Check fraud is one of the oldest and most persistent forms of financial crime, and while it may seem to evolve with each passing year, the basic mechanics remain relatively unchanged. Recent trends on social media where people claim to have “unlocked” a glitch in banking systems, only to discover they’ve engaged in traditional check fraud, highlights the persistent and deceptive nature of this crime and the circular nature of fraud.

What’s old is frequently new again.

Videos of people taking advantage of this glitch at a major U.S. bank’s ATM and engaging in check fraud went viral on TikTok in early September 2024, misleading some into thinking “free money” was available through this method. But participants in the scheme soon found themselves facing severe consequences, including account holds, negative balances and legal repercussions.

Read our blog to learn more about the prevalence of check fraud, social media’s contribution to evolving schemes and the role Reg CC plays in the fraud landscape.

What Is Check Fraud?

Check fraud involves using checks to illegally obtain funds, typically through forged, altered or counterfeit checks. Fraudsters either manipulate checks or exploit gaps in banking systems to cash checks before they’re found to be fraudulent. This scheme can take many forms:

• Forgery: Using someone else’s check or forging their signature to withdraw money from their account.
• Counterfeit Checks: Creating entirely fake checks that appear legitimate.
• Altered Checks: Modifying an existing check, such as changing the amount or recipient.
• Check Kiting: Using multiple accounts at different banks to float funds from non-existent money by taking advantage of the time it takes for a check to clear.

Why Check Fraud Works

Check fraud schemes, such as the one recently highlighted on social media, often succeed due to the lag between deposit and verification. This lag is a crucial part of the banking system as it takes time for a check to be validated by both the bank where it’s deposited and the bank it’s drawn on. Fraudsters exploit this window by quickly withdrawing funds before the bank can verify that the check is fraudulent or insufficiently funded.

Additionally, fraudsters leverage the trust that is inherent in the use of checks as a payment method. Banks have procedures in place that are designed to expedite deposits for customer convenience, but this can also create opportunities for exploitation.

The Role of TikTok and Social Media in the Recent “Money Glitch” and Check Fraud

The recent trend of individuals claiming to have discovered a “glitch” demonstrates how social media can normalize or spread misinformation about fraud schemes. Some believe they’ve found a way to make fast money when, in reality, they are simply engaging in a scheme that has been around for decades.

The misconception comes from how quickly banks credit funds. Many U.S. banks have policies that allow a portion of a deposited check’s funds to be available almost immediately, before the check has fully cleared. This fuels the belief that they’ve unlocked some “hack,” when in fact they’re exploiting regulatory timelines.

Financial institutions should educate their customers about misinformation and nefarious financial schemes. Providing valuable education on best practices or trending scams through different channels to reach a broader audience will mitigate risk for customers and institutions alike while increasing the potential for new business through knowledge sharing.

Prevention Techniques for Financial Institutions

Banks and financial institutions use a variety of methods to prevent check fraud, including:

• Authentication Technology: Incorporating advanced security features in checks, such as watermarks, holograms and unique fonts, to deter counterfeiting.
• Transaction Monitoring: Using sophisticated AI and machine learning to monitor transactions for suspicious patterns and behaviors that could indicate fraud.
• Signature Verification: Comparing the signatures on checks with those on file, although this can sometimes be bypassed with convincing forgery.
• Customer Education: Educating customers about check fraud and encouraging them to monitor their accounts regularly.
• Deposit Holds: Imposing holds on large or suspicious deposits until the checks clear, especially on recently created accounts and/or anomalous activity to that customer’s profile—although this can frustrate legitimate customers.
• Positive Pay: A service where companies provide banks with details about checks they’ve issued, allowing banks to verify each check before processing.

Regulatory Gaps and Challenges

Regulation CC, which enforces the Expedited Funds Availability Act (EFAA), governs the availability of funds from checks deposited into bank accounts in the U.S. It plays a significant role in shaping how quickly funds from deposits become available for withdrawal, impacting both consumers and banks. While its primary aim is to protect consumers by ensuring timely access to their deposited funds, certain aspects of the regulation can unintentionally facilitate check fraud by providing fraudsters with a window of opportunity to exploit funds before a check is fully verified.

Key Components of Regulation CC

Here is a look into the key components that comprise Reg CC:

• Funds Availability Requirements:
• • Next-Day Availability: For certain types of deposits (like U.S. Treasury checks, cashier’s checks, and the first $225 of other checks), banks are required to make funds available for withdrawal the next business day.
  • Standard Hold Periods: Most other checks must have at least the first $225 available by the next business day, with the remaining funds typically made available within two to five business days. Banks can impose longer holds under certain circumstances, such as large-dollar checks or suspicious transactions, but must notify the customer.

These rules mean that a portion of funds from any deposit becomes available quickly, often before the check has cleared. This is where fraudsters can take advantage.

• “Reasonable” Hold Periods:
  • Regulation CC gives banks the ability to place extended holds on deposits they deem risky, but the definition of “reasonable” is based on specific criteria, including the size of the deposit, the account’s history and whether the check is considered high-risk.
  • While these provisions allow banks some leeway, the pressure to make funds available within a few days still exists. If banks hold funds for too long, they risk customer dissatisfaction and complaints.

• Returned Check Timeframe:
  • Under Regulation CC, a check can be returned as unpaid (i.e., bounced) within several days, depending on the type of check. If the check is returned as fraudulent or for insufficient funds after funds have been made available, the account holder is liable for the returned check.
  • This creates a timing gap between when funds are made available and when the check clears. Fraudsters exploit this gap by withdrawing funds during the interim period before the check is flagged as fraudulent or insufficient.

How Regulation CC Can Facilitate Check Fraud

Fraudsters capitalize on the delay between the deposit of a fraudulent check and the bank’s full verification process. The regulation’s expedited availability requirements are meant to protect consumers, but they can also allow a window for fraud in the following ways:

Exploiting Next-Day Availability

Fraudsters can deposit fake, altered or stolen checks, knowing that a portion (usually the first $225) will be available almost immediately. This small window can be enough for them to make small withdrawals quickly.

They may then take advantage of the general two-to-five business day hold period for larger funds. In many cases, the fraudster will withdraw the available funds before the bank realizes that the check is fraudulent.

Check Kiting Schemes

Fraudsters may deposit a series of checks across multiple accounts at different banks, using the float time provided by Regulation CC. Since funds are made available before checks clear, they can create the appearance of available funds that don’t actually exist.

By constantly shifting funds between accounts, they can maintain the illusion of solvency and withdraw funds that will never be backed by valid deposits.

Targeting High-Dollar Transactions

While banks are allowed to place longer holds on large checks, Regulation CC generally mandates availability of funds for most checks within a few days. Fraudsters will deposit large counterfeit or altered checks and use the brief period before the check is returned to withdraw as much as possible.

Consumer Liability and Victimization

When a fraudulent check is returned, the account holder (not the bank) is responsible for the overdraft or negative balance created by the withdrawal. This means that fraudsters can recruit unwitting individuals (e.g., through social engineering or online schemes) to deposit fraudulent checks, leaving them with the financial burden when the fraud is uncovered.

Balancing Fraud Prevention and Consumer Protections

The intent behind Regulation CC is to balance consumer convenience with the need for fraud prevention, ensuring that legitimate customers aren’t forced to wait unreasonable amounts of time to access their money. However, this balance can leave gaps that fraudsters exploit. Some of the issues that arise include:

• Pressure to Release Funds Quickly: Banks are required to follow the funds availability rules, which means they often don’t have enough time to fully verify the legitimacy of a check before releasing funds. While banks can extend hold periods in some cases, the pressure to release funds quickly to satisfy customers creates vulnerability.
• Limited Ability to Hold Funds: Banks have some leeway to extend holds on large or suspicious checks, but Regulation CC limits the amount of time they can withhold funds. This limits their ability to thoroughly investigate potentially fraudulent checks without delaying legitimate transactions.
• Consumer Expectations: Many consumers expect immediate access to their money, and banks face backlash if they impose too many holds or delays. This consumer demand for fast access to funds can put banks in a difficult position where they risk either allowing fraud or alienating their customers.

Regulation CC’s expedited funds availability requirements serve an important role in protecting consumers from excessive delays in accessing their deposits. However, these same rules can inadvertently create opportunities for fraudsters to take advantage of the timing gap between when funds are released and when checks are fully cleared.

Staying Protected against Evolving Schemes

This recent check fraud trend serves as an important reminder that institutions should educate customers to exercise caution when faced with too good to be true financial schemes, especially those circulating on social media. For many, what started out as taking advantage of a short-term glitch resulted in a long-term headache with meaningful consequences.

Want to learn more about trending topics in the industry? Check out our 2024 Banking Priorities Executive Report.

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