Understanding Check Cashing Fraud

May 17, 2017

As a check casher, your top priority is to operate your business legally, compliantly, and efficiently. To do this, you need to understand your risk for check cashing fraud and take action to identify and prevent fraudulent activity at your branches. Financial fraud relating to check cashing can include money laundering, fraudulent IRS checks, counterfeit checks, forged checks, paperhanging and check kiting. Understanding, identifying, and managing your risk for fraud is critical to your business.

Understanding the Risk of Financial Fraud

For check cashers, there are specific types of financial fraud to keep in mind. As a result of regulation, money laundering is usually top of mind for check cashers. Money laundering occurs when illegal money is transferred to conceal its origins. In order to launder money, some criminals turn to check cashing outlets. Another commonly discussed types of fraud involve cashing fake or altered US Treasury checks.
When it comes to the physical check, criminals have different tricks for modifying the check before presenting it to the check casher. Counterfeit checks are either created from scratch or by altering an existing check to reflect an unauthorized change. A forged check may be stolen or changed by the individual presenting it for check cashing. Forgery also includes checks written without proper authorization, usually a business check misused by an employee.
Paperhanging refers to writing checks on closed accounts or ordering checks on closed accounts and using them fraudulently. Check kiting takes advantage of banking regulation requiring shorter wait times for available funds. An individual opens accounts at two or more banks and then uses the “float time” of available funds to create fraudulent balances. All of these techniques are employed in an attempt to defraud the check casher into accepting the check and handing over cash. In order to stay ahead of criminals, licensed check cashers must implement compliance programs.

Check Cashing Compliance

The regulations associated with check cashing compliance are designed to encourage the early detection, prevention, and successful prosecution of financial fraud. They are meant to increase transparent communication between check cashers, law enforcement agencies, and financial institutions. By working together to quickly detect fraud, everyone wins.
The Bank Secrecy Act (BSA) of 1970 is the authority on anti-money laundering (AML) regulation for money service businesses, including check cashers. The Financial Crimes Enforcement Network (FinCEN) is the enforcer of the BSA and the authority on AML regulation for check cashing businesses. The BSA requires financial institutions to conduct independent audits, keep records, report on a variety of financial activity, and file Suspicious Activity Reports (SARs).
Licensed MSBs, including check cashers, are required to operate in accordance with the BSA. Check cashing business owners should reference the FinCEN website regularly to stay up to date on the latest regulation pertaining to their operations. Staying compliant is vital for retaining your license and maintaining a check cashing business bank account.
Designing a program, documenting your efforts, training employees, conducting independent audits, and using POS check cashing technology to collect data are all a part of a thorough check cashing compliance plan. Adhering to a compliance program can help you secure (and hold onto) your business checking account, but you may still fall victim to derisking. Without a bank account, your business is unable to deposit checks and return cash to your customer – you aren’t able to operate.
Check cashing compliance is designed to facilitate quick and early detection of fraud. By swiftly identifying fraud, you can avoid losing money, operate in accordance with the BSA and its related regulations, and maintain your banking relationship. In addition to a traditional compliance program, there are a few other ways that you can discourage fraud at your business.

Check Cashing Process for Fraud Prevention

Detecting fraud starts with a diligent check cashing process. By properly vetting checks, catching red flags, and stopping fraudulent behavior before it starts, you can run an efficient check cashing business. We created this check cashing guide to walk you through our process for working with new customers, analyzing checks, and shutting out financial crime.The guide walks you through the process for cashing: payroll checks, US Treasury checks, refund transfer checks, commercial checks, and personal checks.
In addition to outlining a method for approaching each type of check, the guide will help you spot common red flags. There are several universal truths to remember. First, most fraud is committed using accounts that are less than a year old. To detect this, look for low check numbers on personal or business checks. Second, most fraud is committed by new customers who do not live near your business. Always be wary of first-time customers and adhere to your check cashing process, no matter what.
The presence of a red flag does not always mean the check shouldn’t be cashed. The more red flags that you notice, however, the greater your risk for fraud. If you notice something off about the check or about the customer’s behavior, use follow-up questions to address the issue. Ask about the purpose of the check, how it was obtained, and why the customer is using your check cashing outlet. If something still feels off, consult with a colleague, manager, or compliance officer.

Tips for Securing Your Check Cashing Business

Beyond check cashing fraud, your MSB faces other outside threats. Since your business handles large amounts of cash, you are a prime target for burglars. To minimize this external threat, you can take steps to secure your business location, create opening and closing processes, and train your employees to use your business systems.
When you assess your physical location, make sure you do not give robbers places to hide (ex: large unkempt bushes around the business). Implement a strict procedure for opening and closing the business in pairs to keep a sharp eye out for predators. Secure your business with cameras, an alarm system, strong locks, and mirrors to improve visibility in blind spots. In the event that a robbery does occur, make sure your security cameras are working properly and all doors are marked with tape indicating height.
By taking extra care to prevent fraud and secure your business, you can minimize loss and keep your operations costs down in the long run. The key to the success of these programs is to clearly define your processes and hold regular employee training so that everyone is up to speed.  

If you have questions about creating a system for preventing fraud at your check cashing business, reach out to us directly. The check cashing industry experts at NCC are committed to helping check cashers reach their full business potential.

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