taking internal steps to fight check fraud, financial institutions also need to educate their employees.
When possible, encourage your customers to buy checks with security features such as watermarks and/or security threads. Offer positive pay to commercial clients and educate them about the benefits of this program. Let your customers know that they should use gel pens when writing checks as the ink is harder to dissolve. Remind account holders to make sure they fill each line of the check. Spaces make it easier for thieves to modify the checks.
Additionally, let your customers know about the increased risk of mail theft – cover the risks in newsletters and on posters in your branch, and have tellers talk to account holders who use a lot of checks in person about the risks. Advise customers not to mail checks from their home mailboxes, and if they must do so, they should put in the checks as close to pick-up time as possible. Ideally, however, they should only mail checks from locked boxes or directly from the post office.
You also may want to encourage account holders to use fewer paper checks and look into automated, electric payment options. If they prefer to mail checks, remind them to stop their mail when they go out of town. Also, encourage them to use security envelopes and monitor their accounts closely for cashed checks. Tell accountholders to look at the endorsem*nt of cashed checks. In some cases, thieves don’t even alter the checks, they just deposit them into an account and forge the endorsem*nt.
Protect Your Financial Institution From Check Washing
Running a successful financial institution requires constant vigilance against washed checks and all other types of bank fraud. Are you taking the right steps? Or is your bank facing unnecessary risks? At SQN Banking Systems, we help financial institutions reduce their risk of check fraud. We can help you protect your bank, your customers, your bottom line, and your reputation. To learn more, contact us at SQN Banking Systems today.
