Check Fraud is the forgery or alteration or the knowing issuance of a check on an account that has been closed or has insufficient funds to cover the amount for which the check was written.

How It Happens:

Different techniques are used to commit "check fraud," including such practices as writing checks on closed accounts, having insufficient funds in an account to cover a check, opening fictitious accounts, the alteration of an original check, forgery, and counterfeiting.

Closed account fraud occurs when checks are written against a checking account that has already been closed. This process can also be called "paperhanging," referring to the suspect's reliance upon the time that it takes for a bank transaction to be processed.

Paperhanging offers a window of opportunity for the criminal to defraud the financial institution. A suspect will typically attempt to cash a check at a local branch of the bank or at a convenience store, grocery store, or similar place of business within a short time after closing the account on which the check is drawn.

Check Kiting
An act similar to closed account fraud is the writing of a check against an account containing insufficient funds to cover it. This type of fraud is more commonly known as "check kiting." Check kiting can involve a single account or the use of two or more accounts each from different institutions. The practice relies on the same principle as closed account fraud, creating fraudulent balances in the time that it takes for bank transactions to be processed.

Check fraud can also involve active accounts, both personal and corporate. Criminals open these accounts with the intent of defrauding the bank.

New account fraud occurs when an offender opens an account, usually with false identification, using false employment information and fictitious addresses and telephone numbers. After depositing altered or counterfeited checks into the account, the offender then makes withdrawals for a large portion of the account balance before the bank realizes it has been victimized.

Check Washing
The process of altering a check is another form of check fraud. Chemical modification to checks is one of the most popular forms of alteration. Check washers use acid-based household chemical solutions to erase selected information from the check, while maintaining the integrity of the preprinted information. Offenders then rewrite the checks to themselves or coconspirators, increasing the amount payable.

Counterfeiting
Technology has played a major role in the proliferation of check fraud. The use of relatively inexpensive computers and printers, with capabilities often referred to as "desk top publishing", has enhanced the manufacturing of virtually undetectable counterfeit instruments. Computers loaded with sophisticated graphics capabilities can be purchased from most computer and office supply stores.

A counterfeiting operation requires only a laser scanner to capture the image of an original check, a personal computer, the necessary software to make the changes, and a quality laser printer to produce the counterfeited check. All the necessary equipment to commit this fraud can be obtained for less than $5,000.

Counterfeiters, with the aid of computers, can duplicate corporate and payroll checks, traveler's checks, credit cards, certified bank checks, money orders, currency, and other negotiable instruments, as well as personal identification such as driver's licenses and social security cards.

Cost

Check fraud is estimated to cost U.S. businesses more than $10 billion a year. Recent reports suggest that check washing alone accounts for approximately $815 million lost every year in the United States.

"According to the Create-A-Check web site, in 1997 there were approximately 496 million fraudulent checks written for a total of $9.9 billion. This figure means that, on average, 1.4 million fraudulent checks a day worth $27.30 were written."

"According to Ernst & Young more than 500 million checks are forged annually, with losses totaling more than $10 billion."

"According to a report issued by the American Banker, an industry bankers magazine, estimates of losses from check fraud will grow by 2.5% annually in the coming years."

"According to the National Check Fraud Center, check fraud and counterfeiting are among the fastest-growing problems affecting the nation's financial system, producing estimated annual losses of $10 billion and continues to rise at an alarming rate annually."

The FBI estimates that if commercial banks and other institutions combined their check fraud losses, the total would be $12 billion to $15 billion annually.

High Profile Examples/Case Studies

On June 12, 2000, Los Angeles FBI Assistant Director in Charge James V. DeSarno, Jr., announced the arrest of individuals connected to a check scheme that involved over $40 million.

Other Resources

National Check Fraud Center
http://www.ckfraud.org Office of the Comptroller of the Currency
http://www.occ.treas.gov/chckfrd/idassume.htm