Toolkit Module 1: Check Fraud Basics

What is Check Fraud?

Check fraud is a financial crime that involves the unauthorized use of a paper or electronic check. Generally, check fraud falls into the following categories:

• Methods: ways in which fraudulent checks are created or obtained
• Types: primary types of fraudulent checks
• Schemes: how check fraud is facilitated

The inherent vulnerabilities of paper checks create significant risks, primarily fraud. Paper checks can be altered, counterfeited, forged and otherwise manipulated for the benefit of criminals. This module focuses primarily on the types of fraudulent checks. Understanding how different check fraud schemes are carried out is essential in determining how to identify and possibly, prevent losses.

Why Does the Type of Check Fraud Matter?

• Prevention and detection: each type of check fraud may have different identifiers and once identified, may require different actions to counter the fraud. Generally, the institution that is in the best position to identify a potentially fraudulent check — and prevent a loss — differs based on the type of check fraud. (Note that liability, breach of transfer and presentment warranties are beyond the scope of this toolkit.)
• Associate training: educating all of an organization’s associates on how to identify different types of check fraud may help prevent losses and speed up resolution for customers​
• Customer education and awareness: organizations can develop targeted, meaningful education based on trends and fraud indicators​

Primary Types of Fraudulent Checks

Checks can be modified in different ways

• Altered: an alteration is an unauthorized change in a check that modifies in any respect the obligation of a party, or an unauthorized addition of words or numbers, or another change to an incomplete check related to the party’s obligation
• Counterfeit: a fictitious check created to imitate a legitimate negotiable item, which may or may not contain legitimate maker (payer) and account (Note that case law has used the terms “forgery” and “counterfeit” interchangeably.)

Checks also can be forged

• Forged maker: an unauthorized signature of the maker (payer) on the check
• Improper/forged endorsement: the payee’s signature — the endorsement on the back of the check is forged, missing or otherwise improper

Other ways to create fraudulent checks

• Unauthorized Electronically Created Item (Off-site) or UECI: when any of the following were not authorized by the account holder — the electronically created item itself, the amount stated on the item or the payee stated on the item.
• Unauthorized Remotely Created Check (Off-site) or URCC: a remotely created check that was not authorized in the amount stated on the check to the payee indicated on the check and does not bear a signature applied by the account holder. (This is not intended to include buyer’s remorse or other instances where the maker authorizes the payment but then retracts it.)

Test Your Knowledge

Different types of fraudulent checks can be difficult to identify because criminals continue to become more sophisticated in their schemes.  Review these common check fraud scenarios to see if you can identify the various types of fraudulent checks.

Downloadable Resources

Explore these resources for additional information on check fraud basics.

The check fraud mitigation toolkit was developed by the Federal Reserve to help educate the industry about check fraud and outline potential ways to help detect and mitigate this fraud type. Insights for this toolkit were provided through interviews with industry experts, publicly available research, and team member expertise. This toolkit is not intended to result in any regulatory or reporting requirements, imply any liabilities for fraud loss, or confer any legal status, legal definitions, or legal rights or responsibilities. While use of this toolkit throughout the industry is encouraged, utilization of the toolkit is voluntary at the discretion of each individual entity. Absent written consent, this toolkit may not be used in a manner that suggests the Federal Reserve endorses a third-party product or service.