Check Fraud

Check Fraud

What's the Problem?

	500M Checks Forged Each Year for a Total of $12B in Losses
	1.4M Fraudulent Checks Daily for total of $34M
	5-8% of All Products & Services are Counterfeit - $200B Annually
	Check Fraud is one of the fastest-growing crimes affecting the nation's financial system
	Internet crime rate

Types of Check Fraud

	Forgery – Check issued without proper authorization
	Counterfeiting –Wholly fabricating a check
	Alteration –Using chemicals and solvents to remove or modify handwriting or information on check
	Paper Hanging –Purposely writing checks on closed accounts
	Check Kitting –Opening accounts at 2 or more institutions and using the "float" time to create fraudulent balances

Check Kitting Story

West Coast Bancorp said Wednesday that it has fallen victim to a check kiting scheme that will cost it $1.2 million.

Oregon's largest independent bank with assets of $1.36 billion--reported the $1.2 million loss. It said the loss was caused by a single commercial customer.

Check kiting occurs when in-transit or non-existent cash is recorded in more than one bank account. The crime usually occurs when a bank pays on an unfunded deposit.

For example, a bum check is deposited into an account. Before the cash is collected by the bank, a check is written against the same account and deposited into a second account, or cashed. The increased use of wire transfers allows this type of scheme to be perpetrated very quickly.

More Detail on How the Fraud is Committed

A person will write a check drawn against her account at the bank and deposit it into her account at a bank (or another credit union). Before the funds are collected from the initial institution, a check is drawn against the balance and deposited into the bank to cover the amount of the check. As the member continues this process, checks are drawn against balances in both accounts. Typically, the balances escalate because the kiter writes the draft for more than the amount of that clearing, and will keep the excess amount in cash. Consider the following example:

On Monday, the kiter deposits a $300 bank account check into the credit union. The same day, the kiter deposits a $300 credit union check into the bank account.
On Tuesday, the kiter deposits a $300 bank account check into the credit union account via the ATM, then withdraws $100. The same day, the kiter deposits a $300 credit union check into the bank, and withdraws $100.
On Wednesday, the bank and the credit union collect on their checks from Monday’s deposits. The kiter deposits $1500 checks into each account and withdraws $200 from each through an ATM.
On Thursday, both institutions collect on Tuesday’s deposits.
On Friday, the kiter continues the cycle indefinitely.

Warning signals for the credit union:

	Frequent deposits comprised of checks/drafts drawn against other financial institutions signed by the same maker [other than the depositor];
	Low average daily account balance compared to the amount of deposits;
	Frequent inquiries from other financial institutions about the account or specific items;
	Frequent use of overdraft protection lines of credit;
	Increasing amounts of deposits followed by drafts clearing for similar amounts;
	Equal debits and credits to the account; and
	Excessive use of the ATM or night depository to avoid personal contact.

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