Cheque fraud refers to a category of criminal acts that involve making the
unlawful use of cheques in order to illegally acquire or borrow funds that
do not exist within the account balance or account-holder's legal ownership.
Most methods involve taking advantage of the float to draw out these funds.
Specific kinds of cheque fraud include cheque kiting, where funds are deposited
before the end of the float period to cover the fraud, and paper hanging,
where the float offers the opportunity to write fraudulent cheques but the
account is never replenished. Types of cheque fraud
= Cheque kiting= Cheque kiting refers to use of the float
to take advantage and delay the notice of non-existent funds.
= Embezzlement= While some cheque kiters fully intend to
bring their accounts into good standing, others, often known as paper hangers,
have pure fraud in mind, attempting to "take the money and run."
Bad cheque writing A cheque is written to a merchant or
other recipient, hoping the recipient will not suspect that the chequee will
not clear. The buyer will then take possession of the cash, goods, or
services purchased with the cheque, and will hope the recipient will not take
action or will do so in vain. Abandonment
The paper hanger deposits a cheque one time that s/he knows is bad or
fictitious into his/her account. When the bank considers the funds available,
but before the bank is informed the cheque is bad, the paper hanger then
withdraws the funds in cash. The offender knows the cheque will bounce,
and the resulting account will be in debt, but the offender will abandon the
account and take the cash. Such crimes are often used by petty
criminals to obtain funds through a quick embezzlement, and are frequently
conducted using a fictitious or stolen identity in order to hide that of the
real offender. This form of fraud is the basis for the
Nigerian cheque scam and other similar schemes; however, in these cases, the
victim will be the one accused of committing such crimes, and will be left
to prove his/her innocence. = Forgery=
Sometimes, forgery is the method of choice in defrauding a bank. One form of
forgery involves the use of a victim's legitimate cheques, that have either
been altogether stolen and then cashed, or altering a cheque that has been
legitimately written to the perpetrator, by adding words and/or digits in order
to inflate the amount. Other cases involved the use of
completely fake cheques, as in the case of Frank Abagnale. The perpetrator
passes or attempts to pass a cheque that has been manufactured by him/herself,
but that represents a non-existent account.
= Unusual cases= Disappearing ink has been used to commit
a rare form of fraud. In such cases, the perpetrator chemically alters the
substance so that it disappears in several hours or days rather than a few
minutes. The individual then writes a cheque to him/herself using Bank A's
account for a specified amount, say, $5100. In this amount, the digit 5 is
written with the disappearing ink, and the remainder of the amount in regular
ink. The cheque will be deposited in Bank B's account, where $5100 will be
added, but by the time it reaches Bank A for clearance, the cheque will then read
$100, and only $100 will be debited from that account.
Cheque washing involves the theft of a cheque in transit between the writer and
recipient, followed by the use of chemicals to remove the ink representing
all parts other than the signature. The perpetrator then fills in the blanks to
his or her advantage. Sometimes the cheque fraud comes from an
employee of the bank itself, as was the case with Suzette A. Brock, who was
convicted of theft for writing five corporate cheques to her own birth name
from her desk as a loan servicing agent for Banner Bank of Walla Walla, WA.
The most notorious "bad cheque artist" of the 20th century, Frank Abagnale,
devised a scheme to put incorrect MICR numbers at the bottom of the cheque he
wrote, so that they would be routed to the incorrect Federal Reserve Bank for
clearing. This allowed him to work longer in one area before his criminal
activity was detected. Combating cheque fraud
In most jurisdictions, passing a cheque for an amount of money the writer knows
is not in the account at the time of negotiation is usually considered a
violation of criminal law. However, the general practice followed by banks has
been to refrain from prosecuting cheque writers if the cheque reaches the bank
after sufficient funds have been deposited, thereby allowing it to clear.
But the account holder is normally held fully liable for all bank penalties,
civil penalties, and criminal charges allowable by law in the event the cheque
does not clear the bank. Only when the successful clearance of a
cheque is due to a kiting scheme does the bank traditionally take action.
Banks have always had various methods of detecting kiting schemes and stopping
them in the act. Computer systems in place will alert bank officials when a
customer engages in various suspicious activities, including frequently
depositing cheque bearing the same, large monthly total deposits accompanied
by near-zero average daily balances, or avoidance of tellers by frequent use of
ATMs for deposits. New technology in place today may make
most forms of cheque kiting and paper hanging a thing of the past. As new
software rapidly catches illegal activity at the teller/branch level
instead of waiting for the nightly runs to the back office, schemes are not only
easier to detect, but may be prevented by tellers who deny customers illegal
transactions before they are even started.
Part of how banks are combating cheque fraud is to offer their clients fraud
protection services. Because it is impossible for banks to know every
cheque that a customer writes and which may or may not be fraudulent, the onus
is on the client to make the bank aware of what cheque it writes. These systems
allow customers to upload their cheque files to the bank including the cheque
number, the amount of money, and in some cases, the payee name. Now, when a
cheque is presented for payment, the bank scrubs it against the information
on file. If one of the variables does not match, then the cheque would be
flagged as a potentially fraudulent item.
These services help with external fraud but they do not help if there is
internal fraud. If an employee sends information to the bank with fraudulent
items, then the bank would not know to deny payment. A system of dual controls
should be put into place in order to not allocate all capabilities to one person.
Before the passage of the Check Clearing for the 21st Century Act, when cheques
could take 3 or more days to clear, playing the float was fairly common
practice in the USA in otherwise-honest individuals who encountered emergencies
right before payday. Circular and abandonment frauds are
gradually being eliminated as cheques will clear in Bank B the same day they
are deposited into Bank A, giving no time at all for non-existent funds to
become available for withdrawal. With image-sharing technology, the funds that
temporarily become available in Bank A's account are wiped out the same day.
While there may still be some room for retail kiting, security measures taken
by retail chains are helping reduce such incidents. Increasingly, more chains are
limiting the amount of cash back received, the number of times cash back
can be offered in a week or a given period of time, and obtaining
transactional account balances before offering cash back, thereby denying it
to those with low balances. For example, Wal-Mart's policy is to determine
account balances of those obtaining cash back, and some Safeway locations will
not offer cash back on any accounts with balances under $250, even when funds are
sufficient to cover the amount on the cheque. Customers who are noted to
obtain cash back frequently are also investigated by the corporation to
observe patterns. Some businesses will also use the cheque
strictly as an informational device to automatically debit funds from the
account, and will return the item to the customer thereafter. However, in the
United States this is done through the Automated Clearing House; though faster
than traditional check clearing, contrary to popular belief the ACH is
not instantaneous. Though this practice reduces the room for kiting, it does not
always eliminate it. See also
Advance-fee fraud Bad check restitution program
Bank fraud ChexSystems
Federal Bureau of Investigation House banking scandal
Job kiting, named by analogy Qchex
United States Secret Service White-collar crime
References External links
National Check Fraud Center - a description of laws in all 50 U.S.
states.