How to detect and prevent employee check fraud
This blog examines the increasing threat of internal fraud, highlighting two significant check fraud cases involving industry leaders Synergy Brands Inc. and Vanguard in the beverage and finance sectors. It also offers a practical step-by-step guide to how organizations can minimize this threat by strengthening their internal governance and controls.
Employee check fraud has emerged as a growing threat to organizations of all sizes. Despite the overall decline in check usage, check fraud remains alarmingly prevalent, costing companies millions of dollars annually. According to the 2024 AFP Payments Fraud and Control Survey Report, 80% of organizations experienced payment fraud attempts or attacks in 2023, a substantial increase from 65% in 2022. Personal and business checks are the most affected, comprising over one-third of all fraud at depository institutions, excluding mortgage fraud. For instance, Regions Financial Corp. reported losing $135 million to check fraud in just two quarters in 2023, highlighting the abnormal and costly nature of these losses. Similarly, other banks such as SB Financial Group Inc., ServisFirst Bancshares Inc., and Truist Financial Corp. have also reported substantial losses due to check fraud.
While this type of fraud is most often committed by outsiders, there are numerous cases where internal actors, including trusted employees, have caused devastating financial losses. Understanding these risks and implementing robust prevention measures is crucial for any organization aiming to protect its financial assets.
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“Companies often think that when it comes to writing checks, low frequency equals low exposure—but it only takes one large check to incur a significant loss. [That’s why] it’s important that every organization validates and authenticates payment requests before releasing funds, and that they understand the risks inherent in checks and use the available fraud protection tools on each of their accounts.”
Real-life cases: Synergy and Vanguard suffer millions in losses from employee check fraud
To highlight the seriousness of employee check fraud, let's examine two major high-profile cases that underscore the vulnerability of even the most reputable organizations.
Synergy Brands Inc. ex-CEO sentenced for massive check-kiting fraud
One of the most striking cases involved Mair Faibish, the former CEO of Synergy Brands Inc., who was sentenced to over five years in prison for orchestrating a massive check-kiting scheme. Faibish and his co-conspirators funneled $1.3 billion in checks, backed by insufficient funds, through banks such as Signature Bank, Capital One Bank, and several Canadian financial institutions. These checks were circulated between companies under his control, artificially inflating Synergy's account balances. This scheme not only deceived the banks but also enabled Faibish to falsely record millions in accounts receivables and revenue, misleading both investors and regulators. When the scheme eventually collapsed, Synergy went bankrupt, leading to significant losses for investors, while one of the banks involved suffered over $26 million in losses. This case is a stark reminder that even top executives can exploit their positions of trust to commit fraud, with devastating consequences for the organization.
Vanguard faces fraud allegations and $2 million in losses
Fraud often originates within financial institutions themselves. For instance, Vanguard, one of the world's largest investment management companies, became embroiled in a fraud scandal. In 2019, Scott Capps, a trusted financial advisor at Vanguard, exploited his position to commit check fraud amounting to over $2 million. Over his 23 years with the company, Capps stole passwords from former employees and wrote fraudulent checks from inactive or deceased customer accounts. These abandoned investment accounts, which should have been turned over to state treasurers, became a lucrative opportunity for Capps. He funneled the money to his brother-in-law and other co-conspirators, and by 2013, he had doubled his income through these illicit activities, using the funds to invest in real estate. When the fraud was eventually discovered, Vanguard covered all customer losses and took legal action against Capps and his accomplices. This case underscores how internal fraud can go undetected for extended periods, leading to significant financial damage when internal controls are inadequate.
Both Synergy and Vanguard’s cases clearly illustrate that no organization is immune to the threat of employee check fraud, highlighting the importance of vigilance, stringent controls, and adopting advanced fraud detection technologies.
Understanding the types of check fraud
Employee check fraud can take several forms, each requiring specific preventive measures. Some of the most common types include:
Counterfeit checks: Employees may create fake checks using advanced printing technologies, making them difficult to detect without proper verification tools.
Altered checks: This involves changing details on an existing check, such as the payee's name or the amount, which can be challenging to spot if alterations are subtle.
Forged checks: Forgery involves signing someone else's name on a check without their permission, often using stolen checks.
Check kiting: This fraud exploits the float time between bank transactions, allowing the fraudster to withdraw funds before the original check clears.
Mobile deposit fraud: Fraudsters remotely deposit a check via mobile banking apps and then cash the physical check elsewhere, resulting in double payment.
Preventing check fraud in organizations
Given the recent surge in check fraud cases, it's more important than ever for organizations to enhance their fraud detection and prevention strategies. Here are some practical steps from JP Morgan that can significantly reduce the risk of employee check fraud:
Implement check-positive pay and payee name verification: Automated systems that compare checks presented for payment against a list of issued checks can identify discrepancies, while payee name verification ensures that the name on the check matches issued records.
Use high-security checks: Employ checks with advanced security features such as watermarks, holograms, and reactive paper that indicate tampering. Regularly updating check designs helps stay ahead of counterfeiters.
Adopt electronic payment methods: Encouraging the use of electronic payment methods such as ACH transfers and wire transfers can reduce reliance on physical checks, minimizing exposure to check fraud.
Secure check storage and handling: Store blank checks in a secure location with restricted access and implement a “clean desk” policy to ensure sensitive financial documents are not left unattended.
Regularly reconcile bank accounts: Conduct daily or weekly reconciliations to quickly identify discrepancies or unauthorized transactions. Automated reconciliation tools can streamline this process.
Train employees on fraud detection: Regular training on detecting and reporting suspicious activities is essential. Establishing a clear protocol for reporting suspected fraud incidents and adopting advanced tools like Cygnetise can help employees quickly detect issues and efficiently manage signatory authorizations.
Monitor and review transactions: Continuous monitoring of transactions using advanced fraud detection software and regular reviews of transaction reports can help identify patterns indicative of fraudulent activities.
Enhance mail security: Using secure courier services for sending high-value checks and depositing mail close to collection times can reduce the risk of theft.
The role of authorized signers in check fraud prevention
Maintaining an effective authorized signer procedure is another critical aspect of a robust check fraud prevention strategy. Organizations should ensure that only designated and trusted individuals are authorized to sign checks, establishing a controlled and accountable environment for financial transactions. Regularly reviewing and updating signers' records is essential to minimize the risk of unauthorized or fraudulent activities.
However, managing authorized signers is often a burdensome task, prone to errors and delays. Technologies like Cygnetise simplify this process by digitizing it, allowing real-time updates and secure, transparent records. This not only reduces administrative burdens but also minimizes the risk of errors, ensuring that the management of authorized signers is optimized and secure.
“In the face of rising check fraud, it’s crucial for companies and banks to re-evaluate how they manage and share authorized signers. For larger organizations, this process can be complex and must be managed efficiently and in full compliance. Smaller organizations also need to mitigate fraud risks. By digitizing this process with a purpose-built tool, companies can achieve comprehensive benefits, ensuring that the management of authorized signers is optimized and secure.”
Conclusion
Employee check fraud presents a serious threat that can result in devastating financial losses for any organization. Real-life cases, such as those involving Synergy Brands Inc. and Vanguard, underscore the magnitude of the issue and the importance of strong internal controls and governance in organizations. Implementing advanced internal fraud detection processes and tools like signatory management software can significantly reduce the risk of check fraud. Ultimately, vigilance and proactive measures are crucial for safeguarding organizations’ financial security and assets.