Recovering 50 Stolen Checks: A Costly Lesson for a Management Company — and What to Know

Payment fraud experts widely recognize checks as the payment method most vulnerable to fraud, according to the 2024 AFP Payments Fraud and Control Survey Report.¹  That’s important information for team members of community association management companies to know, because check payments continue to make up a large portion of community associations’ accounts receivable and business transactions.

The physical nature of paper checks makes them easy targets for criminals. Checks are susceptible to theft from mailboxes, office desks and vehicles. Community associations are particularly vulnerable because many homeowners still rely on writing checks when paying their assessment payments. Additionally, some management companies rely on check payments to pay vendors and thieves seek to take advantage of these outdated processes.

One management company’s experience with stolen checks illustrates the devastating consequences of check fraud for community associations. However, a combination of robust internal policies, streamlined procedures and advanced technology controls can significantly mitigate these risks.

Stolen Checks and Fraud: A Real-Life Story

One community management company found itself at the center of a significant fraud incident.

The company’s accounting department prepared a bundle of 50 checks for mailing, which included payments for over a dozen distinct homeowners associations (HOAs). Then, a management company representative, responsible for dropping the bundle of mail off at the post office, made the mistake of leaving the mail unattended in their car. Disaster struck when thieves broke into the car and stole the bundle of checks.

The check amounts ranged from hundreds to thousands of dollars. The thieves endorsed the checks, and the recipient bank did not verify the payee (who the check was made payable to) or endorsement of the check, allowing the fraudsters to successfully deposit them into various fraudulent accounts.

The management company was financially liable for the losses.

How It Happened

The incident unfolded due to a series of preventable lapses.

First, the checks were left unattended in a vehicle, creating a vulnerable situation that increased the likelihood of theft. The management company did not have internal controls and processes to ensure the checks were safeguarded at all times.

Then, the recipient bank experienced a lapse of due diligence by not validating the payee and endorsements, allowing the checks to be deposited into the fraudsters’ accounts.

Taking Action

After discovering the theft, the community association management company contacted the Alliance Association Banking team at Western Alliance Bank and provided a list of checks they believed to have been stolen. From there, Western Alliance Bank’s fraud manager provided guidance throughout the recovery process.

The Alliance Association Banking team used the list provided by the management company to reject the deposit funding request from the bank that accepted the fraudulently endorsed checks. This step alone was able to help keep nearly 75% of the stolen checks from being cashed and pulling funds from the various HOAs’ accounts.

For the remaining 25% of the checks that had been cashed and funded, Western Alliance Bank and the community management company worked together to reach out to each of the intended payees and ask that they submit an affidavit confirming they did not receive the funds. The Alliance Association Banking team then worked with the depositor bank to try to recover those funds. Meanwhile, the management company had to carry the costs incurred during the recovery period. While the management company eventually recovered most of the stolen funds, the process was time-consuming and labor-intensive.

Preventing Check Fraud

Check fraud is an easy target for criminals. Despite advancements in more secure digital payment technologies, the risks of paper transactions continue to be most common.

According to the Financial Crimes Investment Network, banks report that checks account for 88% of fraud cases.²  Prevention can help reduce this number, including the following strategies:

• Establish Internal Policies: Enforce strict policies prohibiting employees from leaving checks unattended in unsecured locations, such as desks, office lobbies and cars. Ideally, arrange a specific pickup time with your local post office so that a representative retrieves mail directly from the office. It is also wise to ensure that couriers or other individuals assigned to deliver checks to the post office go there directly and not keep these payments in their possession overnight or even while running other errands.
• Automate Payment Processes: Transitioning to electronic or card payments significantly reduces the risk of check fraud. Setting vendors up for ACH payments — and selecting Positive Pay protection — reduces the need for physical check payments. You may also consider using a Commercial Credit Card program for vendor payments and encouraging homeowners to pay their assessments electronically.
• Use Positive Pay and Check Payee Positive Pay: Check Positive Pay and ACH Positive Pay are critical tools for detecting most types of fraudulent check payment attempts. Check Payee Positive Pay and Reverse Positive Pay add extra layers of security by verifying payee information.
• Implement Daily Bank Account Monitoring: Monitor bank accounts daily and report any discrepancies within 24 hours of detection. Quick reporting allows your bank to cancel checks without additional paperwork. Timely action is crucial for launching the recovery process, which otherwise can take from three to six months.

Connecting With a Trusted Banker

Your relationship officer can help you create a fraud prevention plan that meets the specific needs of your community associations. Western Alliance Bank works with management companies to provide technology solutions that minimize fraud risk and safeguard the finances of the community associations they manage.

For additional strategies to mitigate fraud risk, including free virtual training for you and your employees, please reach out to a member of our dedicated community association banking team.