Check fraud: 5 ways to help protect your business

Even as more payments get done electronically, fraud involving paper checks is a growing problem. The incidence of check fraud has jumped almost fivefold since the pandemic,  according to the American Bankers’ Association. Businesses can be particularly vulnerable, as they may send or receive hundreds or thousands of payments every day. 

One straightforward way to combat fraud involving checks is to write fewer of them. Electronic payment options are safer, according to the American Bankers Association. Automated Clearing House (ACH) payments, the funds transfer system used among U.S. banks, are as effective as paper checks but may provide better security. 

“We know that paper checks are the most vulnerable,” says Marck Dorvil, a treasury management and payments product executive at Capital One. “We see many benefits,  including improved security, for our business clients as they increasingly use digital payments systems.”

Still, not every business is ready or able to move away from paper checks—and getting rid of them entirely is often not feasible. Creating awareness of the pitfalls of paper checks through education and training is the first step to making them safer. Possible avenues for fraud include: 

• Business email compromise (BEC). If your vendor's email is hacked by cybercriminals through a successful phishing attack or some other route, they may direct you to send a legitimate check to a fraudulent payee or fake account. 
• Check forgery or alteration. Criminals increasingly are intercepting checks in the mail and altering the payee or amount, sometimes using chemicals to wash ink to create what is essentially a signed blank check. 
• Account takeover. Fraudsters exploit a range of methods to acquire login credentials or otherwise gain access to online accounts or treasury payment systems. 
• Employee fraud. One of the biggest vulnerabilities involves people within an organization doing things that are unauthorized or explicitly fraudulent. 

“Fraud vulnerabilities can show up in surprising places,” says Nirva Dalgin, who oversees treasury management receivables and payables products at Capital One. “Take a broad view of the risks and look carefully at all your processes and your whole organization.” 

How can your business help avoid becoming a victim of check fraud? Here are the top 5 measures that have been shown to be effective. 

1. Implement positive pay
The automated fraud protections your bank offers are among the most effective methods to combat check fraud. Positive pay matches the checks a company issues with the checks presented for payment, using amount and payee information that the business provides to the bank whenever a check is issued. Every business should take advantage of this effective fraud mitigation tool. After enrolling, a business must ensure that it has a defined process to input timely and accurate information into the positive pay system. Positive pay can also be used to help protect ACH payments. 

A variation on the system, called reverse positive pay, has the bank flag all checks above a certain amount when they are presented for payment, allowing the business to either approve or stop the payment. 

2. Limit authorizations

When fewer people within your organization have the ability to write checks, you increase control and security over the process. A business should limit the number of people who can sign checks, and restrict authority for ordering new sets of checks to an even smaller group. Separating the issuance, approval and reconciliation of checks among several people is another effective practice. 

Requiring two people to separately authorize ACH payments is another good practice. A second person with different credentials than the person who initiates a payment can check for accuracy, legitimacy and compliance with company policies. Dual authorization is typically easy to set up in a treasury management system or your banking software. 

3. Protect your checks  

Particularly if your business issues hand-written checks, you need to protect them against being stolen and altered. Make sure to use a pen with pigment-based ink rather than dye-based ink, which is easier to remove with readily available chemicals. These pens are marketed as having anti-fraud features. When mailing checks, it is best to drop them in a postal service box or, better yet, inside a post office. Outgoing mail boxes in office buildings and elsewhere may be more vulnerable to theft.  

4. Reconcile accounts daily

Keeping a close eye on accounts and payments is a basic but important way for a business to combat check fraud. Reconciling at the end of each day is a good practice. Watching for checks that are outstanding for an unusually long period of time is a way to spot a check that might have been stolen or diverted. 

5. Strengthen cyber defenses

Cyber defenses for a business are about much more than keeping your bank accounts safe—but that’s part of it. Recommendations include using multifactor authentication, keeping software up to date and training employees so that any breach gets identified and addressed quickly. Special consideration for check and payment fraud is important when identifying the computers or devices that will be used for bank account access and ensuring that they are fully secure. 

No business is going to prevent every type of scam or every instance of fraud. But every business should be aware of the risks—and should know what steps they can take. With a few precautions and some vigilance, your business can boost its security and keep fraud in check. 

Have more questions? Talk to your bank about how to implement the most effective strategy for mitigating check fraud.