The Fraud Prevention Source

Analyzing the Philadelphia Story:
1,569 Counterfeit Checks Create $4,200,000 of Losses

Some of the best known and least or little known organizations in the Philadelphia area were victims of a $6,400,000 check fraud scheme which, according to federal officials, could have resulted in losses of over $100,000,000. Check fraud losses were incurred due to the payment of counterfeit and stolen bank checks. Twelve banks and one credit union charged the accounts of 174 organizations for 1,569 counterfeit checks totaling $4,184,678. Payment of almost $2,200,000 in stolen checks was also part of this scam.

This Philadelphia case is just one of the many counterfeit check and similar check fraud schemes making headlines in recent years. Similar check fraud schemes are still occurring. Some are reported by the media while others are not. In many cases, the perpetrators are never apprehended.

Ethent focused on the counterfeit check aspect of this $6,400,000 check fraud scheme by analyzing the Federal Indictment filed in the United States District Court for the Eastern District of Pennsylvania. The indictment lists the names of 33 charged fraud perpetrators, the 12 banks and the one credit union as well as the names of the 174 organizations from whose accounts the counterfeit checks were paid. The indictment also lists the dollar amount and number of checks charged to each of the 174 organizations. This indictment provided Ethent with substantial information rarely available for analysis.

How Counterfeit Checks were turned into Cash

The fraud perpetrator's method for turning counterfeit checks into cash depended on the amount of the counterfeit check.

1) Counterfeit Checks in Excess of $1,000 Each
These counterfeit checks were deposited into bank accounts controlled by the fraud perpetrators. Once the deposited checks were cleared, virtually all the remaining funds in the bank account were withdrawn, and the account was never used again by the fraud perpetrators.

In most cases, by the time a paying bank discovered that it had paid a counterfeit check (sometimes two weeks or more after deposit), the damage had already been done. The funds had already been withdrawn from the fraud perpetrator's bank account at the bank of deposit.

2) Counterfeit Checks Less than $1,000 Each
These counterfeit checks were cashed by "check passers" at the paying bank. These "check passers" were usually provided with counterfeit identification by the fraud perpetrators so that they could present counterfeit checks to a teller at the paying bank and receive cash in return.

Analysis of the 1,569 Counterfeit Check Transactions

Ethent analyzed the 1,569 counterfeit check transactions, which resulted in losses of $4,184,678, and examined other information contained in the indictment and reported by the press. Here are some of the findings of this analysis.

1) Banks and Credit Unions

• Twelve banks and one credit union paid $4,184,678 from the accounts of 174 organizations because 1,569 counterfeit checks had not been detected as counterfeit before payment.
• One bank paid 678 counterfeit checks with funds from the accounts of 53 organizations for $720,115. Another bank paid 384 counterfeit checks with funds from the accounts of 41 organizations for $1,065,749. A third bank paid 215 counterfeit checks from the accounts of 37 organizations for $1,555,705.
• The credit union paid only one counterfeit check and it was for $82,025. One bank paid only one counterfeit check, which was written for $20,520.
• The remaining eight banks paid 276 counterfeit checks from the accounts of 41 organizations for $740,517.
• Included in three of the banks' totals were 70 counterfeit checks paid from the accounts of eight credit unions for $307,687. Thus, funds were withdrawn from credit union accounts at the three banks.

2) The 1,569 Counterfeit Checks

• 568 counterfeit checks for over $1,000 each were paid, for total losses of $3,484,120 and an average loss of $6,134 per check. Thus, approximately36% of the counterfeit checks created 83% of the losses.
• 1,001 counterfeit checks for under $1,000 each were paid, for total losses of $700,558 and an average loss of $699 per check. Thus, approximately 64%of the counterfeit checks created 17% of the losses.

In reviewing the data, we can see that the losses from deposited counterfeit checks were almost five times the losses from counterfeit checks which were cashed by bank tellers even though almost 2/3 of the counterfeit checks were paid by tellers.

3) The 174 Organizations
The 174 organizations victimized by this counterfeit check scam included educational institutions, hospital and healthcare providers, charitable organizations, community service organizations, public utilities, a television station, a professional sports team, pension funds, labor unions, credit unions, mortgage companies, insurance companies, law firms and commercial businesses of all types and sizes. There was also at least one personal checking account included in the listing of the 174 organizations.

• 76 of the 174 organizations were charged for the 568 counterfeit checks in excess of $1,000, resulting in an average loss of $45,844 per organization.
• 98 of the 174 organizations were charged for the 1,001 counterfeit checks less than $1,000, resulting in an average loss of $7,149 per organization.
• 29 counterfeit checks totaling $21,068 were charged to a large university while eight counterfeit checks totaling $119,000 were charged to a small college.
• One title insurance company was charged for 29 counterfeit checks totaling $123,546. A law firm was charged for 56 counterfeit checks totaling $45,205. A Philadelphia television station  (network affiliate) was charged for 53 counterfeit checks totaling $53,622. One Philadelphia area utility was charged for 42 counterfeit checks totaling $135,435, while another area utility  was charged for eight counterfeit checks totaling $403,098.
• 33 of the 174 organizations were charged for only one counterfeit check each. The largest counterfeit check was for $485,024, charged to one organization. Another organization was  charged $100,000 for a single check. At the other end, the smallest check was $696, charged to one organization for a single check.

Based on the analysis of this sample of 174 organizations and 1,569 counterfeit checks, no conclusions can be drawn concerning which organizations are most likely to be the target of counterfeit check attacks. What we can conclude is that any organization or individual with a checking account is the potential victim of a counterfeit check attack.

Ethent Views

2) Cryptosystem and/or Positive Pay authentication systems could have prevented the payment of virtually all of the 1,569 counterfeit checks because these systems can provide a specific identification for each check. See Ethent Views: "Shared Secret Key Authentication" and Ethent Views: "Positive Pay and Cryptosystem Authentication". 

3) All checking account owners are potential victims of counterfeit check fraud. Counterfeiters can prey on any type of organization or individual, large or small, with checking account balances that are large, small or anywhere in between.