Two kinds of check fraud are on the rise – but you’d never know it from their fun, outdoorsy, active-sounding names. Check kiting and paperhanging are far from their enjoying-nature and decorating-the-home monikers. They’re damaging enough to take down your company, and even the most vigilant and educated of business owners stand to lose millions to these scams.
The process of check kiting is not new, but its perseverance and adaption for going undetected make it one of the nastiest scams you can fall prey to. And it’s nothing like flying a kite. Check kiters balance multiple checking accounts, though they’re not acting responsibly with any of them. The path goes like this:
- A check kiter deposits a check in one bank that’s drawn off an account from another bank.
- The first bank deposits the check from the second bank and gives the kiter credit, requesting funds from the second bank.
- The second bank raises the flag that the account does not have enough to cover the check.
- But because the first check is deposited, the scammer has credit, and has more than likely already drawn against the first account.
In one case study, “champagne” tastes may be to blame for one criminal’s shady behavior. A man named Ronald Champagne scored $500,000 from a bank in a check kiting scheme in New Hampshire and Arizona. The key? He “knew he didn't have enough money to cover the checks.” To some people, not having money just doesn’t matter when they want more of it. In the end, the bank’s insurance covered only $250,000, leaving an after-tax loss of $190,000. Do you want to have to absorb that kind of loss?
Unlike check kiting, paperhanging occurs with accounts that have already been closed – for any reason, including having already suffered fraud, a death, or simply when account owners have left for another financial institution. The National White Collar Crime Center warns that paperhangers rely on the time that happens (hangs) between when they use their check at your place of business and you find out that the account is closed. So the process for paperhanging is:
- Criminals keep tabs on closed accounts.
- They use an actual, hard-copy paper check to pay for something.
- You receive the check, which appears entirely legitimate, and provide the service or goods, then put the check aside to deposit. The criminal makes off with the items.
- You attempt to deposit the check and find out the account is no longer valid.
- Your bank may even assess penalties or surcharges on you for bouncing, so you’re punished twice.
The most dangerous part of paperhanging is that it can sneak up on just about anyone. Criminals aren’t using fake checks, washed checks, altered checks. They’re real, legitimate checks that you and your employees would have no idea aren’t ready to be deposited. Checks have no Inspector Gadget form of “this check will self-destruct after the account is closed” functionality.
What’s a paperhanger’s nightmare? Not that you’ll catch on – because it’s really, really difficult – but that he’ll come to the end of his pad of checks. Some attempt to reorder checks on the closed account, and are then caught, but that’s long after they’ve taken you for your goods and services.
Checks Stay in the Game
Don't let these check cheaters give checks a bad name. Checks are still used by a massive sector of the population and for the most part, will never give you a whit of trouble! You CAN get proactive. Check guarantee will reduce risk, while check verification cuts down on the chance of returned check fees. "Check" out remote deposit capture to arm yourself against bad checks.
Have you noticed any upswings in lost revenue? Have you successfully battled these trends? Please share your stories below. There's power in numbers, and together, we can put check kiting and paperhanging in "check." Maybe you're green at this whole check thing and need to start off small. If so, check out the free offer below.
Tags: Check Fraud