Check Fraud Is on the Rise: Here Are 3 Ways to Protect Your Business

Did you know that the USPS now actively discourages mailing checks? There’s a good reason for that. Checks have served us well for a long time, but the risks associated have skyrocketed. The opportunities the dark web offers to sell checks provide new incentives to bad actors, not to mention the potential threats that exist even within your own organization.

What is check fraud?

Check fraud involves dishonest practices by suppliers within a business's supply chain. It can include issuing fraudulent invoices, altering payment details or generating fictitious transactions to embezzle funds — all of which pose a threat to a business’s financial integrity and requires vigilant measures to prevent and detect such activities.

Unfortunately, due to increased reliance on digital transactions that create opportunities for sophisticated cybercriminals, check fraud has been steadily on the rise. Weaknesses in supply chain security, inadequate vendor verification and the anonymity provided by online transactions are among the biggest contributors to the growing prevalence of check fraud, posing major financial risks for organizations.

Failure to protect against check fraud can have severe consequences for a business. Financial impacts could include significant monetary losses resulting from fraudulent transactions, unauthorized payments and embezzlement by dishonest suppliers. Additionally, a business’s reputation may suffer, leading to a loss of trust among clients, partners and investors. Legal ramifications, such as regulatory penalties and lawsuits, can further compound the damage. In the long term, the overall stability and viability of the business may be jeopardized, making it imperative for companies to implement robust measures to safeguard against check fraud sooner than later. Here are three ways to do exactly that:

1. Centralize & standardize processes

To protect your business from check fraud, companies and their accounts payable departments should adhere to established practices. These include measures like segregating duties, securing check stock and conducting regular reconciliations. Some proven protection practices for protecting check payments include:

• Maintaining access logs
• Employing Positive Pay
• Prompt reconciliation
• Online reporting
• Dual control for check stock
• Unannounced audits
• Centralized check writing
• Immediate bank notification of signature changes
• Segregation of duties
• Separate accounts for large-dollar and manual checks
• Implementing reporting for checks exceeding specified thresholds and out-of-sequence numbers

2. Use ACH or other electronic payment methods

In the end, your main goal should be to expedite the transition of payments to ACH or alternative electronic channels. Some suppliers may also be willing to expedite this process. Suppliers are becoming more cognizant of and interested in real-time payments, offering an extra incentive for them to embrace electronic payment methods.

Businesses are trailing behind consumers due to the widespread use and convenience of alternative payment methods, such as credit cards, debit cards, ACH and various payment apps. Checks constitute a mere two percent of consumer payments, especially as younger generations lack checks or the know-how to write them. Although businesses are catching up, it is crucial not to eliminate check safeguards prematurely to ensure security until checks are no longer in use.

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3. Automate supplier management

The digital realm is not immune to fraudulent activities. With the migration of finances to cyberspace, criminals have adapted, compelling companies to enhance security measures. While safeguarding systems is crucial, users remain a vulnerable point. Cybercriminals often exploit this vulnerability through email, leading to threats like Business Email Compromise (BEC) and Vendor Email Compromise (VEC). These criminals successfully employ social engineering tactics and breach companies regularly.

Email, being a common entry point, demands heightened controls. Business Email Compromise surpasses ransomware in terms of costs. While many companies review payment instructions via email, the manual confirmation process is cumbersome. Using email for sensitive data transmission lacks security and efficiency. Implementing a secure portal for supplier communications and information transfers proves a safer and more efficient alternative.

Additionally, the traditional process of verifying a supplier’s bank account information remains crucial. Yet, manual verification poses challenges. The automation of bank account verification has proven to be a valuable asset in ensuring every supplier account undergoes thorough and efficient scrutiny.

Creating Resilience Against Check Fraud

Protecting your business from check fraud requires a multifaceted approach that combines technological solutions, employee awareness and collaboration with external partners. By embracing advanced security features, fostering a culture of vigilance within your organization, and mitigating external threats through secure supply chain practices, you can significantly reduce the risk of falling victim to check fraud. In an era where financial security is paramount, these strategies can help fortify your business against a persistent and evolving threat landscape.