High-Tech Banks Grapple With a Rise in Old-Fashioned Crime: Check Fraud

Banks are working to reimburse victims more quickly, but recouping funds is complicated

It took California businesswoman Jennifer Krempp one day to realize someone had stolen and fraudulently cashed several checks she mailed on behalf of her family plumbing company.

Three months later, she is still waiting to get all her money back.

“I’m out almost $5,000 on one check,” said Mrs. Krempp, 47 years old, who along with her husband runs Mann Plumbing out of El Cajon, a city about 17 miles northeast of San Diego.

She isn’t the only one anxious to recoup the money—so is her bank, JPMorgan Chase. Yet thanks to a tangle of bank bureaucracy, both Mrs. Krempp and Chase have had to wait for the institution that cashed her stolen check to determine whether her case was indeed fraud.

A Chase spokesman said the bank has been working across the industry and with trade associations to find better ways to resolve fraud cases and help victims get their money back faster from the financial institutions that deposited their checks.

Check fraud might seem old-fashioned in the digital era, but it’s on the rise as criminal gangs become increasingly sophisticated. Here’s how it usually works: A bank customer writes a check and drops it in the mail. Fraudsters fish it out of a mailbox and, often, alter the check in one of two ways: either fraudulently endorsing it or changing it through a process known as washing. Washing allows thieves to change the amount of money, and the recipient, then deposit the check with another bank.

It can take weeks or sometimes even months for the banks to determine whether a fraud claim is legitimate and if the client should get his or her money back.

In 2018, check fraud made up 47%, or $1.3 billion, of banks’ fraud losses—a jump from $789 million in 2016, according to a 2020 survey released by the American Bankers Association, a Washington, D.C.-based trade group for the industry. That was closely followed by debit card fraud losses, which accounted for 44%, or $1.2 billion, in 2018. The figures are the most recent available, according to the ABA.

Theft of checks mailed through the U.S. Postal Service has jumped significantly over the past 18 months. In 2022, banks filed 680,000 check-fraud reports, according to the Financial Crimes Enforcement Network, or FinCEN, part of the Treasury Department. That’s almost double the 350,000 fraud reports filed in 2021.

FinCEN in February issued an alert about the rise in check fraud in conjunction with the U.S. Postal Inspection Service, the law-enforcement arm of the postal service. USPIS said it received approximately 300,000 complaints about mail theft from March 2020 through February 2021, more than double the number from a year earlier.

As the banking industry struggles to keep up with growing fraudulent check claims, theft victims say they are waiting weeks or even months for their cases to be resolved—and their funds returned.

Many consumers mistakenly think the Federal Deposit Insurance Corp. protects them against fraud, said Ronald Mann, a professor at Columbia Law School who studies commercial payment systems. But FDIC protection is generally for extraordinary cases, such as when a bank fails, as seen in the recent government seizures of First Republic Bank, Silicon Valley Bank and Signature Bank.

When a criminal steals a personal or business check issued from an account at one bank and fraudulently alters it, then deposits it in another bank, it usually falls to the depositing bank to make restitution. But there are exceptions, said Mr. Mann, who isn’t affiliated with Mann Plumbing.

Banks can decline to cover a stolen check if a customer takes too long to report it. Most banks require a claim be filed within 30 days to 60 days of the fraud appearing on their statement. They can also deny a claim if investigators suspect the customer was negligent or involved in the fraud.

That gives banks a reason to delay reimbursements until an investigation makes it clear who is responsible, Mr. Mann said.

“If a bank returns a customer’s money right away, the bank has lost that money. If they hold on to that money and it turns out they are entitled to keep it, they still have the money,” said Mr. Mann. “So there is an incentive to try and wait until the dust settles.”

In Mrs. Krempp’s case, criminals got hold of several checks she mailed on Feb. 1 and tried to cash them. On Feb. 3, Mrs. Krempp spotted an oddity when two altered checks hit her account. She and her husband went to the local branch and raised a red flag. While at the branch, she put a stop payment on all the checks she had mailed earlier in the week. A third check still got through and hit her account Monday, Feb. 6, she said.

Chase was able to reimburse $7,000 for the first stolen check within two weeks, thanks to a speedy determination of fraud from the depositing bank. The second one was credited within 24 hours because Mrs. Krempp reported it within that same period. Banks generally can halt payout on any check if alerted within 24 hours.

The third check, dated Jan. 30, proved problematic. It was a tax payment of $66 made to California’s Franchise Tax Board. By the time it posted to Mrs. Krempp’s account, it had been altered and made out to a new name, for a new amount: $4,603. It was deposited into a credit union in San Bernardino County that had a name she didn’t recognize.

Mrs. Krempp said she notified Chase immediately and produced business records showing the original amount and payee. But the pace of the investigation was slow, she said.

More than once, she received messages from Chase asking her for information she had already provided, and telling her the case or her account might be closed unless she responded, according to Mrs. Krempp. Each time, she was able to push through the paperwork with the help of her local branch.  

Chase declined to comment on Mrs. Krempp’s case, citing customer privacy.

On April 28, she got a notice from Chase saying the bank was still following up on her claim, but time was running out. “If we haven’t heard anything from the depositing bank within 90 days of your claim submission, we will close your claim and your funds will not be recovered,” it said.  

Mrs. Krempp, who relies on checks to avoid merchant and banking fees for her company and her clients, said at that point she started to think about getting a lawyer.

“I just didn’t know where to go next,” she said.

A few days after receiving the letter, the bank reached out again and told Mrs. Krempp the money would be returned within 10 days, she said.

The ABA said the industry is aware that check fraud victims are often frustrated by the slow pace of reimbursement. It pointed to improved technology and better collaboration between big and small banks as a way to shorten the time period.

“We believe progress can be made. There are complex legal and operational issues involved, and the industry is working its way through those,” the organization said in a statement.

Even when banks move comparatively quickly, the process can be a strain for customers.

Kristin Robie, a retired physician, had a $79 cable payment stolen from a mailbox near her Upper East Side apartment in Manhattan in January. Several other people in her building who used the same mailbox also lost checks, she said.

Dr. Robie, 75, didn’t learn of the theft until mid-March, when the check meant for her cable bill hit her account, which had about $388 in it. The check had been washed and turned into a payment of $980 to someone for carpentry work and deposited in another bank, Dr. Robie learned.

The check was flagged as fraud and the account closed—but too late to prevent the loss of her $388.

Bank of America worked with her to resolve the case, she said. But it also sent requests for the rest of the $980 it had paid on the bad check.

“They were dunning me for about $590,” she said. “It was unfortunate.”

Bank of America said it makes every effort to resolve fraudulent check claims as soon as possible. In Dr. Robie’s case, her claim was reviewed and she was reimbursed for the money removed from her account within about a month, a bank spokesman said. The collections notices also stopped.

The experience has left Dr. Robie resigned to banking online in future—although it isn’t her preferred method.

“I guess I have to do it,” she said.

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