Scams, check fraud continue to plague financial world

Financial services companies are facing unprecedented increases in fraud of all types. But perhaps most surprisingly, given the growth in payments digitization, is the growth being experienced with check fraud. A new study from Unit21 revealed that nearly a third of banks (30 percent) have seen dramatic increases in check fraud, on the order of 25 to 75 percent in the last 12 months.

This was a key finding of the State of Fraud and AML Report, just released by Unit21. Headquartered in San Francisco, Unit21 is a global risk and compliance company that works with clients to mitigate risks tied to fraud, money laundering and other financial crimes.

One executive quoted in the report—Donna Turner, adviser in residence at EY and a former executive at Zelle and Bank of America—pointed to the proliferation of government assistance checks as contributing to the problem.

"Due to checks being low-tech in nature, their recent reinvigoration and lack of technical advancement, they have become a very easy target," Turner said. "It's critical to invest in AI to automate much of the manual investigation process, allowing analysts to combat check fraud more efficiently."

More than 350 representatives from banks, credit unions and financial technology firms were surveyed about their attitudes about fraud and anti-money laundering (AML) activity over the past year, as well as actions taken to address these issues. Participants also responded to questions regarding the financial impact of fraud on their organizations, and current and future prevention methods. The survey was conducted from June through September 2024.

The data, in a nutshell, shows increases in fraud and scam activity over the past year, and that outdated detection systems aren't keeping up with the problems.

Staggering increases in fraud

The Unit21 report, its third in as many years, shows staggering increases in fraud—not just check frauds, but also romance fraud and credit card fraud, as well as phishing attacks. No bank, credit union or fintech is exempt from these crimes. In fact, 14 percent of respondents surveyed for the report noted growth in excess of 50 percent.

Asked about their top fraud worries, scams ranked at the top of the list. And it's not just about the numbers: scam losses are now outpacing traditional fraud, check fraud and even ACH fraud, Unit21 reported. "The surge in scams, fueled by AI tool, presents a formidable challenge," the report states. The survey revealed that not only are scams increasing in frequency, but they also have become more costly and time-consuming to investigate and resolve. "The pressure to reimburse victims further exacerbates the financial burden," researchers wrote.

Respondents agreed that time is a major issue, as fraudulent activity has increased in the face of prevention that has remained a slow and painful process. Turner suggested that scams in North America will increase due to a lack of centralized fraud prevention.

Real-time monitoring is crucial, AI too

One bright spot that was uncovered is that organizations that have implemented real-time monitoring solutions saw significant improvements in alerts and investigations. Fifty-one percent reported that real-time monitoring has significantly improved fraud detection and prevention in their organizations.

The report points to a need for comprehensive defense strategies that include prioritizing AI-driven fraud detection systems. "AI can assist in automating manual processes," the report states. "This is especially important for tackling time-consuming frauds like account takeovers and scams. Simply put – automation can expedite detection accuracy and mitigation."

Unit21's State of Fraud and AML Report also addresses the recent trend among FIs and other financial organizations of combining fraud and AML teams to reduce operational inefficiencies. Those who have combined teams reported improvements in overall fraud prevention and detection.

Additional steps that can be taken

The Unit21 report is comprehensive, highlighting trends and offering suggestions for combatting the scourge of fraud.

"[B]anks must be equipped to take swift action when a scam is detected, such as blocking accounts or contacting customers," the report states, quoting Frank McKenna, co-founder of the software company Point Predictive.

Additional steps that can help better address scams, the report include:

• Investments in advanced fraud detection systems, including real-time monitoring and AI.
• Implementation of stronger customer authentication and payment hold policies.
• Enhanced consumer education and empowerment (for example, providing guidance on how customers can avoid becoming victims).

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