Note: We have recently had several check fraud claims. We asked our partners at The National Bank of Indianapolis to write the following article to help you protect yourself from check fraud. See also our previous article on the subject.

Financial losses due to fraud are increasing every year. According to the FCC, losses due to fraud were up by more than 30% in 2022 compared to 2021. Nonprofit organizations tend to be particularly at risk due to 990s and other information useful to fraudsters being publicly available.

Particularly alarming is the rise in check fraud. FinCEN released a recent report indicating that check fraud occurrences reported by banks increased to 680,000 in 2022 from 350,000 in 2021.  
It is often recommended that we minimize the use of paper checks as much as possible.  Electronic credit card and ACH payments (with verified and secure payment portals), while not perfect, are much more secure. Credit cards also tend to have the most generous reimbursement terms if fraud does occur.

While this is sound advice, it is sometimes simply unavoidable to use paper checks as a form of payment.  Here is some general information and steps you can take to help protect your organization:

Check Processing and Check Fraud Trends:
Today, the processing of checks by banks is nearly all automated.  Gone are the days of banks examining individual checks and matching to signature cards.  Anyone with your account and routing number can easily create fake checks. On the bright side, bank processing software has become more sophisticated in detecting anomalies in check style and out of sequence check numbers.  

In response, the criminals are now trending back to intercepting real checks and changing the payee information.  This way, an altered check can be paid, and possibly go unnoticed for a much longer period of time.  Unless cancelled checks are examined closely, they can reconcile correctly, and not be noticed until the intended payee calls.  Depending on the payee’s accounts receivable systems, this is sometimes months later.

How to Protect Your Organization:

1. Positive Pay:  Most banks offer this service for a fee, and there is no better defense against check fraud.  It works by matching all checks that are drawn on your account to a file you send to the bank at the time you issue them.  If any information does not match, you are notified and have the opportunity to deny payment.

Some banks have different versions of Positive Pay, so make sure that your service is verifying the payee name as well as the other information on the check.

There is a similar “ACH Debit Filter” product which protects against unauthorized ACH debits which is also highly recommended.

Should you reject this optional risk management too, it will be incumbent upon you to manage your financial transactions in a more timely and more thorough manner.

2. Outsourced Payables Processing: Many organizations hire third parties to manage the processing of payables. The processors generally prefer to send payments via ACH, and only use paper checks when necessary. Usually, they will debit your account once and pull the funds into their bank account, and then make payments to your vendors from there. They should all have Positive Pay, but sometimes fraud still occurs. It is important to review their contracts and disclosures carefully to understand how fraud is handled and who is liable. Some of them have time limits after which they will not reimburse for fraud losses.

3. Reconcile and review account activity frequently: Identifying fraud as soon as possible is critical as the chances of recovering the funds diminish quickly with time. If a fraudulent check is reported within 24 hours, it can usually be returned before funds ever leave your account. Organizations that choose to not incur the expense of Positive Pay must be particularly vigilant.

4. Report fraud to your bank no later than 30 days from the incident. Regulation CC (the Federal regulation governing check processing and liability) requires the bank of first deposit to conduct specific actions if it is notified within 30 days. After that, the opportunity for recourse is greatly reduced.

5. Secure Check Stock: Protecting both unused check stock, and outgoing checks is another critical aspect of protection. Many of the intercepted checks are stolen from the mail. Unsecured mailboxes should be avoided.

What To Do if Fraud Occurs:

1. Notify Your Bank Immediately: The sooner the bank is notified the better the chances of recovering the funds. Your bank should also guide you through the process and advise on next steps.

2. File a Police Report: In addition to getting the police involved, this is a very important step to document the occurrence for potential insurance claims, and disputes down the road with intended payees.

3. Contact the Postal Inspector’s Office – If a check was stolen in the mail, be sure to file a report with this office. They also tend to be more proactive about pursuing fraudsters than the police.

4. Contact MJ Sorority to alert them to the incident and determine any additional action that needs to be taken.

In Summary:

As the threat of check fraud continues to evolve, we all must remain vigilant and proactive in educating ourselves and our employees . Staying informed about emerging trends, leveraging advanced banking technologies, and adopting best practices will help fortify our defenses. It is important to have a good relationship with a knowledgeable and responsive banking partner who can help develop and continuously improve your defenses against losses due to fraud.

We have recently had several claims involving fraudulent checks. Sororities aren’t the only victims. In an alert sent out in February, the Financial Crimes Enforcement Network, also known as FinCEN, reported that, “Despite the declining use of checks in the United States, criminals have been increasingly targeting the U.S. Mail since the COVID-19 pandemic to commit check fraud.” Criminals are becoming increasingly sophisticated in their methods, making it crucial for organizations to stay vigilant. These fraudulent activities encompass a range of tactics, including counterfeit checks, altered payee information, and even identity theft to gain access to legitimate bank accounts. As a result, it is imperative for chapter and house corporation officers and volunteers to be aware of these risks and adopt strategies to mitigate the threat of check fraud. We recommend the following strategies:

Semi-annual email newsletter sent to chapter presidents, officers, and chapter advisors.

A quick self-guided presentation reviewing the basics of the MJ Sorority program.

A quick, self-guided presentation to help you plan your next chapter event.

A self-guided presentation covering risk management basics for chapter presidents.

A self-guided presentation for chapter advisors.

At the beginning of each academic year, we email out a resource for chapter officers and advisors. Click here for the 2021 version.

Review and implement the following steps as needed:

Via ChubbWorks.