How check-cashing scams could be affecting your customers

September 7, 2020
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If you run a crypto business, be on the lookout for signs of check-cashing scams. This old-fashioned fraud is as prevalent as ever.

Even though most of us regularly use modern tools like debit cards and online banking to manage our finances, the good old-fashioned paper check hasn’t gone completely out of style yet.

In fact, the check-cashing scam is still regularly reported as one of the top financial frauds plaguing consumers year after year.

While paper checks might seem as archaic to cryptocurrency enthusiasts as CDs or 8-track tapes in a world of digital streaming music, the check-cashing scheme still poses a major threat to consumers, with victims losing a reported $2,400 or more on average.

BitAML is continuing its blog series on crypto scams to provide businesses in the space with the education and tools they need to help protect their customers and the health and safety of the wider cryptocurrency market.

This week we’re looking at the check-cashing scheme. We’ll detail this scheme and its variations in depth, explain how cryptocurrency plays into it, and give business owners tips on what they need to do for their compliance and how they can help customers who show signs of becoming victims of fraud.

How a check-cashing scam works

In a typical check-cashing scam, the fraudster offers to pay the potential victim via check (or another monetary instrument) in return for sending them funds in the form of cryptocurrency.

They generally ask for funds in a small denomination so that the victim thinks they are “getting a deal” and provide a crypto wallet address for the victim to send funds to.

While at face value this type of scheme may sound instantly suspicious, the fraudster usually has a believable reason for needing funds in the form of cryptocurrency.

Additionally, the check that they send a potential victim appears to be legitimate. Forged checks are incredibly sophisticated, and in some cases may even be legitimate checks belonging to accounts from other victims of identity theft.

Lastly, when the check is deposited, funds appear in the victim’s account, lending credence to their legitimacy. But this is only because banks are required by law to have funds available immediately, usually within a couple of days.

Even though a check may “clear” initially, once the bank discovers it is a forgery (which can take weeks), the check will bounce and the funds will disappear from a victim’s account, sometimes leaving them with a deficit and overdraft fees.

By then, of course, the victim is left responsible for the lost funds and any related fees.

Since cryptocurrency transactions are difficult to trace and impossible to reverse, there is no way to reclaim the lost funds.

Variations and other red flags

Some check-cashing scams attempt to recruit a victim as a “secret shopper”. Another version of this scam involves overpayment for a recent item that the victim sold online.

Regardless of the variation, every form of the check-cashing scam has one thing in common: Victims receive a check and are asked to wire back a payment of some kind.

What potential victims should do

Overall, consumers should not accept money from anyone in exchange for sending money to someone else or somewhere else. Do not deposit or cash checks for a sender that you do not know.

And the cardinal rule: Never send cryptocurrency to anyone pressuring you to do so.

If you receive a check that seems suspicious, you can check with the FDIC’s BankFind to determine if it came from a legitimate financial institution.

Consumers who think they have become a victim of a crime can lodge a complaint with the Federal Trade Commission here. You can also file a complaint with the Internet Crime Complaint Center or contact your local consumer protection agencies.

What crypto businesses can do to help

A strong AML compliance regime will include protocols for Know Your Customer (KYC) and transaction monitoring, which should help businesses detect potentially suspicious activity.

First-time customers approaching your exchange or kiosk to initiate an unusually large transaction will trip these various triggers, and through your customer onboarding process you may find that they mention “depositing a check for someone who needs bitcoin” or some other reason that may suggest fraud.

In these cases, warn the customer of the potential for financial schemes in the space as well as other disclosures (i.e., “permanent, final transactions”). Such disclosures should be part of a robust consumer protection policy in your institution.

As ever, be on the lookout for first-time customers age 60 or greater. Elder financial exploitation continues to be a serious societal problem in both traditional finance and in emerging markets like cryptocurrency.

In our experience, elder financial abuse is still not common knowledge among most cryptocurrency financial institutions. Every business in the space should have policies, protocols, and appropriate employee training in place to mitigate this threat against one of our most vulnerable populations.

Key takeaways for bitcoin compliance

Learning more about financial scams in the cryptocurrency space and installing the appropriate measures to help combat them is mission-critical for financial institutions in our industry.

Without clear regulations, it’s up to business owners to self-regulate in an effort to encourage a market that continues to grow and attract mainstream adopters. The only way this can happen is for the market to be safe and fair.

That’s why we emphasize the importance of consumer protection in AML compliance.

Right now, positioning your business to emphasize consumer protection is a proactive, good faith initiative. But even so, legislation being considered in multiple states suggests regulators are taking notice of the crypto space.

Consumer protection mandates from regulators are coming, potentially as soon as this year. Cryptos who get a head start will be advantaged. Those that do not will be left behind.

Read our blog post on consumer protection, and the various laws and regulations being debated in the states, here. If you need help getting a head start, or have any other compliance questions, reach out to BitAML here

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