Understanding and Preventing Check Fraud: A Guide for Local Businesses

Check fraud is one of the most common scams affecting businesses today. Despite the rise of electronic money transfers, many businesses continue to use checks for payments, making them appealing targets for criminals. This article explores check fraud and its forms, its impact on businesses, and how proactive measures, including Positive Pay from Home Federal Bank of Tennessee, can help protect your business.

Signing a check

What is Check Fraud?

Check fraud is the illegal use of checks to acquire funds unlawfully. It can occur in several ways, but it typically falls into one of two categories:

  • Counterfeit checks: Criminals steal basic account information to create fake checks that look legitimate. Within hours, they can produce hundreds of realistic-looking checks and deplete your checking account.
  • Altered checks: Thieves steal a legitimate, signed check and alter the payee or amount. The check is then cashed, and funds are gone from your account before you realize the check didn’t reach its intended recipient.

The Impact of Check Fraud on Businesses

The repercussions of check fraud can extend far beyond immediate financial losses, affecting some of the most important aspects of business operations. Here’s how check fraud can significantly impact your business:

  • Financial loss: Direct monetary losses can be substantial, impacting cash flow and profitability.
  • Reputational damage: Trust is a cornerstone of customer relationships. Check fraud can damage a business’s reputation, making customers wary of continued engagement.
  • Operational disruption: Dealing with the aftermath of fraud, including investigating and rectifying fraudulent activities, can distract from core business operations.

Still using checks but not convinced your business is at risk? These five statistics illustrate the scope and impact of check fraud.

  1. Check fraud costs U.S. businesses over $18.7 billion annually. This staggering figure underscores the financial impact of check fraud on the economy. Businesses, particularly small and medium-sized enterprises, can face significant financial strain due to losses. Source: Federal Reserve
  2. Check fraud is the #1 payment fraud threat to businesses. Despite advancements in digital payment security, checks remain a primary target for fraudsters, making check fraud the leading type of payment fraud faced by businesses today. Source: Association for Financial Professionals
  3. There were 680,000 reports of check fraud in the U.S. in 2023. The high number of reported cases indicates that check fraud is a widespread issue affecting numerous businesses across the country. Source: U.S. Treasury Department
  4. Check fraud has increased by 95% since 2021. This dramatic increase highlights the growing prevalence of check fraud, emphasizing the need for businesses to implement robust fraud prevention measures. Source: American Bankers Association
  5. Mail theft, which often leads to check fraud, has doubled in one year. Mail theft is a significant contributor to check fraud, as criminals often steal checks from mailboxes to alter or counterfeit them. Source: United States Postal Inspection Service

Getting mail from mailbox

Common Causes of Check Fraud

  1. Stolen Checks: Criminals intercept incoming checks or outgoing checks meant for vendors or employees. They can alter these physical checks or use the information to create counterfeit checks.
  2. Internal Fraud: Sometimes, the culprit is an internal employee. Even a well-trusted, long-time employee with access to the company’s accounts can commit check fraud.
  3. Email Fraud: Fraudulent emails from scammers posing as coworkers, vendors, or customers can prompt unsuspecting employees to issue checks.

Employer hands over a check to his subordinate

How to Prevent Check Fraud

As a pillar of strength and stability in East Tennessee for over a century, Home Federal Bank of Tennessee cares deeply about our local businesses, and when they face challenges, we offer solutions. To safeguard your business against check fraud, consider these proactive steps:

  1. Opt for Electronic Payments: Whenever possible, use electronic payments instead of mailing physical checks.
  2. Avoid Unsupervised Mailboxes: Never leave outgoing checks in unsupervised mailboxes. Use a USPS Collection Box or drop checks off at the post office.
  3. Monitor Internal Processes: Regularly review bank statements and daily transaction activity online to check for irregularities.
  4. Separate Duties: Ensure the employees authorized to sign checks are not the same people who reconcile the accounts.
  5. Two-Person Authorization: Consider instituting two-person authorization on outgoing checks and payments.
  6. Secure Check Stock: Keep all check stock or cash equivalents in a secure location with logged access.
  7. Sign Up for Positive Pay: Detect fraud as it happens. Positive Pay verifies the checks your business issues against those presented for payment.

Mature businessman checking his bank account for fraudulent activity

Positive Pay: A Business Solution for Check Fraud

One of the most effective tools in the fight against check fraud is Positive Pay from Home Federal Bank of Tennessee. Positive Pay acts as a vigilant guard, checking every transaction against a list of issued checks. Here’s how it works:

  1. Check Issuance Data Submission: Businesses submit a list of issued checks, including details like check numbers, amounts, and payees.
  2. Verification Process: When a check is presented for payment, the bank cross-references it with the list. Any discrepancies trigger an alert for the business to verify the check’s legitimacy before processing.
  3. Real-time Alerts: Positive Pay provides real-time alerts, allowing businesses to act swiftly if a fraudulent check is detected.

The benefits of Positive Pay are substantial:

  • Fraud Protection: By verifying checks against issued lists, businesses can prevent unauthorized checks from being cashed.
  • Check Verification: Ensures that all presented checks match the details provided.
  • Decision Control: Businesses decide whether to pay or not to pay based on verification.
  • Exception Handling: Immediate notification of discrepancies for prompt action.

For more information on how Positive Pay can protect your business, visit Home Federal Bank of Tennessee’s Positive Pay page.

To get started today contact one of our business bankers. We are here and eager to help.

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If it seems too good to be true, it probably is! Scams are more sophisticated than ever, and staying informed is the key to protecting yourself. From phishing messages promising unimaginable rewards to phone calls pretending to be your bank, there’s a lot to look out for. At Home Federal Bank of Tennessee, we’re here to help, and want to empower you with the information you need to outsmart the latest tricks. Let’s delve into some of the most prevalent schemes currently circulating, their deceptive tactics, and how you can best avoid them.
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