Check Fraud: Can We Deal With It?

By Author: Lumber Joe
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There are several ways check fraud is done. It usually means purchasing goods or services and paying with the check that was been stolen from the owner and counterfeited or manipulated. Usually thieves steal the check from the owner, counterfeit owner's signature and try to use the check for fraudulent purposes. Generally criminals focus on merchants that trade with high-value goods, such as cars. In fact such merchants must be more cautious about accepting checks or banker's drafts, since they can be stolen or counterfeited and merchants may lose a lot from fraudulent transaction. However as practice shows, such merchant are often deceived due to their negligence.

Criminals often pursue following tactics: they make purchase at the merchant's store and make a payment through the check or banker's draft that is of the higher amount than the goods purchased. Criminals assure merchant that the check or banker's draft will be cleared and ask him/her to transfer excess funds either to their account or to the account of the third person. In fact such a conduct should be alarming for the merchant and should raise a concern that ...
... it can be a scam, however in many cases such fraudulent conduct turns to be successful.

In these cases it is extremely difficult to track fraudulent checks in the clearance system. Although banks try to do their best to tackle this kind of fraud, but owner of the check very often does not realize that one of the checks from his/her checkbook has been stolen and moreover money has been withdrawn from the account using the missing check. Sometimes it takes weeks or even month before the fraudulent cash is claimed back.

Since 2007 the banking system through the Check and Credit Clearing Company is amending the ways by which checks are processed. The new system involves the following: in case the fraudulent check is used, merchant retains funds if they are not claimed within six working days with the exception, when merchant voluntarily agrees to give them back, or the merchant is part of the fraud scheme.

Generally offshore banking institutions examine check fraud events case to case, but in most cases if the customer is innocent and just a victim of check theft, he/she is refunded. However if the merchant accepts fraudulent check or check for inflated amount, the merchant is unlikely to get the goods back and he/she is obliged to refund the cash. However after 2007 merchants can be sure that they do not have liability to refund fraudulent cash, if it is not claimed within six working days, unless merchant is part of the fraud scheme.

Despite these changes, banking industry continues to recommend merchants to be cautious about accepting checks; however it seems that these recommendations and actual deeds deeply contradict to each other. On one hand, in the previous scheme merchants were heavily discriminated, since they were the ones who bore all the risk and check owners were the ones, who were not subject to financial loss, despite the possibility that checks could be stolen due to owner's negligence. The new scheme offers quite a good solution for merchants: if the funds are not claimed in time, then check owner loses them. At the first sight founds fair!

But let us now analyze this situation more deeply. In fact new measures raise moral hazard problem: if merchant knows that after six days fraudulent cash will become his/hers, he/she will have less incentive to control and refrain from suspicious operations, since there is high possibility of retaining these funds. Now let us imagine situation, when a merchant and a thief can find it beneficial to cooperate and can even agree to divide proceeds from the fraud. Why not? Before stealing checks, thieves often gather some information about habits of a victim. If the thief is sure that the person he stole a check from with the high probability will not check his/her bank statement within six days, then the whole operation can turn out to be quite beneficial. This may give rise to the wave of fake transactions, where merchants will be involved.