In 2024, check fraud accounted for 30% of all fraud losses reported by financial institutions, second only to debit card fraud, which accounted for 39%.
The rise in check fraud is mainly due to the return of forged endorsements, where criminals steal checks, often from the mail, and cash them by forging the payee's signature.
In this article, we will break down the dynamics of forged endorsement fraud and clarify the steps financial institutions can take to respond quickly, minimize damage, and safeguard their clients.
Key takeaways:
- Forged endorsement fraud is on the rise: Forged endorsement fraud continues to grow as criminals steal checks and forge the payee's signature to deposit them into their accounts. This type of fraud bypasses traditional detection systems since the check itself often appears legitimate.
- Traditional fraud detection methods are insufficient: Traditional systems that focus on detecting altered amounts or duplicate check numbers often overlook forged endorsements.
- Liability for forged endorsements falls on the depositary bank: Under UCC and Regulation CC, the bank that accepts a check with a forged endorsement typically holds liability.
- Proactive measures are key to prevention: Implementing advanced fraud detection methods, such as behavioral analytics and real-time fraud detection, can help prevent forged endorsement fraud before it occurs.
- VALID Systems helps prevent forged endorsement fraud: VALID Systems offers AI-driven fraud detection solutions designed to help banks identify and prevent forged endorsement fraud before funds clear.
What is a forged endorsement?
A forged endorsement occurs when someone fraudulently signs another person's name on the back of a check to cash or deposit it.
In other words, a fraudster intercepted a legitimate check issued to a valid payee and forged the payee's signature in the endorsement area.
By doing so, the fraudster impersonates the payee and attempts to negotiate the check without the payee's knowledge or consent.
How forged endorsement fraud works
This scam typically unfolds in the following steps:
- Theft of the check: A check is stolen, often from a mailbox or office mailroom.
- Forging the signature: The thief signs the payee's name on the back of the check.
- Depositing the check: The forged check is deposited into an account controlled by the thief, often through ATMs or mobile deposit to avoid face-to-face scrutiny.
- Creating a fake identity: In some cases, the thief may open a new bank account using the payee's name or a similar name to make the endorsement appear legitimate.
- Traditional processing bypass: Since the front of the check looks valid with the correct payer, payee, and amount, traditional check processing systems often don't flag any issues.
- Discovery of the fraud: The intended payee or the check issuer usually discovers the fraud when they realize that the funds never reach the rightful recipient.
Forged endorsements vs. Other check fraud
There are several types of check fraud, each with distinct characteristics and legal implications.
Here's how forged endorsements compare to other common forms of check fraud:
Forged maker signature
This fraud occurs when a fraudster forges the account holder's signature on the front of the check, creating a completely counterfeit check.
In contrast, a forged endorsement involves a legitimate check that a fraudster misdirects after it is issued.
Altered checks
In this case, a fraudster physically alters a legitimate check, such as changing the amount or the payee's name (often using chemicals in a process called check washing).
If a bank doesn't catch the alteration, it typically takes responsibility. In a forged endorsement, the check's details stay the same; only the fraudster falsifies the endorsement.
Counterfeit checks
These are completely fake checks that imitate real ones. The paying bank is usually liable for counterfeits, as it's responsible for verifying the check's authenticity.
A forged endorsement, however, involves a real check that was stolen and misdirected, so the paying bank sees a valid check and signature, but the fraud lies in the endorsement.
Missing endorsement
If a check is deposited without an endorsement or with an incomplete endorsement, it can cause problems. U.S. banks require proper endorsements, and if a bank accepts a check with a missing or incorrect endorsement, it can be held liable.
In many cases, a missing endorsement has the same legal effect as a forged one, as the payee doesn't properly endorse the check.
Legal framework: UCC, Reg CC, and Treasury rules on forged endorsements
Here's a breakdown of the key U.S. regulations governing forged endorsements:
- UCC articles 3 and 4: Governs negotiable instruments (Article 3) and bank deposits/collections (Article 4). If a forged endorsement occurs, the transfer of funds is improper, and liability typically falls on the depositary bank, which is in the best position to verify the endorser's identity.
- Transfer and presentment warranties: Under UCC §§4-207 and 4-208, banks warrant that all endorsements are genuine and authorized. The paying bank can claim a breach of warranty against the depositary bank if it pays a forged endorsement.
- Statute of limitations: Under UCC 4-406, customers must report forged endorsements within three years of receiving their bank statement. Failing to report on time bars the claim, and the drawee bank loses the right to recover from the depositary bank.
- Regulation CC: The Expedited Funds Availability Act governs check collection, returns, and endorsements under Regulation CC. It aligns with UCC warranties, holding the depositary bank responsible for forged endorsements, with claims handled through inter-bank processes and affidavits.
- U.S. Treasury checks: Forging endorsements on Treasury checks (e.g., tax refunds, Social Security payments) is a federal crime under 18 U.S.C. §510. The U.S. Treasury reclaims funds from banks when a forged Treasury check is paid, holding the bank of first deposit responsible, even months later.
Forged endorsement fraud: Real-world examples
Here are recent cases of forged endorsement fraud:
Best prevention strategies for stopping forged endorsement fraud before it happens
While responding well to fraud is important, preventing fraud is even better.
Here are several prevention strategies for banks, with an emphasis on behavioral analytics, real-time detection, and smart controls that are proving effective in 2025:
1. Strengthen identity verification at account opening
Many forged check scams involve fraudsters opening new bank accounts (often online) in the name of the payee or a similar name to deposit stolen checks. They may use synthetic identities or stolen personal info.
As a bank, you should support your customer identification program (CIP) for new accounts:
- Use document verification, database checks, and even biometric verification where possible to catch fake IDs.
- Flag instances where an account's title closely matches a known business or government payee (fraudsters sometimes open "look-alike" business accounts to match checks).
Pro tip:
As FinCEN suggests, consider limiting certain high-risk features for new online accounts until verified (for example, lower mobile deposit limits). A modest inconvenience upfront can save a fortune in fraud losses later.
2. Leverage Reg CC holds and policies for suspicious deposits
Regulation CC allows exceptions to fast funds availability in cases of new accounts, large deposits, or if the bank doubts the collectability.
Banks in 2025 are revisiting their funds availability policies, especially for remote deposits (RDC). Fraudsters love ATM and mobile deposit because they can deposit checks with minimal scrutiny.
To mitigate this:
- Implement stricter holds on high-risk check deposits (e.g., large amounts, third-party payees) and hold suspicious mobile deposits until they clear.
- State in your mobile deposit agreement that you may delay availability for suspected fraudulent items.
- Flag suspicious deposits, like personal accounts depositing third-party checks, and avoid accepting them via mobile.
- Promote safer payment methods, like online bill pay or cashier's checks, to reduce exposure to mail theft.
3. Implement behavioral analytics and real-time fraud detection
Traditional check fraud systems focused on the check itself - e.g., detecting altered amounts or duplicated check numbers. Forged endorsements require looking at the context and the depositor.
Modern fraud prevention means harnessing data and AI:
- Monitor deposit patterns: Every check fraud is effectively a deposit fraud at its core. Machine learning solutions now analyze the depositor's account behavior in real time. For example, if an account is new, has a low balance, and suddenly receives an extensive check (especially one payable to someone else or from a government agency), the system should raise an alert.
- Leverage Consortium Data and AI models: One institution might only see a single suspicious check, but network-wide data could reveal a pattern. By pooling industry data, these systems identify when the same payee name and check number appear elsewhere or when one ID opens multiple accounts across banks - clear signals of fraud.
- Implement Payee name matching: New fraud tools can scan the payee name on check images and match it with the account holder's name. While handwriting can complicate this, advancements in image analysis are improving accuracy. For instance, if a check payable to "Alice Green" is deposited into "Tom White's" account, it signals a potential issue, unless it's a joint account or a business transaction.
Pro tip: Utilize real-time scoring with CheckDetect
VALID Systems' approach uses an AI-driven model called CheckDetect to score each check transaction instantaneously. It examines factors like the payer's history, account attributes, and even comparisons to a "unique payer network" to detect anomalies.
With this, banks get a severity score for each deposit, allowing them to triage risk and intercept fraudulent checks before funds go out. This technology has had tangible results - over $225 million in fraudulent check deposits identified early by Valid's CheckDetect, significantly reducing losses for banks.
4. Train employees to detect and prevent forged endorsements
Employee cautiousness is crucial in identifying forged endorsements, especially in high-risk transactions. In 2025, banks are focusing more on frontline training to help staff spot suspicious activity and prevent fraud before it happens.
To strengthen this:
- Train employees to scrutinize IDs when cashing or depositing third-party checks to avoid forged endorsements.
- Educate staff to look for inconsistent handwriting or signs of tracing on endorsements, especially if the style differs from the payee's name.
- Encourage staff to be alert for red flags, like new customers receiving multiple checks for "refunds" or "prizes," which could indicate fraud.
- Help commercial clients secure outgoing checks and reconcile accounts promptly to catch discrepancies early.
5. Educate customers to reduce check fraud risk
Customer education is a fundamental strategy in preventing check fraud. With the rise of mobile and remote deposits, educating both individuals and businesses on security practices is critical.
To improve security:
- Promote the use of electronic payments to reduce the circulation of checks and the risk of forgery.
- Advise customers to use secure mailboxes and monitor mail deliveries (e.g., USPS Informed Delivery) to reduce mail theft.
- Remind both businesses and individuals to review bank statements and online activity regularly to detect unauthorized checks early, ensuring quicker recovery under UCC 4-406.
Stay ahead of forged endorsement fraud with VALID Systems
For U.S. financial institutions, the resurgence of forged endorsement fraud is a wake-up call. Check fraud may sound old-school, but it has reinvented itself in the past two years - fueled by organized theft rings and gaps in modern defenses.
VALID Systems is at the forefront of AI-driven fraud prevention, offering advanced solutions to combat the rising threat of forged endorsement fraud. Leading financial institutions such as PNC, TD Bank, and Truist trust VALID Systems to protect their operations from this growing risk.
With years of industry expertise and cutting-edge technology, VALID Systems helps your institution stay ahead of fraud tactics that continue to evolve. Our seamless integration, real-time analytics, and proactive detection allow banks to respond quickly, reduce risk, and preserve customer trust in an increasingly complex fraud landscape.
Essential VALID solutions to fight forged endorsement fraud:
CheckDetect:
CheckDetect identifies up to 75% of potential forged endorsement fraud at the point of presentment, allowing your bank to intercept fraudulent checks early and minimize financial loss.
INclearing Loss Alerts:
INclearing Loss Alerts uses machine learning to uncover fraud patterns often missed by other systems, offering an additional layer of defense against sophisticated fraud schemes.
Edge Check Data Consortium:
With access to data from over 420 million accounts and $6 trillion in processed checks annually, VALID Edge helps spot emerging fraud trends before they escalate into serious issues.
Ready to stop forged endorsement fraud before it happens?
Book a free consultation with VALID Systems to discover how our innovative AI solutions can help your bank prevent forged endorsements and minimize fraud-related losses.