Inclearing Check Fraud: Detection, Risks, and Prevention

At 11:47 PM, a $50,000 fraudulent check hits your inclearing system. You have 13 minutes before the midnight deadline passes and your bank becomes liable for the loss. This scenario plays out daily across financial institutions.
While this scenario represents immediate operational risk, the underlying issue extends far beyond individual incidents. Financial institutions face a systematic vulnerability where fraudsters exploit the critical processing window between check presentment and liability determination. These actors have identified regulatory timing requirements as a structural weakness, deliberately targeting the narrow operational timeframes that govern clearing processes and risk transfer mechanisms.

By exploring what inclearing check fraud is, why fraudsters target it, and how banks can respond, we can see how fraud teams can turn this battleground to their advantage.

Key Takeaways

• Inclearing is a critical checkpoint for fraud detection: The inclearing stage is when the paying bank reviews checks before payment. It is often the last chance to stop fraud, since liability typically shifts to the paying bank after the 24-hour processing window.
• Fraud schemes targeting inclearing are diverse and costly: Counterfeit checks, forged signatures, altered checks, fraudulent endorsements, and first-party schemes all bypass front-end controls and hit banks during inclearing, with losses sometimes reaching tens of thousands per incident.
• Fraud attempts and losses are climbing sharply: Statistics show check fraud remains the top payment fraud method, with a 90% rise in suspicious activity reports since 2021 and billions in annual losses, fueled by mail theft, organized rings, and continued business reliance on checks.
• Proven defenses combine customer engagement, controls, and tech: Strategies such as proactive customer alerts, Positive Pay, Reg CC hold optimization, real-time monitoring, collaboration, and staff training significantly improve fraud interception rates at inclearing. VALID Systems offers targeted tools to protect both deposit and inclearing stages.

What is inclearing check fraud?

Inclearing check fraud occurs when fraudsters exploit the bank's inclearing process, targeting checks the bank sends through the check clearing system for payment.

Check processing involves two banks: the paying bank and the deposit bank. After someone deposits a check, its electronic image moves through Federal Reserve networks to reach the paying bank. This final stage, when your bank receives and reviews the check is called inclearing.

Why inclearing is a prime opportunity for fraud detection

From a fraud-fighter's perspective, the inclearing moment is a golden opportunity: it's the point at which the bank that knows the account best reviews the check.

Historically, the law has placed the responsibility on the paying bank to detect certain types of fraud at this stage. Banking regulations (UCC Article 4) place fraud detection responsibility squarely on paying banks. Miss a fraudulent check, and you absorb the loss. Failing to detect fraud at the inclearing can be very costly. Once the midnight deadline passes, the paying bank is usually liable for the amount of the check.

For community and regional banks, absorbing a hit from a $50,000 counterfeit cashier's check or a ring of forged personal checks can be painful. Combine that with today’s volume of attempts, and the risk is obvious.

According to IntraFi's Q2 2024 Bank Executive Business Outlook Survey, 90% of bankers reported higher levels of fraudulent check-writing at their institutions. Some even observed a surge exceeding 50% over the past three years.

Common Fraud Schemes at the Paying Bank

Inclearing check fraud often targets paying banks through schemes such as:

• Counterfeit checks: Criminals create fake checks with real bank details. In 2024, 94% of institutions identified this fraud, with over a third reporting higher losses.
• Forged signatures: Unauthorized signatures on stolen or counterfeit checks. About 90% of banks reported forged maker or payee signatures.
• Altered checks (check-washing): Thieves steal legitimate checks and chemically alter them to change payees or amounts. For instance, thieves might steal a $100 check to a utility company, wash it, and rewrite it for $10,000.
• Fraudulent endorsements: Forged payee endorsements or double-presentment fraud (mobile deposit plus later cashing).
• First-party fraud (kiting and paperhanging): Account-holders inflate balances or pass bad checks, sometimes through mule accounts.

Inclearing check fraud: Real-world examples

Here are some recent cases that show how fraudsters exploit the inclearing process before detection:

• Greenwich, Connecticut – $137K Altered Check Theft (2024): Authorities charged James Buster with stealing a $137,582 check from a Greenwich resident, altering it, and depositing it into his account. The bank froze the funds, but the case shows how altered items can enter the clearing stream before being flagged.
• Nationwide – JPMorgan "ATM Glitch" Fraud (2024): Multiple customers exploited a viral ATM deposit glitch, withdrawing funds from counterfeit or bad checks before they cleared. JPMorgan Chase sued to recover over $661,000 in losses.
• Torrance, California – Postal Worker Mail-Theft Fraud (2022–2025): A former letter carrier stole 16 U.S. Treasury checks from the mail and worked with accomplices to cash them using forged IDs. Banks processed many checks through in-clearing channels before flagging them as fraudulent.

These incidents reveal how inclearing fraud exploits systemic loopholes that let fraudulent items pass between banks before detection. With Valid's INclearing Loss Alerts, this $137K loss could have been prevented before the check cleared.

Fraud trends and insights on inclearing check fraud

Check fraud is growing more sophisticated, and statistics show that inclearing fraud is still one of the biggest payment threats. Here's a condensed look at the latest findings:

• Checks: #1 payment fraud threat: The 2024 AFP survey found 80% of organizations faced payment fraud in 2023, with checks as the most targeted method. By 2025, 63% reported check fraud incidents, tying with business email compromise as the top vector.
• Rising volume and losses: Recorded Future reported a 90% jump in check-related Suspicious Activity Reports from 2021 to 2023 and $21 billion in U.S. check fraud losses in 2023.
• Mail theft and organized crime: FinCEN's alerts highlight mail theft and organized rings as major drivers, with postal key thefts and check washing fueling the surge. Joint efforts between FinCEN, the U.S. Postal Inspection Service, and banks began in late 2024 to counteract these trends.
• Corporate check reliance: Despite the risks, 91% of businesses still used checks in 2024, especially for B2B and large transactions. Experts recommend reducing check usage and bolstering defenses, with ACH promoted as a safer alternative.

• Regulatory and industry collaboration: Initiatives like the ABA's Check Fraud Claim Directory focus on information sharing. Regulators, banks, and fraud solution providers are pushing for more cooperation to close detection gaps.

Best practices for banks to combat inclearing check fraud

The following strategies, drawn from proven industry practices and recent success stories, are designed to give banks a stronger defensive posture against these attacks:

1. Strengthen customer education and real-time verification

Customers can be a powerful first line of defense, especially when banks involve them in pre-payment fraud checks. Account holders often identify fraudulent checks when they review their statements or online banking activity.

By notifying customers before final payment, banks can intercept fraud in time to return the item and avoid losses.

What to implement:

• Send proactive alerts via text, email, or banking app when a suspicious inclearing check hits the account. Include enough detail (check number, amount, payee) for quick verification.
• Encourage customers to confirm check details immediately.
• Develop educational campaigns on secure mailing practices, safe checkbook storage, and the benefits of online bill pay over physical checks.
• Host fraud prevention webinars or workshops for business clients and seniors, who are frequent targets of mail theft and check washing.

Pro tip:

Integrating VALID's INclearing Loss Alerts enables fraud teams to instantly flag suspicious items during the inclearing review process, notifying customers faster.

Applying AI and behavioral data, it identifies suspicious checks that bypass initial image-based detection without generating excessive false alarms. By combining these alerts with customer confirmation, banks can return fraudulent items before they settle.

2. Expand use of Positive Pay and payee verification services

Positive Pay remains one of the most reliable tools for catching counterfeit and altered checks before payment.

For business and municipal customers, it should be positioned as an essential service, not an optional add-on.

Steps to strengthen this control:

• Require Positive Pay enrollment for high-risk commercial accounts, particularly those with high transaction volumes or frequent out-of-area payments.
• Offer Payee Positive Pay, which compares the issued payee name against the check image to catch alterations from check washing schemes.
• Use internal negative lists and high-risk parameters for consumer accounts.

3. Refine Reg CC hold policies to allow more investigative time

While Regulation CC dictates funds availability timelines, it also provides leeway for exception holds when fraud is suspected.

Banks that train staff on using this flexibility wisely can create a critical buffer for fraud investigation.

Measures to adopt:

• Educate tellers and back-office teams on when and how to place exception holds for large checks, repeated overdrafts, or items that appear altered.
• Incorporate fraud detection data into hold decisions, ensuring that suspected checks receive additional review time before funds are released.

Pro tip:

Pair Reg CC holds with VALID's CheckDetect to identify and act on high-risk checks immediately. CheckDetect provides risk scoring in real time, enabling banks to justify holds with data-backed suspicion and avoid releasing funds prematurely.

4. Invest in technology-driven real-time monitoring

Given the short window for review, technology is critical for inclearing fraud detection.

Modern systems can analyze transaction patterns and check images in seconds, alerting fraud teams before an item posts.

Technology upgrades to consider:

• Deploy machine learning models that identify anomalies based on the customer's typical behavior (amounts, payees, frequency).
• Use image analysis to detect alterations, forgeries, or duplicate checks.
• Integrate alerts into fraud team workflows to ensure flagged items are reviewed promptly and escalated as needed.

Example:

A payroll account that usually issues sub-$1,000 checks suddenly sends an inclearing item for $9,000 to an unknown payee. Anomaly detection paired with image forensics can flag and stop such an item before payment.

5. Build collaboration networks to share fraud intelligence

Fraudsters don't limit their schemes to one bank. They exploit the lack of communication between institutions, hitting multiple targets before patterns are recognized.

Collaboration strategies:

• Participate in industry fraud forums through state banking associations or the ABA/ICBA.
• Share redacted case studies or scam alerts with peer banks in your market.
• Join formal intelligence-sharing groups like the Fraud Information Sharing Alliance.

6. Equip and empower frontline teams to act on suspicion

Branch tellers and call center representatives may not stop every fraud, but they can catch anomalies if they're trained and encouraged to act.

Recommended actions:

• Provide regular training on current check fraud tactics, including how inclearing schemes operate.
• Establish clear escalation procedures for items that appear altered, have mismatched payees, or don't align with a customer's regular activity.
• Conduct fraud drills or scenario-based exercises to reinforce policy compliance during high-risk transactions.

Team culture focus:

Maintain a culture of fraud awareness, where preventing a $50k loss is valued as much as making a $50k sale.

How VALID Systems helps banks stop check fraud before and during clearing

With check fraud on the rise, banks need smarter, faster ways to catch bad checks before the money's gone. Valid Systems delivers two solutions built specifically for that challenge - CheckDetect and INclearing Loss Alerts.

Together, they help banks spot suspicious items at both the deposit stage and during inclearing, giving fraud teams the early warning they need to stop losses before they happen.

Here's how they make a difference.

CheckDetect - Fighting fraud at the point of deposit:

CheckDetect is a real-time fraud scoring and alerting system that analyzes every check at the moment of deposit (whether that deposit is over the teller counter, via ATM, or through a mobile app).

Using advanced machine learning models and behavioral analytics, CheckDetect evaluates the risk of each check and provides an instant decision or alert. If a check is deemed high risk (for fraud or likely charge-off), the system can flag it for investigation or even automatically hold the funds. The goal is to stop fraudulent checks from ever entering the clearing stream, or at least delay them until vetted.

Banks that have implemented CheckDetect report striking results:

• One of the top 10 U.S. banks using CheckDetect saw a 73% year-over-year drop in check fraud losses within six months.
• Millions in fraud prevented; false positives cut by 40%; manual reviews reduced by ~25%.
• Captured over 75% of potential check deposit charge-offs with high accuracy.
• Consistent protection across all deposit channels - branch, ATM, and mobile.

INclearing Loss Alerts - A safety net for fraud that slips through

No system will catch 100% of fraud at the deposit, which is where INclearing Loss Alerts comes in. This solution scans checks on the back-end during the clearing process, identifying sneaky fraudulent items that bypass front-end controls as they reach the paying bank.

By leveraging AI and behavioral data (patterns of account activity, customer behavior, etc.), INclearing Loss Alerts adds an extra layer of pattern recognition without creating operational drag on the massive volume of normal checks.

Ready to stay ahead of inclearing check fraud?

Contact Valid Systems today to learn how our targeted fraud solutions help you catch high-risk items early, cut losses, and protect your customers with confidence.