How to Protect Your Business from Check Fraud

As businesses continue to embrace the digitization of their operations, there’s a tremendous amount of time, effort and resources focused on cybersecurity risks. Yet while other forms of fraud and risk attract more attention and funding, check fraud continues to cost companies billions.

So how big of a problem is check fraud? The American Bankers Association 2019 Deposit Account Fraud Survey found that total attempted check fraud stood at $15.1 billion, while banks prevented $13.8 billion—or 91% of attempts—for a net loss of $1.3 billion.

In fact, according to the Association for Financial Professionals’ (AFP) 2020 Payments Fraud and Control Survey, 74% of companies that experienced attempted or actual payments fraud last year were victims of check fraud. Despite the risk, the AFP found that 42% of companies use checks for business-to-business payments.

Given their ease of use, businesses will continue to use checks for the foreseeable future. Therefore, minimizing losses requires a willingness to use checks coupled with mechanisms to detect fraud as soon as it arises.

Common check fraud includes the forging of signatures or endorsements, the alteration of payee names and dollar amounts, and the creation of counterfeit checks. Like other forms of financial crime, perpetrators look for companies that lack the people, processes and technology to prevent losses.

Here are some of the ways companies can protect themselves from check fraud:

• Positive Pay—Identified by many anti-fraud experts as the most effective form of defense against check fraud, positive pay is a service offered by banks that automates the detection of fraud by matching checks presented for payment to a bank with a list of checks issued by the company. Using automation, the bank highlights exceptions. The company can then choose to authorize the red-flagged item or have the check returned. Fifth Third Positive Pay Services offer companies a range of options, including payee name verification, and teller-maintained positive pay. Companies can also use reverse positive pay, in which a company maintains control over its list of issued checks and assumes responsibility for detecting exceptions by reviewing checks issued versus those presented.
• Check Blocking—Using this method will allow electronic debits and check deposits to post while blocking any checks from posting to the account.
• Bank Account Reconciliation—Once a fraudster uncovers a company’s weaknesses and succeeds in passing a bad check, they often repeat the process for as long as it proves successful. Performing daily reconciliation of accounts can substantially reduce check fraud by confirming the legitimacy of transactions posted against an account and highlighting anomalies quickly. Fifth Third’s Account Reconciliation service provides fast, accurate account activity information. If a company chooses to reconcile their bank accounts in-house, to prevent internal fraud, those involved in the reconciliation should not be involved in issuing checks as well.
• Restrict Check Posting—Placing a “post no checks” restriction on accounts that do not need to accept check payments can reduce the potential for check fraud. To further protect these accounts with no need to process checks, companies can also request that their bank only process Automated Clearing House (ACH) transactions from these accounts instead of checks.
• Require Dual Signatures—For large check transactions, companies should consider increasing the visibility of those transactions within their organization by requiring the signatures of two executives with the authority to issue such payments (also known as dual signatures). Establishing this requirement for large transactions adds another barrier of protection against check fraud.
• Establish Company Policies and Procedures—Although most check fraud schemes involve third parties, companies should take steps to minimize the potential for employees to commit check fraud. A corporate policy should define which executives can issue and approve check payments. It should also detail the dollar limits of their authorization. Additionally, the policy should identify who can order new check stock. Once received, blank checks should remain in a secure limited location, with limited employee access.
• Designate Employees to Respond to Bank Enquiries. If a bank uncovers suspicious check activity, bank employees may need to contact the company to confirm their suspicions. Selecting an individual to answer calls from the bank can help ensure the bank’s fraud detection team has the confirmation it needs to protect the company’s funds. Additionally, companies should provide employees with examples of forged, altered and counterfeited checks, and their role in helping prevent losses. For example, if a company accepts checks from the public, point of sale employees should receive training in how to spot a fraudulent check.

In addition to the above risk-mitigation strategies, one of the simplest ways to reduce check fraud is to reduce the number of checks issued. By moving to electronic payments, such as ACH, wire, or other forms of electronic payments, companies can minimize the number of checks in circulation with the potential to fall into a criminal's hands. Companies can also use an ACH Debit Blocking service which enables customers to specify which companies are authorized to post ACH debits to their accounts, blocking those that are not authorized.

Fifth Third’s ACH processing is an ideal solution for repeat payables such as payroll, reimbursements, dividends, taxes, and other items. Wire transfer services through Fifth Third use the latest security technology on front-end and back-end processing for fraud protection, with the ability to process larger-dollar transactions that require immediate settlement.

Ready to get started to improve your organization's defenses against check fraud? Schedule time with a Fifth Third banker.