While checks once served as the cornerstone of business-to-business (B2B) transactions, the long-standing payment method now exposes companies to a serious risk: check fraud.
Check fraud has emerged as a significant risk for accounts payable (AP) teams, as checks are particularly vulnerable to unauthorized alterations, replication, and counterfeiting. The growing threat highlights the urgent need for organizations to modernize their payment processes and protect against ever-evolving check fraud schemes. When left unaddressed, check fraud can lead to substantial financial losses and disruptions.
Key takeaways
- More than a third (34%) of finance leaders surveyed in MineralTree’s 9th Annual State of AP Report said that check fraud remains a common threat to their organization.
- Common check fraud schemes include the use of counterfeit checks, business email compromise, and vendor fraud, all of which can lead to significant financial losses and reputational damage.
- AP automation is critical in reducing reliance on paper checks and strengthening fraud prevention measures.
What is check fraud?
Check fraud refers to the unauthorized use of checks to illegally obtain money from an individual or business. Scammers use deceptive practices, such as counterfeit and forged checks, to redirect funds into their own accounts or conduct unauthorized transactions for financial gain.
Checks are particularly vulnerable because they’re relatively easy to alter or forge. As check fraud schemes grow increasingly sophisticated, it’s critical for AP teams to remain vigilant and proactively implement safeguards.
How does check fraud impact businesses?
Check fraud has far-reaching implications for businesses, particularly for those still reliant on paper checks. Though most businesses now use digital payments, the State of AP Report reveals that 97% of organizations still use traditional checks for at least some payments. So, it’s unsurprising that the data from the report also shows that 34% of finance leaders view check fraud as a common threat to their organization.
For businesses, check fraud often results in financial losses, operational disruptions, or damaged relationships with vendors. These impacts can strain resources and erode trust with stakeholders, underscoring the need for effective fraud prevention.
How does check fraud work?
Check fraud tactics are designed to exploit weaknesses in an organization’s financial processes, particularly within AP workflows. Often relying on gaps in internal controls, bad actors leverage stolen information or create fake invoices to execute their schemes. Fraudsters may also use counterfeit checks, intercept checks in the mail, or manipulate legitimate checks to redirect funds into their accounts.
What are the most common types of check fraud schemes?
Check fraud can take many forms, each exploiting different aspects of payment systems and processes. By understanding the following types of check fraud schemes, organizations can build more effective defenses against fraud. Some of the most common check fraud schemes include:
- Invoice fraud
- Business email compromise
- Vendor fraud
- Counterfeit checks
- Interference with USPS
- Internal fraud
- Altered or forged checks
- Check washing or cooking
- Check tampering
- Paper hanging
Let’s take a closer look at each check fraud scheme below.
Invoice fraud
Invoice fraud refers to submitting false or manipulated invoices by fraudsters posing as legitimate vendors and suppliers. These schemes frequently rely on phishing tactics or compromised vendor accounts to deceive AP teams into issuing payments for illegitimate invoices.
Business email compromise
Bad actors executing business email compromise (BEC) schemes leverage phishing tactics to impersonate executives or trusted vendors, convincing AP staff to issue unauthorized check payments. This type of scheme often involves detailed knowledge of company hierarchies and payment processes, making it particularly challenging to detect.
Vendor fraud
Vendor fraud can involve an employee of the organization, an external party, or even a combination of both. It entails submitting fake or manipulated invoices to extract payments. In some cases, fraudsters may impersonate legitimate vendors and alter account details to redirect funds. Vigilant vendor verification and routine audits are critical to counteract this type of threat.
Counterfeit checks
Counterfeit checks are fraudulent checks that are created to mimic legitimate ones. Fraudsters often use stolen account details to make counterfeit checks, which are becoming increasingly realistic as bad actors hone their graphic design skills. Scammers design these checks to bypass basic security measures, making them difficult to detect through typical verification processes.
Interference with USPS
Mail theft has become an increasingly common avenue for check fraud, with a reported 10% year-over-year increase in schemes involving stolen checks. Fraudsters intercept checks in transit and either alter them or use the information to produce counterfeit versions — highlighting the vulnerabilities of relying on physical mail for financial transactions.
Internal fraud
Internal fraud occurs when an employee or contractor exploits their access to the organization’s financial systems. Individuals may alter checks, create false invoices, or manipulate payment approvals in these schemes. This type of check fraud underscores the importance of strong internal controls and routine audits.
Altered or forged checks
In cases of altered or forged checks, fraudsters take legitimate checks and modify critical details, such as the payee’s name or the amount. Sophisticated fraudsters make subtle changes that require diligent oversight to identify. AP departments with lax verification processes are particularly susceptible to this form of fraud.
Check washing or cooking
Check washing involves erasing ink from a legitimate check to rewrite details. Advanced fraudsters use chemicals to remove ink without damaging the check itself, allowing them to alter payee names and amounts. This type of fraud often targets businesses with insufficient check security measures.
Check tampering
Check tampering is a form of internal fraud in which employees intercept and alter checks before they are cashed. This scheme often involves changing payment details to redirect funds into unauthorized accounts. Regular reconciliation and dual approval processes can help mitigate this risk.
Paper hanging
Paper hanging occurs when individuals write checks for goods or services already delivered that they know cannot be cashed due to closed or overdrawn accounts. This fraudulent activity often targets businesses that lack robust verification systems to confirm account validity before payment processing.
What are the common warning signs of check fraud in a business?
Detecting check fraud early can significantly mitigate its impact on business operations. Familiarize yourself with the following warning signs to identify check fraud before it escalates.
- Discrepancies between checks, invoices, and bank statements
- Duplicate, missing, or out-of-sequence checks
- Altered check details
- Checks cleared unexpectedly
- Late or irregular account reconciliation
- Increased number of manual checks
Keep reading for a closer look at each warning sign.
Discrepancies between checks, invoices, and bank statements
The presence of discrepancies between checks, invoices, and bank statements is one of the clearest indicators of check fraud. Inconsistencies between documents often signal unauthorized alterations or fraudulent activity that require immediate investigation.
Duplicate, missing, or out-of-sequence checks
Other red flags to watch out for are missing checks, duplicate payments, or checks processed out of sequence. These anomalies typically point to internal fraud or tampering, underscoring the need for strong record-keeping practices.
Altered check details
Checks with altered details, such as changes to payee names or amounts, are another common sign of fraud. That’s why it’s important to implement strict verification processes to identify and address these irregularities before they lead to financial losses or reputational damage.
Did you know? Mineraltree’s system automatically cross-references invoice information with the information in the system. As a result, businesses can more easily catch fraudulent activity before processing payments.
Checks cleared unexpectedly
Checks that clear unexpectedly — particularly those that were not recently authorized or issued — may indicate fraudulent activity. Regular account monitoring can help identify and address these issues before they escalate.
Late or irregular account reconciliation
Delayed or inconsistent account reconciliation processes open the door for fraudulent activity and discrepancies to go undetected. Timely and thorough reconciliation is critical for detecting and preventing check fraud.
Increased number of manual checks
A sudden rise in manually issued checks can signal weaknesses in your payment process. Fraudsters often exploit the absence of automated security protocols, such as real-time verification or approval workflows, to manipulate or misuse checks.
How to protect against check fraud
Fraud prevention starts with recognizing the risks and vulnerabilities associated with AP processes. By addressing these weak points, you can better safeguard your financial operations.
- Validate vendor information
- Strengthen internal controls
- Leverage positive pay
- Convert to digital payment methods
Validate vendor information
Make sure to routinely update your vendor information to ensure it’s accurate. Regularly cross-checking vendor details and verifying payment instructions can also reduce the risk of fraudulent transactions.
Strengthen internal controls
Implement robust internal controls such as regular audits or restricted access to sensitive financial systems. You can also require dual authorization for high-value payments, which creates an additional layer of protection against fraud.
Leverage positive pay
Positive pay is a fraud prevention tool that compares checks presented for payment against a list of authorized transactions. The automated solution flags discrepancies for immediate review, enabling you to detect and halt fraudulent checks before processing.
Convert to digital payment methods
Consider transitioning to digital payments to reduce your reliance on paper checks. Payment methods like virtual cards and ACH transfers offer increased security, faster processing times, and the ability to track invoices in real-time.
Did you know? MineralTree’s dedicated team can help enroll your vendors in digital payments. They can also cross-check vendors with their internal database to determine which vendors are already enrolled, eliminating redundancies and streamlining the transition.
How AP automation can help mitigate check fraud risks
The State of AP Report reveals that 55% of organizations have already automated payment execution, which includes tasks like cutting and sending checks. Another 27% noted that automation is a top priority for the next 12 months. AP automation directly addresses check fraud risks with benefits including:
- Improves access controls
- Provides digital audit trails
- Enhances data security
- Unlocks real-time monitoring
- Reduces reliance on paper checks
Automated systems enhance access controls through role-based permissions that assign certain access levels to users based on their job responsibilities. Multi-factor authentication adds another layer of security by requiring users to verify their identity through multiple methods, such as passwords and one-time codes.
Provides digital audit trails
One of the key advantages of AP automation is the creation of digital audit trails. Detailed records provide clear and accessible documentation of every payment activity, from initiation to reconciliation, even for checks processed through the platform. Access to audit trails enables you to quickly identify discrepancies, supports compliance efforts, and streamlines audits with minimal operational disruption.
Enhances data security
AP automation systems leverage advanced encryption and secure protocols to protect sensitive financial information. Centralizing payment data in secure digital systems helps reduce the risk of data breaches while supporting compliance with relevant regulatory standards.
Unlocks real-time monitoring
Automated AP solutions enable real-time monitoring of payment activities, delivering instant insights into your financial processes. This oversight helps you detect irregularities faster, allowing you to mitigate potential fraud risks before they escalate. Real-time monitoring also enhances cash flow forecasting by offering up-to-date financial data.
Reduces reliance on paper checks
Automation supports the shift to digital payment methods, reducing the use of paper checks and minimizing your exposure to fraud. By digitizing transactions, you eliminate one of the most vulnerable aspects of your payment process and gain greater control over payment workflows. Digital payments also reduce processing times and improve transparency in your financial operations.
Combat check fraud risks with MineralTree
Check fraud remains a prevalent challenge for AP teams, requiring a proactive and multifaceted approach to prevent it. MineralTree’s AP automation solution equips you with the tools needed to minimize reliance on paper checks, enhance internal controls, and secure your payment processes. By shifting to digital payments and leveraging technology like Positive Pay, you can significantly reduce your risk of check fraud.
Ready to safeguard your AP processes against fraud? Schedule a demo today to learn more.
Check fraud FAQs
Tl;dr? If you’re short on time the frequently asked questions below provide a quick snapshot of what you need to know about identifying and combating check fraud.
1. What is a check fraud scheme?
A check fraud scheme involves activities like forging, altering, or counterfeiting checks to steal funds from an organization. These schemes exploit weaknesses in payment processes and banking systems to defraud businesses and individuals. Accounts payable (AP) departments remain a prime target for check fraud schemes.
2. How do companies check for check fraud?
Organizations can leverage a combination of tools and processes to detect check fraud, including the use of Positive Pay, internal audits, and real-time monitoring of payment statuses. These methods help identify discrepancies and unauthorized transactions before they cause damage.
3. What is positive pay?
Positive pay is a security feature used by many AP teams to combat check fraud. It verifies checks presented for payment against an authorized list of transactions provided by the issuing organization. When the tool detects a discrepancy between the documents, it flags it for review to ensure only legitimate checks are processed.
4. What are the indicators of fraud in a business?
Common indicators of fraud include altered check details, such as changes to the payee amount, discrepancies between issued and cleared transactions in bank statements, and unexpected or unauthorized check clearances. Other signs may include anomalous patterns in financial records, missing documentation, or sudden changes in payment requests from vendors. Businesses must watch closely for these signs and take swift action when irregularities appear.
5. What happens if you deposit a fake check?
Depositing a fake check can lead to serious repercussions, including financial loss if you spend the deposited funds before the check is flagged as fraudulent. Banks can freeze the depositor’s account to prevent further transactions, and the depositor may also be held responsible for repaying the withdrawn amount. In some cases, depositing a fake check can result in legal consequences.
6. What is the difference between BEC and phishing?
Business email compromise (BEC) and phishing are two distinct but equally harmful fraud tactics. BEC involves impersonating trusted parties, such as executives or vendors, to manipulate victims into transferring funds. On the other hand, phishing often focuses on tricking individuals into revealing sensitive information, like financial details or login credentials. Bad actors executing phishing attempts are frequently — but not always — motivated by financial gain.
