3 Takeaways from Auriemma Roundtables on Check Fraud Detection

Check fraud remains an urgent topic for financial institutions — in 2023 it caused $21 billion in losses across the Americas, and losses remained high last year. As financial institutions face increasingly sophisticated threats, consortium analytics has emerged as a powerful tool to strengthen check fraud prevention and improve efficiency in financial crime management.  

I recently presented at an Auriemma Roundtables event where industry leaders discussed how to make the case for a check fraud prevention solution that allows in-clearing institutions to evaluate deposit-side risk.  

When a check is deposited, the in-clearing institution must return suspected fraudulent checks by 2 p.m. on the second business day after it’s deposited. If fraud is discovered later, the in-clearing institution may refuse liability for the cheque by pursuing a breach of warranty claim against the Bank of First Deposit (BOFD).  

Consortium analytics, together with real-time analysis and machine learning, can help institutions detect hard-to-identify typologies, such as altered checks and forged endorsements. This enables them to avoid the breach of warranty claim process — providing considerable benefits to your check fraud prevention efforts.  

Here are three key takeaways from my Auriemma Roundtable discussions that can help financial institutions of every size enhance their check fraud detection strategies. 

1. Detect Check Fraud During the Hold Period

The breach of warranty process is manual, time-consuming and often contentious. Settling it can take anywhere from a few weeks to several months if the claim is disputed.  

Financial institutions need a check fraud solution that uses consortium analytics, machine learning and real-time analysis to identify anomalies in check features and analyze payee accounts for red flags. This enables you to detect fraudulent checks before two business days have elapsed, enabling timely returns and reducing future breach of warranty claims.  

2. Redirect Resources to Higher-Priority Work

Hard-to-detect check fraud typologies need specialized attention to identify them during the hold period. A consortium solution, combined with real-time analysis and machine learning, can liberate your team to perform higher-impact due diligence.  

Consortium analytics deliver more effective alerts to the in-clearing institution on deposit-side risk, often improving false positive rates by an order of magnitude. This means identifying fraudulent checks with less overhead. With that increase in efficiency, institutions should consider reinvesting resources into dedicated teams focused on identifying more difficult frauds like washed and endorsement-based checks.  

These fraudulent items need additional scrutiny that only these specialized teams can provide, including attempting to validate the check with the intended payee. As an industry we need to include the maker and intended payee in the validation process where possible. 

Three questions these new teams should be asking the maker of the check and use as a waterfall strategy: 

• Did you write this check?
  • This helps identify counterfeit items.
• Did anything on this check change?
  • This helps identify altered or washed items.
• Can you confirm the intended payee received and deposited this check?
  • This helps identify issues related to endorsements.

With teams quickly investigating these issues, you will identify and stop altered, washed and fraudulently endorsed checks before the breach of warranty process is necessary. 

3. Build a Business Case for Check Fraud Prevention

Consortium analytics will help identify fraud faster, but it may be challenging to gain buy-in on processes that seem to benefit the BOFD more than the in-clearing institution. The in-clearing institution is doing the work to return fraudulent checks as soon as possible, helping the BOFD avoid losses and minimize the number of Breach of Warranty claims returning to the maker institution.  

So how do we develop a business case to help another bank avoid losses?  

As a starting point, include breach of warranty claim reductions as part of your cost savings analysis. These savings will be further enhanced by having specialized teams doing less manual work and instead investigating suspicious checks before two business days have elapsed. 

Additionally, your business case should highlight reduced false positive rates in comparison to image-based or point solutions for fraud types where you are directly accountable for the loss. 

Quantifying these indirect benefits helps institutions present a stronger argument to senior management and secure support for adoption of consortium analytics.  

How Nasdaq Verafin Supports Check Fraud Detection

Nasdaq Verafin’s Check Fraud solution empowers financial institutions to win the fight against check fraud. With a multi-layered approach that includes consortium-based analytics, real-time analysis, machine learning and MICR and image analysis, we provide actionable insights to detect and prevent check fraud.  

Visit us to learn more about how Nasdaq Verafin can support your check fraud detection strategy. 

About the Author

MAURICEO CASTANHEIRO
VP –  Head, International Payments Fraud, Nasdaq Verafin

Mauriceo Castanheiro (CFE, CAMS) is the Head of International Payments Fraud at Nasdaq Verafin with over two decades of experience combating fraud in the financial sector. In his senior advisory role at Nasdaq Verafin, Mauriceo collaborates with global banks, including Tier 1 institutions, financial industry partners, and key influencers, strengthening Nasdaq Verafin’s reputation as a thought leader and fostering industry-wide cooperation. Having held pivotal positions in fraud management at several of Canada’s largest banks, encompassing roles in business intelligence, operations, analytics, and strategy, Mauriceo offers extensive expertise to Nasdaq Verafin and contributes significantly to the development of innovative solutions for financial crime prevention.