I cannot wrap my head around the security of Cheques. They have been around since forever (and I still don’t get how they got verified, although I can understand that fraud could have been way higher back then).
Is there a unified standard for them? Or a proof that it is valid from the government?
In: Economics
Not an answer but since you’re thinking about this..
“Catch Me if You Can” is based on a true story and has lots of fraudulent cheques.
Hi, cheques after your bank gets them go through a “Clearing House”. Here they will carry out the checks on whether the cheque is valid, and if money is available to honor it .
When you hand a cheque over to a bank they can ring up the original bank and ask whether the cheque matches an account there. In practice this is rarely done (but could be for very large cheques).
Crucially, the cheque has to clear before the money is legally yours. This means that the money has to be transferred out of the account of the person who issued the cheque and into your account. Now banks can choose (or in some jurisdictions are obliged) to make the money available to you before the cheque clears, but they will take it back if it turns out there wasn’t enough cash in the issuing account to transfer over to you. This is a risk for the bank if you take all the cash out of your account beforehand.
The risk of large scale fraud is low because the cheque is a physical object, and because you often need to physically take it to a branch. It is much easier to scale up electronic fraud which is also more anonymous and so less risky for the fraudster. That said, cheques are being phased out in part because they are risky in this way.
There is typically a standard set by the government that checks must include specific information (routing number, account number, amount, date, names, signature, etc.).
The banks involved in the cashing of a check have procedures and processes in place (combination of legal regulations and their own corporate rules) to negotiate the exchange (validating the check, ensuring there are enough funds, etc.).
The only thing preventing fraud are the banks’ validation procedures and people’s desire to actually commit fraud.
1. If you attempted to cash a check using a non-standard medium, this would likely raise flags in and of itself and bring additional scrutiny on the exchange. Would-be criminals generally don’t like scrutiny.
2. The other option would be to use stolen checks but anyone that has their checks stolen should report those to their bank. Checks are individually numbered and banks can basically void those checks making them ineligible for use.
3. Lastly are forged checks. Forgery requires skill and special equipment which increases the overhead and reducing the potential profit. Not to mention the risk of forging the number of a check that’s already been used.
4. Intermediary organizations protect themselves quite often by requiring those paying by check to provide identification. People attempting to pay by fake checks, then would have the additional cost of forging fake IDs.
Not to mention that you can only steal what’s in an account, meaning you have to know that head of time.
This is why most check scams/frauds today don’t actually rely on getting fake checks cashed. One of the most common scams is giving someone else a bad check for too much money and then asking for the difference in cash. Once you have the cash, you disappear and the mark is left with a worthless check that fails to cash.
Someone already discussed the clearing house, so I want to say something different.
You could theoretically make your own checks, written by hand, on anything you like. There’s nothing that says that only checks printed by your bank are the only checks that will work.
The important part of the checks are the account and routing numbers. You could write those on a napkin and use that napkin as a check. The bank would still be able to process your homemade check and conduct the money transfer.
You are asking about [cheque clearing](https://en.wikipedia.org/wiki/Cheque_clearing). You may have heard about people waiting for cheques to “clear” and so on.
Clearing is the process by which one bank checks with another bank that a particular cheque is valid. This used to involve having a physical clearing house where all the local banks would get together, have their own clerks, and swap the cheques they received that day (1700s-1800s).
There have been various different attempts to automate this process (e.g. adding numbers to the bottom of a cheque to help sort) and since the 1990s it has been done via taking pictures of the cheques, to save the banks having to physically move the cheques around. Obviously the increasing use of the Internet and computers has helped speed this process up.
The point of all this is that there is usually a delay between when someone pays in a cheque and when the money actually goes through. Even if their account is credited immediately, the money may not actually be there (and the bank can withdraw it) for a few days, until the cheque has “cleared.”
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And this can be abused for fraud. A common way would be for the fraudster to pay someone via cheque for something (knowing the cheque will not clear), and then convince the victim to provide whatever is (not) being paid for before the cheque has fully cleared (but after they have paid it in). The fraudster is then long gone when the cheque “bounces.”
As noted in another reply, “Catch Me If You Can” involves a lot of this kind of cheque fraud. One particular trick used there (pre photographs and so on) was using fraudulent cheques from US East Coast banks when trying to get money on the West Coast and vice versa, so the automated system the banks used for clearing the cheques would send them across the country (rather than checking them with the local branches of the same banks), making the clearing process take a few extra days – something the victims might not expect, so they’d think the cheque would have cleared.
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