Help customers protect against ‘check washing’ and holiday-timed mail fraud

Check writing is giving way to digital payments, but there’s no doubt that a sizeable contingent of valuable bank customers maintains a preference for paper. With physical check writing comes a heightened risk of increasingly sophisticated fraud. The winter holidays are an especially vulnerable time, not only for package theft, but for check theft and fraud. Bad actors intercept checks from the U.S. mail system and alter the documents to redirect funds. 

According to the Financial Crimes Enforcement Network (FinCEN), the U.S. Treasury’s investigative arm, reports of check fraud have more than doubled over the past three years. The rise is due in part to greater reporting of such theft than in earlier years when reporting was less thorough. 

Earlier in 2023, FinCEN issued an alert revealing that there were 680,000 cases of possible check fraud reported last year. That’s a jump from 350,000 in 2021, which was a 23% increase over 2020.  

FinCEN said it sees no indication that check fraud is going to decline anytime soon, so it redoubled its call on financial institutions and the United States Postal Inspection Service to be increasingly vigilant. FinCEN warned that the main source of stolen checks is the U.S. mail. That includes the large blue boxes on street corners and outside U.S. Postal Service (USPS) branches, as well as from residential mailboxes. In its own findings, the USPS said approximately 25,000 blue boxes were hit in the first half of 2023.  

Fraudsters may see vulnerabilities that afford them access, and they know that physical check writing can more often be used for big-ticket expenses. Data from the Atlanta Fed shows that consumers are more likely to use checks for higher-dollar-value payments for utilities, rent, charitable donations, government taxes and fees and building contractors. And compared to other types of income, rental and self-employment income are more likely to be paid by physical check. 

Rachel Koning Beals, senior editor at BAI, sat down with Todd Robertson, senior vice president at ARGO, which provides fraud-prevention expertise and technology to the financial services sector. Robertson offered advice on how banks and credit unions can help protect their customers and themselves from this rise in check fraud. 

What is “check washing,” an increasingly popular way of altering paper checks to commit fraud?  

Check washing starts when a scammer steals a physical check, usually from the mail, then uses chemicals to “wash” off the ink, fills in their own name and cashes it. Sometimes, the fraudster uses an associate with a legitimate account to defray suspicion before eventually receiving the money themselves. 

The data indicates we are seeing a rise in incidents of fraud and check-by-mail theft around the holidays, say versus even a few years ago. Are you increasingly helping banks at this time of year? 

There is an awareness as fraud has increased and that includes the holidays, which simply brings more volume of mail and mailed checks. The postal carrier has hardened up the blue boxes. And so you’re seeing a lot of action on that side. But all that means is that the fraudsters are going to move to a different angle to be able to perpetrate the fraud not only against individuals, but small businesses, which may be writing and handling a lot of checks.  

One of the best lines of defense for now is educating consumers on the type of ink that is most preferable for a check, and that is black ink that’s indelible, or semi-permanent, so that it’s longer lasting. Yes, all the way down to the pen or the ink type that we’re using to sign these checks is becoming really important. 

What is the relationship or chain of responsibility among the USPS, law enforcement, consumers and the financial industry when it comes to remedying check washing and any mail-based fraud? 

You’re hitting on a powder keg. Various state and federal laws protect bank customers from large check fraud losses linked to mail theft, but no doubt, that leaves payor and payee banks to fight over which institution is liable.  

It can really depend on whether the item in question is counterfeit or if it is an altered item. You’ve got a different statute of limitations for each. And then there’s the question of the bank of first deposit or if it’s the depositing bank, and there are differences in who is responsible. Importantly, because of the rise in fraud, I believe we need to see a step up in officials who classify the fraud, and faster. These fraudulent items need to be classified 100% correctly, and right now, they’re not always classified correctly. 

What are some best practices for how banks and credit unions should discuss fraud risk with customers, especially around check washing? It seems there should be a balance between making sure customers are aware of the risks, yet not discouraging them from conducting payments business with methods they prefer. 

I think this can be a valuable conversation with customers. Getting these sophisticated pens into consumer hands could be one thing. Yes, it’s 2023, and we’re talking about educating customers on ink, but it matters. And, certainly, customers should be reminded not to put checks in the outgoing mail with the red flag up. I even caution against dropping checks in the [USPS] blue box. Walk it into the post office. I think it’s just about being helpful and teaching diligence. 

And on the small business and business side, positive pay services are becoming so important. They can capture the amount, who has been paid, the date, the check number, and there’s so much content and data on file that can be matched up against that item. It protects both the bank and the institution or the organization using checks from getting into a fight over an item. 

Let’s talk more about the practice of “positive pay” to discourage check fraud. 

The cash-management system known as positive pay is a big must-have, for small businesses especially, but for any business. It requires payments be transported nightly electronically so that checks can be matched up to them the next day. And you’re starting to see the Better Business Bureau getting engaged here. 

Now, there are nuances worth exploring. You’ve got traditional positive pay; you have payee positive pay. And then you’ve got things like ACH positive pay and reverse positive pay. There is scope for bank knowledge in selling the best-fit service to a small business, which may be reluctant to add on costs of service. But it can be a great service, and thus, potentially a great value. The quickness is the key.  

Relatedly, any best practices on how financial institutions can talk to customers about combining paper and digital banking? For instance, using online access to see canceled checks sooner. 

Being able to track images of cleared checks can help you intercept fraud more quickly, but it requires the consumer acting as intermediary. Banks are smart to use marketing campaigns to educate at mass scale or via branch interactions, recognizing that banking habits differ between baby boomers and Gen Z. 

In addition to the physical theft of paper checks, what are some digital fraud practices related to check payments that both financial institutions and their customers need to be aware of? 

An ongoing trend is the continued use of the dark web as a black market for “glass,” which is illegal, but high-quality, checks sold online, with a guarantee they’ll clear at the bank. Financial services trade groups and law enforcement are now advising banks to try to monitor “glass,” asking, does this check fit with normal customer behavior? Does this check fit with normal account behavior? And then look at the specific features around those items: Is the amount way out of whack for past behavior? What about the serial numbers? Can we tie this document in with transactional history? But the only way institutions can do this is with time. And so, this needs to get faster and be able to pick up on multiple nuances at once. 

Todd Robertson is senior vice president at ARGO. Rachel Koning Beals is senior editor at BAI.