Checks continue to be an attractive vehicle for fraud

In early 2023, the U.S. Financial Crimes Enforcement Network (FinCEN) issued an alert on a nationwide surge of mail-theft-related check fraud schemes in the U.S. Between March 2020 and February 2021, the U.S. Postal Inspection Service (USPIS) reported a 161% increase in mail theft complaints all while Bank Secrecy Act (BSA) reports of check fraud have also increased. In 2022 alone, more than 680,000 check fraud Suspicious Activity Reports (SARs) were filed with FinCEN. (See “FinCEN Alert on Nationwide Surge in Mail Theft-Related Check Fraud Schemes Targeting the U.S. Mail,” Feb. 27, 2023.)

It might be tempting to think that with all the new forms of noncash payment options available today, such as Zelle and Venmo, fraudsters would focus all their energies on those instead of low-tech paper checks. But as the FinCEN alert demonstrates, this isn’t the case. Many credit the COVID-19 pandemic and the circulation of government-relief checks through the mail as a major motivation for the surge in check fraud.

“To paraphrase an old saying, ‘don’t let a good crisis go to waste,’” Ken Smiley, a fraud mitigation expert for Amegy Bank, tells Fraud Magazine. “This sentiment was certainly adopted by criminal organizations during the pandemic and has long been a trend following other natural disasters or war. Criminals have been emboldened by the success of check fraud, so it has become a very organized crime process as a result.”

But there are other aspects to checks that keep fraud relevant even as fewer people are using them on a daily basis. It seems that for fraudsters, check fraud never really goes out of style. (See “Cases of check fraud escalate dramatically, with Americans warned not to mail checks if possible,” by Ken Sweet, Associated Press, June 12, 2023.)

Early use of checks

People have used some form of checks or promissory notes throughout history. Indeed, the use of checks can be traced back to the first millennium in the eastern Mediterranean region. By the 10th century, Muslims were largely using this transactional method, and they influenced Europeans returning from the Crusades to set up banking, which then functioned to facilitate payments between local merchants rather than extend credit. (See “The Evolution of the Check as a Means of Payment: A Historical Survey,” by Stephen Quinn and William Roberds, Economic Review, Federal Reserve Bank of Atlanta, Number 4, February 2008.)

However, those early European banks didn’t allow the use of checks because they were considered a fraud risk. Medieval banks required that the payor, payee and banker were present for all transactions, guaranteeing that the actions of each party had at least two eyewitnesses. To make deposit accounts “checkable,” and to control risk, European banks developed the bill of exchange, which communicated remittances between cities. These bills took on written forms because payments occurred at different times and places than actual payments. Bills of exchange were used before checks and functioned to move money across regions. By the 16th century, a negotiability framework began to emerge in Europe, which helped develop the use and versatility of checks. (See “The Evolution of the Check as a Means of Payment: A Historical Survey.”)

“Checks have been the dominant form of payment since the 19th century,” says Smiley. “Back then, checks were safer than carrying cash or gold. It didn’t take long for check fraud to pop up.”

The fall of checks and the rise of check fraud

The use of checks peaked in the mid-1990s. Alternative payment options readily became available as debit cards and electronic remittance were offered to consumers. In a faster-paced, electronic world, quicker financial transfers took over. Convenience reigns supreme in the modern world, but that doesn’t mean people have entirely given up on checks yet. According to the U.S. Federal Reserve, people wrote 11.2 billion checks in 2021. That’s still a large number even if it’s down from 14 billion checks written in 2018 and 18 billion written in 2015. And while fewer people might be writing checks, when they do write them, they’re writing them for larger amounts. Over the years, the average value of checks has been on the rise, from $679 in the first quarter of 1989 to $2,653 in the third quarter of 2023. [See “Federal Reserve Payments Study (FRPS),” Board of Governors of the Federal Reserve System and “Commercial Checks Collected through the Federal Reserve--Quarterly Data.”]

But why do people continue to use checks despite more convenient electronic options? Many companies pass credit card processing fees on to their customers, but a check avoids that extra 1% to 5% fee, which saves the customer money. Additionally, some small businesses don’t have the resources to invest in electronic methods, but these cash-based small businesses can accept checks to deposit into their accounts. Furthermore, some consumers are hesitant to engage in online or digital transactions that jeopardize their data.

However, checks are still important for establishing direct deposits for many organizations. They also help with recordkeeping. Canceled checks serve as receipts and evidence that individuals or businesses were paid by correct parties, which can be useful should payments be disputed. In addition, in the U.S., the IRS classifies checks as supporting business documents for organizations’ books.

“Checks remain the most common business to business (B2B) form of payment today,” says Smiley.

Checks linger as important pieces of consumers’ lives and business transactions. But what makes them a strong method of payment is also what makes them vulnerable to fraud — they haven’t evolved with new technology. Because they’re so low tech, they’re easy to manipulate. Checks lack internal mechanisms like a chip in a payment card. A new check cashing process is unlikely to take over the business world. While everyone is focusing on developing new digital payments, updates, methods and coins, checks are almost stagnant in any progression — ideal for the perpetrator who doesn’t want to invest in all the newest tech either.

An easy target for fraud

Fraudsters continue to target checks largely because they’re still so easy to come by. Fraudsters have attacked and robbed mail carriers for the arrow keys that open mailboxes. They can then pilfer personal checks, business checks, tax refund checks and other government-related checks such as Social Security or Medicaid payments. Plus, people still widely use them to pay their rent and utility bills, make charitable donations and send gifts to loved ones. (See “The Evolution of the Check as a Means of Payment: A Historical Survey.”) And checks are physical documents, which make them vulnerable to manipulation. Fraudsters can easily wash them, forge them and counterfeit them with fairly inexpensive tools. Something as simple and readily available as nail polish remover can wipe away a signature, and a forger can use a computer printer to scan and alter a check. In recent years, fraudsters have found newer, more sophisticated ways to commit check fraud. For example, perpetrators can buy stolen checks on dark-web marketplaces and even can purchase bank accounts in which to deposit them. (See “We Can’t Stop Writing Paper Checks. Thieves Love That.” by Tara Siegel Bernard, The New York Times, updated Dec. 19, 2023.)

But there are fairly low-tech actions that people can take to fortify their checks against fraud. For example, check writers can use gel-ink pens and other inks that fully saturate paper, making them difficult to wash and forge. Another preventive measure is mailing a check from the post office rather than dropping it in a home mailbox or public drop box where fraudsters can easily get to them. People should limit the number of checks they write, and they should also monitor their bank accounts regularly for unusual activity on the checks they’ve written.

Generational divides

The fate of checks and the future of check fraud might rely on younger generations who’ve largely opted out of using checks. Younger generations tend to be drawn more to the easy and instantaneous nature of digital payments. Conversely, older generations shy away from the online and mobile banking options. Reportedly, only half of Generation Z adults have written a check while slightly less than half of baby boomers have used P2P payment services. Older generations seem to prefer physical payment methods over the digital, while younger generations opt for the inverse. (See “Generational Financial Gaps: Can Gen Z Write a Check? Can Baby Boomers Use Venmo?” by Sandy Baker, Finance Buzz, Aug. 22, 2023.) This supports the notion that checks are slowly falling into obsolescence. Younger generations either don’t know or care how to write checks as other options are better suited to their digital lifestyles.

Fight against check fraud continues

While younger generations embrace newer technologies, older generations hold fast to the methods with which they are most familiar. Logic suggests this is why checks — and check fraud persist. Checks have over a millennium of history, and people are still using them. Checks haven’t given up their power entirely and fraudsters still embrace the opportunities.

Laura Harris, CFE, is a research specialist for the ACFE. Contact her at lharris@ACFE.com.